Taken with my iPhone on my return flight to New York last weekend – very grainy but I really loved the view. With the torrid pace of luxury development the city is currently experiencing, perhaps we’ll have condos with the same view in a few years.
I just returned from an incredibly helpful and fun annual appraisal conference in Texas. I was asked to make a presentation and ended up joining their board of directors. I’ve been a member of RAC (Relocation Appraisers & Consultants) for about 20 years and even though the organization started out with a primary emphasis on relocation appraisals in the early 1990s, RAC is so much more than that. Most of the members provide expertise in complex residential with a lot of work in litigation support. The quality of the residential appraisers in this organization is the best in the country – bar none. Most of the mainstream US appraisal trade groups emphasize or have a majority concentration of commercial appraisals and RAC fills the void.
I saw an opinion piece written about appraisal management companies over at HousingWire that made me just about fall out of my chair – and my office chair is a sturdy Herman Miller Aeron so it was quite an unsettling piece. I’ve written about AMCs quite a bit since HVCC came into effect on May 1, 2009 and my last big piece: “Appraising for AMCs Can Be Like Delivering Pizza” prompted a senior executive at one of the largest US AMCs – who we don’t work for – to call me after he read it and say, “all of what you wrote is true – how do we change it?” He sounded very reasonable and earnest and got his Chief Appraiser to reach out to me to explore what to do. That person ended up providing me with robotic and defensive feedback before I even asked any questions – making it clear it was all about keeping his job, not improving the industry. Sad.
Make no mistake – I am not against the concept of AMCs and there are some reasonable ones to deal with – but the majority of them are poorly managed and therefore can only attract appraisers with the “form-filler” mentality.
This HousingWire editorial was called “It’s time to debunk the 3 biggest myths about your AMC” by the CEO of an appraisal management company. We don’t work with them and I don’t know of them or the author. It’s a corporate sounding piece so I’m guessing that it was pitched and written by their PR firm as a way to sell the virtues of a good appraisal management company.
What threw me for a loop was the omission of any discussion about the actual providers of valuation expertise. AMCs do not provide value opinions to banks. AMCs manage appraisers who provide value opinions to banks. My guess is they or the AMC industry in general are receiving more pressure from banks for the rising cost of the appraisal process – not because the appraisal fees are rising – but because the AMC appraisal quality is so poor that relative to the cost, the value-add of an AMC really isn’t really there.
We have started to observe national lenders push back against the poor quality of AMC appraisals and some lender personnel are now bypassing AMCs on complex or luxury properties because they don’t trust the expertise coming out of the AMC. Amazing.
Here are the 3 “myths” presented in this AMC PR piece. I restate each point being made to reflect the reality of the appraisal process:
THEIR Myth 1: Appraisal Management Companies add costs to the lender’s business.
So, yes, the costs of putting a solid value on a piece of real estate have gone up. But this is not due to the fact that an AMC has been added to the equation. It’s due to the fact that it costs more to do it right, to employ the technology, to manage the fee panels, to quality-check the results. Like most myths, this one has at its core the ugly truth that the price of an appraisal has gone up between $80 and $200, depending upon the circumstances.
MY Opinion of Myth 1: The rise in costs is NOT because appraisers are arbitrarily raising their fees. It is because the appraisal management industry takes half of the appraisers fee paid by the borrower at application to cover their costs and ended up driving most good appraisers out of retail bank appraisal work – now dominated by AMCs. The rising costs are being born by the AMCs who try to checklist away the poor quality. Here’s how: Imagine making a modest salary for a job well done and then one day (May 1, 2009) you get your pay cut in half. The middleman between the bank and the appraisers (the AMCs) got to keep the other half of the appraiser’s fee/salary. In reality, this 50% pay cut was the appraiser paying for bank compliance with HVCC by hiring the AMC. Would you quit your job if you got a 50% pay cut? Most would say yes. Who would replace you at 50% of an already modest wage? A lower caliber, lesser experienced person who was able to cut corners – like eliminate research – and essentially be willing to be a form filler rather than a valuation expert – quality evaporates not matter how much “review” is put in place. AMCs have been grappling with poor quality and probably have had to increase oversight as more banks push back against the poor quality. I think the additional compliance issues being touted throughout this opinion piece in this “Myth” are probably more of a scare or fogging tactic than a real reason for higher costs. The higher cost that is being represented by the AMC is more likely from the fact that AMCs are being forced to find better appraisers in certain markets and those appraisers are less willing to subsidize bank compliance with HVCC out of their own hide. We doing more and more AMC work now and we are paid a full fee and are given a fairly reasonable turnaround time. Why? Because that AMC’s panel quality was poor and their bank clients basically told the AMC to use firms like mine or the bank will go to another AMC who will use a higher caliber of appraiser.
THEIR Myth 2: AMCs deliver poor turnaround times that can’t compare to internal teams
Anyone who buys into this myth must live in a world without Service Level Agreements (SLAs) that spell out exactly what a vendor will provide to a lender. It sets the terms of the engagement and specifies penalties that the vendor will suffer should it fail to live up to the promises the document holds. Turnaround times are always part of the SLA between an AMC and a lender…Now, here’s the grain of truth at the center of this ridiculous myth: lenders are working to incorporate so many new compliance rules into their processes that the collateral valuation process is simply taking longer for many of them than it has in the past. Part of this comes from the fact that compliance checking takes time. Part of this comes from unnecessary processes within the lender’s shop that exist out of some executive’s fear of possible compliance problems. The appraisal process is taking longer in many cases, but it’s not due to the AMC. It’s just part of the new business environment we’re working in.
MY Opinion of Myth 2: This is simply a reframing of the conversation between lenders and AMCs. The biggest problem with most AMCs today is they demand an unreasonable turn around time – some require 48 hours (more with complex properties), about 1/3 the minimum average time needed to do a reasonably competent job. Because the AMC bank appraisal quality is generally poor, AMCs have to insert more and more checklists into the QC process to appease their lender clients. The lender clients require more service level agreements BECAUSE THEY DON’T TRUST THE QUALITY OF THE PRODUCT, NOT BECAUSE OF MORE FEDERAL COMPLIANCE ISSUES. In turn, the appraiser gets a gum chewing 19 year old who calls them every day to fill out a checklist. Banks were fine, pre-HVCC, with the turn times of their in-house and outside fee panel staff and it NEVER was as fast as the typical AMC requires today. Today, most AMCs have to differentiate themselves from other AMCs by cost and turn around standards. With the poor quality of the typical AMC bank appraisal, the AMC gets squeezed financially as banks and appraisers are beginning to push back with more requirements and costs. An appraisal is NOT a commodity – it is a professional service. If the AMC doesn’t respect the bank appraisal industry and pays them poorly, all the AMC can ever hope to receive in return is a poor quality product that can’t be check listed away.
THEIR Myth 3: The lender relinquishes control when they outsource to an AMC
The lender is in complete control at all times and federal regulators have made it crystal clear that the lender is the responsible party anytime they outsource to a third-party vendor. No lender will relinquish control to a third party when it knows the CFPB will come back to its front door in the event of a problem. There are some aspects of the collateral valuation process that the government has said must be removed from the control of the loan officers originating the loan and the managers who oversee them. Federal regulators do not want the lender to control the outcome of the appraisal process and so they have made it clear in the regulations that it must be moved away from the origination department. The uncomfortable truth is that the federal government wants the lending institution to lose a bit of control here, for the good of the consumer and the financial institution. But handing responsibility for a few aspects of one process to a third-party outsourcer is not the same thing as giving away control. No lender we know and no good AMC executive would equate these two.
MY Opinion of Myth 3: One of the biggest myths furthered by many AMCs is to fog lenders with the idea that HVCC requires banks to use them to be compliant. The statement “The uncomfortable truth is that the federal government wants the lending institution to lose a bit of control here” is very misleading. All the government wants is a separation between the sales function and the quality function of a bank – a firewall – which is an AMCs major selling point. The irony here is that large AMCs are just as susceptible to lender pressure as the individual appraisers, but on a much larger scale.
I am not anti-AMC. However I am against bank appraisers paying for a bank’s compliance with HVCC and being marginalized as a result. The appraiser is the expert developing the value opinion for the bank, not the AMC.
In my experience to date, the majority of AMC bank appraisals that I have seen are very poor. But it doesn’t have to be that way. If the lender paid the market rate for an appraisal and an additional fee for the AMC to administer the process, the quality would improve. Borrowers today generally don’t realize that the bank appraisers is paid a fraction of the “appraisal fee.” Today’s bank appraiser is paying for the bank’s compliance with HVCC and this has largely destroyed many of the quality firms in the appraisal industry. It doesn’t help that the residential appraisal industry has no real representation in Washington.
But I do like my chair.
Knight Frank just released their 2014 Wealth Report which takes a look at the investment trends for ultra high net worth individuals (aka UHNWI’s defined as $30M+). It’s chock full of investment insights, including real estate. We provided some data/insight to the report (translation: a very tiny portion). Yesterday I mentioned their crazy new Asteroid Index yesterday.
Here are a few topics covered in the report:
Back in mid 1980′s the front door of a new condo conversion at One Tompkins Square Park was spray painted with words “Die Yuppie Scum” and it became the battle cry for protests against gentrification of the East Village. With the eastward push of new residential development in the 1980s from the West and Central Village, residents and local businesses worried about being priced out and losing the intangibles that made the neighborhood unique – and that they would disappear along with it.
I remember appraising apartments to the east of Tompkins Square Park, seeing squatters inhabit derelict buildings, observing a burned out school bus on blocks in front of a newly converted walk-up and the self-described “Anarchists” in the park. All that is gone.
Merriam-Webster defines gentrification as:
the process of renewal and rebuilding accompanying the influx of middle-class or affluent people into deteriorating areas that often displaces poorer residents
Philadelphia is one of the first cities to tackle the issue in an attempt to keep the long time residents there and in doing so, helping to minimize the loss of the character of the neighborhood. It is fascinating and encouraging to see city governments be proactive on the issue since it costs money in the short term.
The initiatives, planned or underway in Boston, Philadelphia, Washington, Pittsburgh and other cities, are centered on reducing or freezing property taxes for such homeowners in an effort to promote neighborhood stability, preserve character and provide a dividend of sorts to those who have stayed through years of high crime, population loss and declining property values, officials say.
Joe Anuta at Crain’s New York Business lays out the permit situation for building construction, which reached 18,000 units in 2013.
Citywide, 2013′s figure is still shy of the 20,000 units the congress estimates developers need to build annually simply to keep up with the growth of the number of households, to replace outdated buildings and to provide housing options for New Yorkers across the income spectrum.
With all the construction going on right now, it isn’t enough to:
Check out my 3CW column on @CurbedNY:
After an insanely chaotic and active 2013, it’s probably time to think about how 2014 is shaping up inventory-wise. At the end of last year, I was of the opinion that listing inventory was at or near a bottom and we would see some increase in supply but not nearly enough to match demand. And so far that has been the story. In this week’s column, I took a look at the first eight weeks of each year going back to 2009. Inventory always rises at the beginning of the year as sellers anticipate the spring market and skip over the December doldrums. I’d go back further in time, but I only began tracking inventory on a weekly basis in addition to monthly right after Lehman collapsed (I had more time on my hands). This analysis looks at overall Manhattan inventory at all price points—clearly there are nuances not reflected, i.e. luxury listings at historical averages while the remainder at chronic lows, so relax…
My latest Three Cents Worth column on Curbed:
Inventory Rising At Fastest Pace in 4 Years [Curbed]
For the overall inventory in the Manhattan market, the operative phrase remains “tight supply” with no real relief in sight. While we are seeing a nominal improvement year to date in 2014, the operative word remains “nominal.” $10M+ has long had bloated supply with lots of “I’ll sell if you pay that” listings. $5M and up continues to see the most supply relative to demand. Supply is chronically low below the $3M threshold and most acute between $1M and $2M.
Side by side Manhattan regional comparison:
I started this analysis in August 2009 so I am able to show side-by side year-over-year comparisons. The blue line showing the 10-year quarterly average travels up and down because of the change in scale caused by some of the significant volatility seen at the upper end of the market. The pink line represents the overall average rate of the most recently completed month for that market area.
Absorption defined for the purposes of this chart is: Number of months to sell all listing inventory at the annual pace of sales activity. (The definition of absorption in our market report series reflects the quarterly pace – nearly the same)
Knight Frank, my friends across the pond, go interstellar in this incredibly detailed info graphic excerpted from their new Wealth Report To Infinity and Beyond for Property They also include a link to their interview with Richard Branson on the post.
The Wealth Report 2014 highlights the rising trend for private wealth investment in space research — from asteroid mining to sub-orbital space travel. Knight Frank has identified more than 70 wealthy individuals, with a combined wealth of over US$200 billion, who are targeting this growth sector. The investment promises to transform terrestrial property markets.
Now that the Oscars are behind us and the “next big snowstorm” just missed NYC, I thought I would finally talk about pizza. But because of why you are here – I’ll make price per inch and price per square foot interchangeable.
One of my favorite podcasts, NPR Planet Money had a great segment called “74,476 Reasons You Should Always Get The Bigger Pizza“
The math of why bigger pizzas are such a good deal is simple: A pizza is a circle, and the area of a circle increases with the square of the radius. So, for example, a 16-inch pizza is actually four times as big as an 8-inch pizza. And when you look at thousands of pizza prices from around the U.S., you see that you almost always get a much, much better deal when you buy a bigger pizza.
Explanation of above math: 200.1 inches of pizza surface versus 50.2 inches of pizza surface (pi*r squared=surface area of a circle) And here’s an easy way to calculate the volume of a pizza if you can’t help get enough pizza geometry.
Here’s the (pizza) logic
The premise of the piece is that it is much cheaper to buy a large pie than a small pie on a price per inch basis. Pricing for a large pie doesn’t expand as much as the surface area does so the price per inch drops precipitously. In the example above, the 16″ pizza wouldn’t be priced 4x as much as the 8″ pizza – probably more like 2x. Apparently pizza makers don’t take geometry seriously.
Buy the large and throw the unused portion in the fridge. Perhaps that is why people buy homes somewhat larger than what they actually need – they will grow into it.
In suburban real estate, after a certain point, larger the home is, generally the lower the price per square foot. There is a point of diminishing return on excess square footage. The total dollar price is higher, obviously, but the cost of additional space is usually less on a per square foot basis. Hence the pizza analogy applies.
Queen of Versailles, Florida
A well known example of diminishing return is the home featured in the documentary, Queen of Versailles. The 90,000 square foot home is so oversized for the Windmere, South Florida housing market that the vast majority of the living area likely has no value as a single family – other than to the current owners, of course.
In a market with one of the highest per capita population density for a US city, there is a premium for larger contiguous space so perhaps that is why we have so many pizza joints. Here is an price per square foot table by apartment size – you can see how ppsf expands with apartment size consistently over the decade (actually it has shown this pattern for the past 25 years). It’s expensive to get more living area in Manhattan.