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Appraising

Bad Actors: AMC Appraisal Perspective Through Rhetorical Misdirection

October 20, 2014 | 4:45 pm | Public |

I was invited to speak at the Great Lakes Chapter of the Appraisal Institute last week and met a lot of great appraisers who cover the state of Michigan.

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I spoke about the housing market and the misinterpretation of residential housing metrics, inspired by this article and the following infographic from the Detroit Free Press.

Inkster +106.4% !!!!! a largely distressed market with what I was told only has a handful of rock bottom sales ie $10K in 2009 becomes to $30k in 2014 – a perfect example. Hot? Hardly.

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As much as I think I held their attention for the entire hour allotted, my presentation fell short of getting audience adrenaline pumping like the Jordan Petkovsky, the Chief Appraiser of a TSI Appraisal, a large national AMC and affiliated with Quicken Loans. I still wonder how beneficial this public relations could be by talking to the industry like a politician – as if residential appraisers were clueless to the “incredible benefit” that AMCs provide our industry.

Here are a few of the questions (paraphrased) posed to an audience comprised of heavily experienced residential and commercial appraisers:

Q: “I realize there is friction between AMCs and appraisers. What has to happen to solve this problem?”
A: Someone in audience: “Someone has to die” followed by a burst of laughter from the entire room.

Q: “We spend millions on powerful analytics. Wouldn’t it be great for appraisers to get their hands on this technology?” (repeated 2 more times slowly for effect).”
A: Someone answered: “You have to spend millions on technology because the appraisal quality is so poor you need to analyze the markets yourself.”

Q: “How do we attract new appraisers into the business?”
A: My answer “Until appraisers are fairly compensated when banks are made to be financially incentivized to require credible reports, nothing will change.”

Q: “How do you think banks feel about the reliability of appraisals today? They don’t feel the values are reliable.”
A: My answer “Because AMCs pay ±half the market rate, they can only mostly attract form-fillers (aka “corner-cutters”). They don’t represent the good appraisers in the appraisal industry.”

Q: “We focus a tremendous amount of effort on regulatory compliance on behalf of banks and boy are they demanding! We even have a full time position that handles the compliance issues.”
A: My comment – that’s a recurring mantra from the AMC industry as a scare tactic to keep banks from returning to in-house appraisal departments. Prior to 2006 boom and bust cycle and the explosion of mortgage brokers with an inherent conflict of interest as orderers of appraisals, the profession was pretty good at providing reliable value estimates. The unusually large demands by regulators (if this is really true and I have serious doubts) is because the AMC appraisal quality is generally poor. If bank appraisal quality was excellent, I don’t believe there would be a lot of regulatory inquiries besides periodic audits.

What I found troubling with his presentation – and I have to give him credit for walking into the lion’s den – is how the conversation was framed in such an AMC-centric, self-absorbed way. I keep hearing this story pushed by the AMC industry: The destruction of the modern appraisal industry was the fault of a few “bad actors” during the boom that used appraisal trainees to crank out their reports. That’s incredibly out of context and a few “bad actors” isn’t the only reason HVCC was created – which was clearly inferred.

Back during the boom, banks closed their in-house appraisal centers because they came to view them as “cost centers” since risk was eliminated through financial engineering – plus mortgage brokers accounted for 2/3 of the mortgage volume. Mortgage brokers only got paid when the loan closed, so guess what kind of appraisers were selected? Those who were more likely to hit the number – they were usually not selected on the basis of quality unless the bank mandated their use. Banks were forced to expand their reliance on AMCs after the financial crisis because the majority of their relationships with appraisers had been removed during the bubble – the mortgage brokerage industry imploded and banks weren’t interested in re-opening appraisal departments because they don’t generate short term revenue.

The speaker spent a lot of time talking like a politician – “we all have to work together to solve this problem” “appraisers have to invest in technology.” When asked whether his firm had an “AVM”, he responded almost too quickly with “No” and then added “but you should see our analytics!”

The residential appraisers in the audience were largely seething after the presentation based on the conversations I heard or joined with afterwords.

It’s really sad that appraisers don’t have a real voice in our future. We’ve never had the money to sway policy creation and we can’t prevent the re-write of history.

But we’re clearly not the “bad actor.”

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Lone Wolves: Appraisers Fighting Everyone, Including Appraisers

September 27, 2014 | 2:20 pm | Milestones |

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A few days ago I published a critical piece on the appraisal industry for Bloomberg View called Guess What’s Holding Back Housing.

There are many great people, incredible talents and solid organizations within the appraisal profession. But in my opinion only 20% of the industry are truly competent professionals and the remainder are merely varying degrees of form fillers.

I have been an appraiser for 28 years and it is apparent that the industry is dying a death of a thousand knives. One of the key reasons for this slow death is the lack of national leadership and the extreme fragmentation since most appraisal shops are comprised of a single or just a handful of professionals. I’d also like to offer that the majority of our profession seem very willing to make unsupported negative inferences on reviews of a colleague’s work such as appraisal field reviews or troll columns like mine.

Like I said, 80% of the profession are really not professional. Many of these appraisers have not looked up from their clipboards in quite a while and take an objective look at the world around them.

I have found appraisers throughout my career to be hyper defensive about the quality of their own work (I am definitely one of them on occasion). Just ask any bank review appraiser what it was like to call an appraiser out on an unsupported analysis. And just ask any appraiser what it is like to get meaningless criticisms from a bank appraisal reviewer over nothing germane to the value opinion.

A few week’s ago a colleague sent me a link to the first empirical study on the impact of HVCC on the appraisal profession by the Federal Reserve Bank of Philadelphia. The thrust of the study was the analysis of “low appraisals.”

When I used the term “low appraisals” in my piece combined with their editors choice of post titles: Guess What’s Holding Back Housing all bets were off.

It was “game on”, yet I’m in the appraisal trenches with all of them. The most amazing thing about the adverse reaction was that most of the appraisers who trolled the comment section or sent me scathing emails never read the Fed’s working paper on the analysis which was the basis of the post. The core of the working paper is only about 10 pages double spaced in length yet they were more willing to troll a colleague than undertake a professional debate.

I could chalk this unprofessional reaction to the battering our industry has taken over the past decade – I certainly feel that way – but it doesn’t explain everything. Because our industry has no real voice in related public policy, we continue to be marginalized by robotic institutional processes such as AMCs, AVMs and upper management that still sees our services as merely a cost center.

When I received the first email troll comment, I queried his email address and called him up right away. He was surprised that I found his phone number but we had a pleasant discussion. He was concerned that I would out him.

I exchanged emails with several of the email ranters and the replies were much more civil. I also did this with a few of the commenters on the post.

Although the majority of these responses are rambling rants, they shed some light on the state of the appraisal profession.

Take a look at a sample (I redacted their last names, firm names and contact info):

Hello Jonathan- I’ve heard good things about your firm and its work, so I am doubly shocked by the headline in your article “Guess What’s Holding Back Housing,” and the implication that somehow appraisers are to blame for the sluggish pace of the housing recovery. There’s no question mark at the end of the “Housing.” It’s not a question, but more of an accusation. You do know we’ve been through a severe recession, don’t you? That in spite of the increase in employment that has taken place we have created a lot of part-time jobs and done away with a lot of high-paying full-time jobs. Labor force participation is way down. You do know that lending standards have tightened? Are you aware of these facts? I ask that because your article conveys ZERO understanding of any of these fundamentals. The term “Low Appraisals” manages to be erroneous and stigmatizing at the same time. That an appraisal is “low” tells me nothing about the quality of the appraisal. It may be a great appraisal. It may be a terrible appraisal. It says nothing about whether the appraisal conforms to regulatory guidelines and industry standards and is a credible opinion of market value. I NEVER use that term when referring to an appraisal. I have dealt with many irate customers throughout the years and I always take the time to explain to people what an appraiser is supposed to do – which the general public frequently does not understand. The term “low appraisals” is also stigmatizing. If “low” appraisals are “holding back housing,” well that is not a good thing, is it? As a leader in an industry which is poorly understood by the general public, I am saddened that you would take the space granted to you to further the misconceptions people have about appraisers and what we do. It is NOT our job to “make” or “hit” a number. When we make that the job is when the problems start happening. You could have explained to Bloomberg’s readers that appraisers have to weigh an offer for a property in light of market evidence. If the evidence to support the sale price is not there, an appraiser is doing his or her job in NOT “hitting the number.” Your use of the “low appraisal” term suggests that the appraisal is somehow flawed. If the appraisal is flawed, it is not because it is “low” but because it does not incorporate appropriate data and/or analysis. In all my time in the appraisal industry I have always offered irate clients a change to point to specific, substantive errors or omissions in any appraisal when they do not agree with its findings. The overwhelming majority of the time the client, or broker, or other interested party has nothing to say. They are angry because the number is “too low.” They don’t know or care if the appraisal is well done or poorly done. All they care about is that it is “low.” I hope you will use your prominent position in the industry and your access to publications such as Bloomberg to speak the truth about what appraisers are do, not further misconceptions. Sincerely William

I called William directly and we spoke at length.

How can you, a highly recognized real estate appraiser, write an article for Bloomberg suggesting that appraisers are partially responsible for the weak housing market when the quality of the appraisal reports was not analyzed? How can anyone, or an agency make such a suggestion if the reports weren’t analyzed? I am a retired general real estate appraiser who reviewed many reports and to do so required a knowledge of the real estate market in which the report was prepared. In my own opinion, again without an analysis of any reports, it is more likely that the appraisers are better now and are NOT trying to hit the target as was the case prior to the 2006, 2007 blowup because they are under so much scrutiny from the lenders. For example, no more calling an average property “above average with no repairs necessary” when, in fact, the property has a few problems. The local appraiser group has shrunk as the worst ones are no longer in business, as is the case of many of the unscrupulous lenders who employed them.

My response to the above:

Hi Thomas,

Thanks for sending the note.

It’s actually quite easy to write about it. I disagree with your observations about today’s quality. It is very poor.

I have reviewed thousands of residential appraisals, been an expert in a number of national litigation cases and the quality right now is just as bad as it was during the boom, but different. The Fed study I referred to in the piece inferred a quality problem as a result of the metrics presented. Talented professionals like I’m sure you were are no longer entering the industry.

Yes the mortgage broker-orientated appraisers are largely gone now but the new generation of appraisers working for AMCs are just as bad, but in the opposite direction. Now we have an industry working for half the market rate who need to cut corners to be able to complete the report. With AMC’s it is much more common for the appraiser to be missing local market knowledge and to drive much farther to their assignment.

Mortgage appraisers today who work for AMCs tend to be biased low because they don’t know their market area cold which is just as bad as being biased high back during the boom.

I want our industry to provide a neutral well research product. The problem is the the clients don’t care and see us as a commodity rather than a profession.

Again, thanks for sharing your thoughts.

Thomas did not respond.

Jonathan, Summarized: Appraisers were responsible for the housing bust AND now for holding back progress in the housing market. Funny how that is……..that so many cover the above as truth and that few actually write about the actual purpose of the appraisal process. I suppose it would be harder to headline an article like that and draw readers in. I enjoyed this part in particular; “The quality of appraisal reports wasn’t analyzed, but the paper suggests that it may have declined.” I look forward to reading more. Sincerely, Adam

My response to Adam:

Hi Adam

Summarized: you need to drop the righteous indignation lathered in sarcasm approach. It’s not productive unless you are merely a troll.

Otherwise I assume you are an accomplished appraiser. Would you like to discuss this tomorrow? I’d really appreciate dissecting the disconnect.

Let me know.

Adam did not respond. The more sarcastic the commentary, the more afraid appraisers like Adam are to engage in reasonable discussion.

I don’t think you have all the correct information. For only a $400 to $500 fee an appraiser will make sure I don’t pay too much for a house. Nor pay the real estate agent a 7% commission which on a $500,000 home would be $35,000. Nor pay $300,000 in interest to a mortgage company. So are “low ball” appraisals really the problem? Or were “inflated values” the problem? Or is it that appraisers keep the other guy honest? Sorry sir, but I want to not get ripped off! Bobby

My reply:

Bobby

Thanks for the reply. On a bank appraisal, the appraiser’s client is the bank, not the borrower – a common misunderstanding.

We had a continuing dialogue.

I just read the article on Bloomberg View and I have to say, as a certified real estate appraiser, I am a little offended. I know the graphs and the statistics show that there has been an increase of real estate sales and refinances that are killed by the appraisal. I also agree that the HVCC and later the Dodd-Frank Act has increased the number of what are called “low appraisals”. I think the problem myself and many other appraisers have is even the often incorrect use of the phrase “low appraisal” itself. As in all professions there are always going to be the few that don’t do the job correctly or even those who falsely skew the results. The other 98% of the appraisers out there are just giving the honest truth, as we are required to by our ethics and the law. Most appraisers including myself have a great respect for the fact that we are there to protect the borrower and the lender, or the seller and the buyer in the case of a sale. I have read many articles in realtor or mortgage professional trade magazines and online blogs about these “low appraisals” and the bad “low ball appraisers”. The story often goes like this; A realtor Jane Doe describes how “bad, low appraisals” have killed 4 of her last 10 sales. She says the problem has gotten worse and she has been a realtor for 20 years and appraisal quality is at an all time low. The truth is that most agents, like appraisers are honest professionals who are doing a good job. The issue is their job is to get a buyer and seller to agree on a price… so that they get what they want and money can be made. They are advocates for “brokering” the deal and work on commission. There are few checks and balances in that system, it is self regulated by the free market, which is great… most of the time. What sometimes happens is this: The house for sale is a nice 2,000 sf, 3 bed 2 bath ranch home in Niceville Subdivision, the seller feels his house is worth at least $250,000 and the buyer loves the house and they feel that $240,000 is the highest they can pay. The house goes under contract for $240,000 and 2 agents and 2 clients are happy… for now. Then when the appraisal comes back at $225,000 everyone thinks it is a low appraisal, 2 agents, 2 clients, 1 loan officer, etc. all want the house to be worth the agreed upon $240,000. The problem is the appraiser is doing his job and found that out of 30 total sales in Niceville S/D, 8 of them are similar ranch style homes that are in “average” to “very good” condition selling between $190,000 and $220,000. Most of the ones that best match the size, condition, # of garages, amenities, etc. have sold for about $215,000 after + & – adjustments are made for differences. That is what is known as “The MOST PROBABLE PRICE a property will bring in a competitive and open market”, not the highest price “if you get lucky”, or the price you can get “if the buyers are from out of town and don’t know the local market”. The scope of work we agree to is just that, the most probable price. Lenders want to know that if the loan stops performing that they actually own something that is worth what they lent on it. If 90% of homes like the one in this case sell for $215,000 and I value it for $240,000 I have not done my job correctly. If the loan defaults 6 months later when the buyer losses his job and the bank loses money because they can’t find that rare buyer willing to pay too much, I have harmed them. If the buyer of that house gets relocated in 6 months and cannot sell it or has to take a loss when he realizes he can only get the usual $215,000, I have harmed him. The agents and loan officers that made the high commissions 6 months ago have nothing to fear, they did their job and got the deal done. The appraiser will be the one that will be getting the call from the attorneys. That is something that needs to be remembered. We are NOT paid on commission and our work is scrutinized by underwriters to test us constantly. It is in our best interest to do the right thing and value a property fairly, not too high or too low…. And that is what we do…. and get pressure in one direction or the other if values are going up or going down. That is why the average age appraiser is over 55 years old and few are joining the profession. Being a punching bag for doing the right thing gets old as fees go down gobbled up by the AMC’s that Cuomo forced on the industry as the cost of living, gas, business expenses, insurance, etc. goes up. P.S. Look at Cuomo’s involvement and gain, in creating a forced middleman in the modern appraisal industry. Regards, John

Thanks for your thoughtful reply John.

The phrase “low appraisal” was the metric selected by the Fed and the basis of the study. It strikes a nerve in appraisers and rightful so. They used it in a mechanical way versus the way NAR might complain that appraisers are killing their deals. Still, the appraisal quality of the industry is worse today compared to 10-20 years ago. Are there good appraisers out there? Of course. I am. You sound like you are. But the industry is dying and part of the reason, but not the entire reason, is us. We have no leadership and are simply being marginalized – the outcome in my opinion is a lower quality product that reduces the reliance on our industry.

Thanks again for sharing your thoughts.

John replied again with a very well articulated description of the state of the appraisal industry.

I agree that we need to do more. In Louisiana we are pretty good about regulating AMC’s and there is a requirement for them to pay C&R fees but many still don’t. I am sorry if I sounded rude in my first e-mail but as you know the low appraisal thing strikes a nerve with most of us. I would love to see a large powerful national organization that truly advocates for appraisers the way NAR does for realtors. That would be the real answer. Getting most of us in one organization I agree is the problem since we are lone wolves in many ways.

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Bloomberg View Column: Guess What’s Holding Back Housing

September 27, 2014 | 12:54 pm | BloombergViewlogoGray | Columns |

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Read my latest Bloomberg View column Guess What’s Holding Back Housing. Please join the conversation over at Bloomberg View. Here’s an excerpt…

During the U.S. housing boom, real-estate appraisers acted like deal-enablers rather than valuation experts. Indeed, inflated appraisals were a key ingredient in the erosion of mortgage-lending standards that led to the housing bust. Now we are seeing the opposite — low appraisals — with unwelcome consequences for the housing market.

[read more]


My Bloomberg View Column Directory

My Bloomberg View RSS feed.

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My First Post: July 31, 2005 APM Marketplace Radio’s “Appraising the Appraiser”

June 18, 2014 | 10:21 am | Milestones |

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It is hard to believe it has been nearly 9 years since I wrote my first blog post. Back then I was very frustrated with real estate world around me. The housing market was booming and my appraisal competitors were increasing their staff size by a multiple of 20 (they’re now essentially out of business). We weren’t part of the (fool’s) gold rush.

Apparently I had missed a key math and ethics class in school that would help me understand what was happening and why it was happening. Everyone seemingly was losing losing their minds – appraisers, consumers, banks, rating agencies, investment banks, investors – to a word – everyone. It didn’t help that national appraisal organizations, all of whose memberships had been dropping since appraisal licensing was introduced in 1991, did not understand or were not willing to speak out about the obvious problem. Appraisers were not allowed/not able to be a neutral valuation experts for lenders to make informed decisions on lending/risk of their collateral – lenders just didn’t care because they could off-load the risk to investors around the globe. The appraisal industry was converted nearly overnight to “deal enablers.”

I saw my career ending in 3 years if I didn’t do something. I did the only thing I could think of – start talking openly about the lack of independence the appraisal industry had at that time (amazingly, how little has changed in this regard). No appraisers I were aware of were speaking openly about the problem in 2004-2005 – our industry was living in constant fear of alienating their lender clients. Since I was losing lender clients to my rapidly growing competitors who were morally flexible, I really had nothing to lose.

My first blog post was a June 23, 2005 interview with Bob Moon at APM Marketplace in a segment called “Appraising the Appraisers” My industry was a symptom of a larger problem that eventually crushed the global economy – a credit crunch.

The original APM audio link is now broken but I have it here (I hope APM doesn’t mind).


It’s a time capsule and (I believe) worth a listen.

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AMC Structure Systematically Pushes Good Appraisers Out of Business

June 13, 2014 | 2:25 pm |

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Good appraisers are unable to compete with the fly-by-night form fillers that proliferate the AMC industry.

We have done some work for the AMC of a global bank who provides mortgages in Manhattan when they are willing to pay the market rate for appraisal services. They send us requests to appraise a variety of co-op apartments in Manhattan. We recently received an appraisal request for a very large co-op apartment in a unique building (property probably worth well over $10M). The AMC offered a generic fee which is roughly 1/3 the local market rate for this type of property.

We sent them a request to be paid the market rate and was then asked to make an “exception request” and explain the reason for the higher fee so they can go back to the borrower to get approval. We are nearly always rejected.

Problem 1: Conflict of Interest Unbelievably the AMC is aligned with the borrower’s interest in cost savings without concern for quality. The AMC is in business to manage the appraisal process and therefore help protect the bank’s exposure to risk. When you get right down to it, the only value-add an AMC provides to a bank is cost containment (and they are not cheaper than banks doing it themselves) so why would an AMC be incentivized to allow the appraiser to collect a fair fee? It makes them look ineffective at cost containment.

Problem 2: Paying Lip Service to Quality The reason an appraiser is requesting a higher fee is the complexity of the assignment. What else would it be? Yet we have to write a specific request to this property which we haven’t inspected yet. In reality, the next appraiser on the conveyor belt will be selected and given a higher rating for being cooperative. This is a sham process – it is merely a way to document the appraisal process in case the regulators show up.

Here’s the standard BS response that this AMC gave to our request – this AMC is located in a rural location in the upper reaches of the northeastern US – they are concerned whether the borrower would feel comfortable paying a higher fee on a 50% cash co-op building on Park Avenue. The sender is a clerical (non-appraiser) individual who is giving the appraiser the following boilerplates response and doesn’t really understand what they are saying:

When you became an approved appraiser, you agreed to follow the processes and procedures required by [XXXXXX] by signing our Engagement Letter. We require all vendors to submit a fee exception form when they feel the work is outside of the norm. We need that information to justify your fee request to our borrowers. We are not looking to force an appraiser to complete work at low fees, we are looking to provide the best possible work at the best possible price for our borrowers. We expect that you are the expert in your market and we are looking for your expertise and explanation to make our borrowers understand why the fee may be warranted. However, we also expect the fee to accurately reflect the work involved and borrowers have the right to refuse to pay that fee and request that another appraiser be assigned. While, it may be frustrating for our appraisers, it is our current system and all of our vendors are required to follow the process.

No, it’s insanity.

Question How much do you think this clerical person understands about our specific submarket and whether they understand how much another appraiser who will work for a lowball fee does understand about our specific market?

Answer Nothing. This is merely canned comment process designed to blunt the impact of an investigation by a regulator in the future.

Here are a few other thoughts on this whole sham process:

Why Appraiser Robots Rule The World of AMCs
- In a market like Manhattan, especially for a substantial property, you could say that there is no such thing as a standard property and fees are based things like time spent on the assignment and the experience needed to handle the complexity….unless you see appraisers as robots and every assignment is the same.
- Beyond saying things like this is a unique property with limited data and would take a longer time to work on to provide a credible result aren’t enough to justify a higher fee to a borrower who wants to keep the fee low. Does the bank (AMCs client) even understand that this is happening?

So what would help an appraiser get a fee approval of any kind from this AMC? Here are a few reasons I might use next time when I have to substantiate a higher than generic appraisal fee:
-There are attack dogs in the building lobby that we have to run from and I am expecting them to tear at my clothes and force me to seek out significant medical attention.
-The flooring of the co-op apartment is believed to be covered with shards of glass and we therefore have to buy steel toed work boots to do the inspection.
-The occupant is known to carry a weapon, having assaulted visitors and did jail time as a result – so we need to buy a Kevlar vest

You get the idea. Good grief.

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RAC: The Best Appraisers in North America

June 11, 2014 | 5:36 pm | raclogo | Videos |

Really! This short intro video accurately portrays the RAC organizational culture and why I love these people.

I am a long time member of RAC, an appraisal organization that specializes in complex residential properties. It was founded in 1990 to focus on the relocation subset of residential appraising but this is not a mutually exclusive point. An appraiser who provides high quality relocation appraisals also provides high quality appraisals for complex residential assignments. Most of our members do a lot of appraisal work outside of the relocation universe.

For Miller Samuel, relocation appraisal work has never been a large part of our practice given our New York market location but the draw to retain my membership has remained powerful.

Here are some thoughts:

For Appraisers – RAC is nominally priced, full of incredible experienced people and most important, absent the crazy appraisal politics that have nothing to do with making someone a more valuable appraisal professional. Check us out.

For Financial Institutions – If you ever need a resource to get the best residential real estate appraisers in the country, you simply need to check out RAC. And if our organization doesn’t have coverage in a specific market you are interested in, we’d be happy to recommend someone to you.

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[London Calling] ‘Mike Mulligan and his Steam Shovel’ New Development Edition

June 9, 2014 | 10:41 am |

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I read Mike Mulligan and his Steam Shovel nearly every night to my 4 sons when they were younger (probably an unnecessary qualifier). It was also my favorite children’s book as a kid.

As it turns out, this story preempted current London construction methodology (h/t boingboing.net).

So, many of the squares of the capital’s super-prime real estate, from Belgravia and Chelsea to Mayfair and Notting Hill, have been reconfigured house by house. Given that London’s strict planning rules restrict building upwards, digging downwards has been the solution for owners who want to expand their property’s square-footage.

mikemulligandig

This trend reflects the appraisal concept of highest and best use for the equipment despite the inherent wastefulness. Does it make sense to leave the equipment in the basement? With all the concern in the US about below grade empty oil tanks and the environment, I wonder how this practice is allowed, cost effectiveness aside.

Given the exceptional profits of London property development, why bother with the expense and hassle of retrieving a used digger – worth only £5,000 or £6,000 – from the back of a house that would soon be sold for several million? The time and money expended on rescuing a digger were better spent moving on to the next big deal.

You really need to read the book.

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Spectacular TED Talk on The US Financial Crisis: How it Happened + How to Prevent

May 31, 2014 | 4:59 pm | Favorites |

Wlliam Black, a former bank regulator, made a TED Talk last fall that I wish I had made (but I couldn’t be as eloquent although I have a cooler tie). It should be required viewing by anyone who is connected with the housing industry.

Black’s presentation lays out the financial crisis in the proper context. He provides the recipe for disaster for all to see and it is NOT complicated to understand. Change the perverse incentives and a lot of this goes away. So many opportunities to avoid this crisis were missed.

And this is the first time I’ve heard someone talk about the unrelenting pressure that banks (and mortgage brokers) placed on appraisers, essentially forcing our industry to either make the number of get out of town. By 2007, 90% of appraisers said they were coerced by banks to make the number. That seems low to me. It had to be 100% or else those 10% of appraisers were living in a cave.

I’ll be returning to this video periodically for the foreseeable future as a reminder.

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Room 666: Providing court testimony as an expert witness makes you better

May 21, 2014 | 9:54 am |

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I took the photo of this door in NYS Supreme Court yesterday and it got me thinking about quality of “experts” as did this.

In a perfect world, any appraiser or analyst (in any profession) should be forced to provide expert witness testimony in court at least once – covering a paper they’ve written, research they have presented, an opinion they’ve formed, a sales pitch they’ve developed, heck even a blog post they’ve posted.

I actually like providing testimony and our firm does a fair amount of this work for our clients. Getting grilled for hours and even days by lawyers trying only to chip away at your credibility in front of others provides amazing clarity to the way you approach your analysis and profession (aside from being exhausting).

Many talking heads that opine on a housing market, a stock, a court case, etc. often aren’t tested to fully articulate their thoughts, assuming they are even thinking. Hence, BS reigns.

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Floored: Can/Should A Governing Body Set Minimum Sales Prices?

May 6, 2014 | 2:47 pm |

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The concept of “setting a price floor” applies to gated communities, homeowner associations, planned unit developments – in fact any situation where a central governing body has direct influence over the sales price and/or buyer of your property. I believe the idea of “setting price floors” is surprisingly common in the outer boroughs of NYC, especially Queens.

Let me back up a second to provide context.

As the Manhattan market peaked in 2007/2008, we began to observe some co-op boards setting floors to prices in their buildings to “maintain value” for their shareholders. While a fiduciary responsibility, it is steeped in contradictions to free market principles. There was a great New York Times summary piece about this practice back in June 2007: “Should Co-op Boards Set ‘Floor Prices’?

About 15 months after the NYT article was written Lehman Brothers had collapsed and AIG, Fannie Mae and Freddie Mac were all bailed out. Manhattan sales prices had fallen about 30% from 2008 to 2009. During this period I observed an increase in the practice of setting price floors. A hypothetical scenario (the type I often observed first hand) for – let’s call it – “Apartment XXX” and the timeline might go something like this:

  • Sold in 8/2007 for $1,000,000
  • Listed in 8/2008 for $1,100,000
  • Zero activity until 1/2009, offered $700,000. Offer rejected by shareholder.
  • Offer made by new buyer in 2/2009, offered $705,000. Offer rejected by shareholder.
  • Offer made by new buyer in 3/2009, offered $700,000. Offer accepted by shareholder.
  • Board turndown – “price too low.”
  • Offer made by new buyer in 4/2009, offered $695,000. Offer rejected by shareholder.
  • Offer made by new buyer in 5/2009, offered $710,000. Offer accepted by shareholder.
  • Board turndown – “price too low.”
  • Taken off market by shareholder.

A co-op board CAN’T dictate sales prices
It is clear from the steady stream of new offers in my hypothetical that the market had reset to a significantly lower level during the year. If that was the case (it was), then the board was actually doing a disservice to their shareholders by making their apartments essentially unsaleable. A buyer isn’t going to pay what the seller or the board wants the price to be. Econ 101. Housing market prices change over time, hopefully rising more than falling in the long run. The brokerage community also has a fiduciary responsibility to get the highest price for their seller under market conditions at that time. Although the board is trying to protect their shareholders (and themselves as shareholders), they have in effect, temporarily nullified the market in their building. The brokerage community is less likely to bring offers to sellers because they assume the board will reject the price even though the property had been properly exposed and vetted in the marketplace.

A co-op board CAN protect their shareholder against price outliers
One of the misnomers of the “setting a price floor” discussion is the fact that appraisal quality for lenders has been decimated since the financial crisis as banks now fully rely on appraisal management company ie “AMC” appraisers and most have no “local market knowledge.” An out of market appraiser will likely be more influenced by outliers than a local appraiser because the out of market appraiser is data starved and has no experience in the nuances of that market. It is clearly prudent for a board to be vigilant about outliers as reflected in the video. I’ve consulted on transactions for boards that don’t represent market value – ie the heir or executor lives on the other side of the country, doesn’t care about the market value and simply wants to dump the unit, make some money and move on. The out of market appraiser will probably use that sale as a “comp.”

“Protecting against outliers” is very different than “controlling prices” in a market.

In the outer boroughs especially in Queens, I believe the practice of setting a price floor has remained a widespread practice for years. Here’s a co-op attorney who is providing tips on how to “maintain values” on Habitat Magazine‘s web site. Concepts like setting up “sliding scales” to sell at 95% of the average of past sales may work in a stable market but worry me because the co-op won’t be able to respond to downturns and is in danger of choking off the market, potentially depressing prices even more.

This video also talks about apartments being different in condition and boards need to consider this because real estate appraisers don’t take into consideration whether or not an apartment was renovated.

No! This is absolutely an incorrect or the appraiser is not being asked to provide an opinion of market value – appraisers are supposed to take condition into consideration if they are being requested to provide an opinion of market value.

As I mentioned earlier, with the proliferation of AMCs, appraisers working for retail banks are generally being paid 50% of the market rate and can’t or won’t confirm condition of their comps. Higher up banking executives don’t yet equate appraisal fees with appraisal quality.

“Maintaining Value” in a co-op (or multi-unit housing entity with a governing body) Here are a few (non-legal) valuation thoughts on “maintaining” values in a co-op. I’ve personally always taken this to mean that the corporation is run efficiently for the benefit of the shareholders and when that happens, property values are “maintained” relative to the market. I also believe their values will ebb and flow with the world that surrounds the building – ie supply, demand, credit, interest rates, economy, employment, etc. These are outside factors tend to be things that the board has no control over. If the board takes actions to control “market forces” they can potentially damage shareholder value and they are potentially not fulfilling their fiduciary responsibilities.

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