Matrix Blog

Boards & Associations

Sadly, The Appraisal Institute is now working against its local chapters

December 6, 2016 | 6:38 pm | Favorites |

appraisalinstitutelogo

I have a lot of good friends and colleagues who frequently give at least a passing thought to quitting the Appraisal Institute, the largest real estate appraisal industry trade group. At the national level, the association has lost the ability to work for its members and has instead, shifted into a political failure spiral by enacting policies that are against their chapters’ and members’ best interests.

I get these types of comments from members at get togethers who say things like…

“I am only paying my dues to retain my designation.”

“The chapters are the only relevant thing AI provides to help me.”

“The self-dealing politics at National sickens me.”

Their announcement of the new administrative policy on November 30, 2016 continues the trend:

As you might have heard by now, the Appraisal Institute Board of Directors recently took a significant step to enhance your chapter’s ability to focus its attention on providing member services by reducing your current administrative burden. This is great news for chapters.

Here’s the letter that was sent to chapter leaders:

ai11-30-16

It reminds me of an old IRS joke: The IRS agent walks into your office with arms extended for a handshake and says:

“I’m from the IRS and I’m here to help you.”

It has been discouraging to watch the Appraisal Institute (National) erode into irrelevance while the appraisal industry is crying out for leadership at a seminal moment in our history. Dodd-Frank is about to be gutted and appraisal management companies have run out of appraisers willing to work for half pay. Instead they have morphed into a trade group that is unable to help its members. I challenge my readers to provide any evidence of such leadership since the financial crisis.

One of the only remaining redeeming features of the Appraisal Institute aside from their SRA and MAI designations has been the strength of local chapters. It’s where the rubber hits the road, where appraisers press the flesh at local meetings, take classes and listen and interact with guest speakers. The real value of AI membership remains at the chapter level.

At the Appraisal Institute headquarters in Chicago (National), they clearly recognize the power of the local chapters. For an organization that has been encumbered by procedural minutae, they developed the ability to enact policy without input or oversight. Here’s the current controversy over a non-vetted decree from National that involves money.

National has enacted a new policy that requires all money at the chapter level be administered by National. It’s a political power grab that will further alienate dues paying members. This is part of the growing pattern of AI’s lack of communication to their members.

The response

The very large New York Metro chapter responded in a letter from their board 2 days later – about being blind sided by the new policy. It’s an incredible read – a full-on indictment of the thinking of National. So many great appraisers in that chapter but how long will they put up with this? You can see how hard the local chapter is holding back it’s anger for such a policy. See link for pdf or the full text below. Bold emphasis provided by me.

AI Metropolitan New York Chapter Board Letter to AI National Board


December 2, 2016

Dear Members of the Appraisal Institute Board of Directors:

This letter is being submitted on behalf of the Board of the Metropolitan New York Chapter of the Appraisal Institute as a response to the National Board’s recent decision to implement a new Appraisal Institute Chapter Financial Management and Administration Policy. The Metro New York Board met this week and unanimously agreed to communicate our disapproval of the new policy and our astonishment that such a major change could be effectuated without any sort of prior notification or consultation with the Chapters and the Membership. Furthermore, to announce this decision as a fait accompli late on a Friday before a holiday week is alarming to our Chapter’s Directors.

The Metro New York Board finds it surprising and unacceptable that such a significant policy change in the governance of Chapter finances could be constructed without any transparency, input or dialogue with the Chapters and Membership. Simply being informed that national will take over our Chapter funds, albeit with assurances of our continued control of our finances, is outrageous paired with the admission that “Adjustments may have to be made to the policy as implementation progresses.” By creating this plan, effectively behind closed doors, you have not instilled any sort of confidence that the policy you are demanding we accept is acceptable to the Chapter. Given that the Appraisal Institute has a model for gaining feedback from the Membership – with the 45-day notice model provided for other significant actions impacting Members and Chapters – the Metro New York Board feels it is not at all appropriate for the national Board of Directors to unilaterally create this new policy in such an opaque manner. Given the potentially serious impacts of this new policy on the individual Chapters, we believe a more extended, perhaps 90-day notice would be minimally appropriate particularly given that this change was basically “sprung on” the Chapters on the advent of the holiday season that creates extra demands on all of us.

Beyond our uneasiness with the lack of transparency and how this new policy was implemented, the Metro New York Board finds the policy itself to be unacceptable. We believe that turning over our funds to national would limit and impact the autonomy of our Chapter and potentially diminish our stature in the local real estate community. The Metro New York Chapter is one of the most active Chapters and has been diligent in providing necessary education opportunities for our members and candidates, organizing enriching events for our members and the broader New York City real estate community, and fostering a supportive framework to help candidates work towards their designations. Importantly, this last goal contributes to the health of the organization nationally. Many of these programs are supported by our members through a historically successful Chapter sponsorship program. We believe our success in these endeavors illustrates that we are proficient in managing our own funds, maintaining reserves, and knowing how to do what needs to be done on a local basis. Certainly stripping the Chapter of its funds, particularly under terms that may be subject to change, will undermine the Chapter membership’s confidence that our efforts to maintain the economic health of the Chapter constitute time well spent. Furthermore, several Chapter sponsors who have consistently supported Chapter endeavors have expressed concern about this change in policy and that it may impact their willingness to continue such sponsorships in the future considering the substantial loss of Chapter autonomy as a result of the new policy changes.

While we look forward to hearing more details regarding the new policy from National on Tuesday’s call, the Metropolitan New York Chapter Board strongly urges the National Board to reconsider implementing this new policy.

Appraisal Institute, New York Metro Chapter
John A. Katinos, MAI, President
On behalf of the Metro New York Chapter Board of Directors


I heard a rumor that AI wants to do away with chapters and I’ve also been told that is not true – but with the opaqueness of National, I don’t know what to believe. And I keep hearing rumors about AI spending millions to expand their footprint across the globe but haven’t seen any measurable success let alone share the status of this effort with members. Is esoteric global expansion worth raising dues in a compensation compressed environment? Is the membership even aware of this effort and the millions supposedly lost?

Most of my peers nationwide have expressed frustration with an organization mired in self-serving politics. And it only seems to be getting worse.

My moment of zen was their self inflicted and childish exit of the Appraisal Foundation a few years ago. I eventually left AI and moved on to two other organizations that provide what appraisers are looking for. Remember that most of us are “lone wolves” and belong to organizations to get other perspectives. I can’t tell you how many SRAs and MAIs I know are talking about leaving the organization.

And did you ever wonder why there are so many statewide appraisal coalitions popping up? It’s largely because of inaction by National or their opposition to issues important to appraisers.

Incidentally, this new policy parallels the changes made by the Chinese government a while back. They moved the majority of the tax income stream from the provinces to the national government. This forced the provinces to go hat in hand to the national government to beg for an allotment of income each year. Sound familiar?

Lots of graft ensued for the provinces to get their “share” of revenue. In fact one of the reasons there are as many as 40 ghost cities in China right now is because the provinces were incentivized to generate GDP. What better way to do that then to build cities for several hundred thousand residents that would never come.

The moral of the story: central planning is never efficient. Through the loophole that National installed allowing them to modify this policy at anytime in the future is a recipe for disastrous self-dealing.

This is the appraisal industry’s moment to have some impact on our future. There are many challenges in front of us. The Appraisal Institute on a national level is now officially obsolete.

Enough with the self-dealing. We don’t make enough money collectively to fund their boondoggle. We need leadership, not politics.

Tags: , ,


How Not to Value A Co-op Apartment: Price per Share

May 12, 2016 | 11:59 am | Favorites |

Dakota_1890_wiki
Source: Wikipedia.

Co-op Boards Cannot Prevent Sales They Think Are Low Without Damaging Shareholder Values

I have spoken with buyers, sellers or real estate agents that were told by co-op board members their sale may not be approved by the board because the resulting “price per share” of the sale (purchase price/apartment shares) is less than a prior similar sale in the building. Here are some thoughts about co-op boards who try to “protect” shareholder values by preventing transactions.

  1. Co-op boards wield a lot of power over a sale within their building. In a research study I coauthored that was published by NYU Furman Center for Real Estate and Urban Policy with Michael H. Schill and Ioan Voicu called The Condominium v. Cooperative Puzzle: An Empirical Analysis of Housing in New York City found that there was an inherent cost of a co-op board’s power over their shareholders, unlike the relationship between a condo association and their respective unit owners. It is important to note that market forces are far more powerful than a co-op boards intention to “protect” the market within their building. Much of this gateway mentality stems from the legacy of no public record for co-op sales prior to 2003 (made public record in 2006, but retroactive to 2003). When a co-op overextends it reach and stops a sale because the price is considered too low – often because it falls short of a recent similar apartment’s sales price – the co-op board is doing a disservice to their shareholders, despite best intentions. Why? The decline of a transaction where the listing was properly exposed to the market creates a public perception that the board is disconnected from the market. Brokers are less likely to bring buyers to listings within such a building in the future. Less market exposure for listings in the building means fewer potential buyers and ultimately a lower achievable sales price.

  2. Housing markets do not always rise. This was made clear during the housing bubble and bust cycle a decade ago. The mindset of requiring a current sale to be higher than the last highest similar sale would prevent any sale from occurring when a market is flat or falling. This taints the building in the market and would make values fall much harder in a down cycle once the board capitulated. This would serve as a significant miscarriage of board power during such a cycle. I saw a lot of this circa 2009 after Lehman collapsed. A board would consistently nullify deals on a specific listing that was properly exposed to the market. By the time the third market vetted contract was signed at about the same price, the seller would give up and be possibly exposed to significant financial hardship. And since many co-ops are restrictive about a temporary rental scenario, the seller would be unable to rent the apartment after they moved out.

  3. One of a few valuation remnants of the past includes a co-op board valuing a current contract sale on a price per share basis. This is a “shotgun” approach to determining a reasonable market value and is at best case, a broad brushstroke approach that is not suitable for an individual apartment valuation. Valuing by share allocation does not reflect the fair market value. When the sales price per share is consistent with a building average or trend, it is simply coincidence within a wide bandwidth of price probabilities. Such a price per share valuation philosophy would appear to violate the board’s fiduciary responsibility to protect its shareholders by penalizing them for a share allocation perhaps done decades or even a century ago. There is no science to the original allocation of co-op shares and the patterns are often fraught with inconsistencies. For example, the perception of value for a certain exposure in the building may be different today than it was in 1927. A buyer doesn’t look at a per share valuation in a building as market value for guidance – they never have. They look at competing properties in the market surrounding the property. Incidentally all of those co-ops with competing listings likely had different rationale for their respective allocations when they were built or converted.

  4. Investor value can be mistaken for market value. In the case of the co-op board judging an adequate sales price based on the price per share within the building is known as investor value. It is the value to them, not the value to the market. This is why sellers can be so disconnected from the market when setting their asking price. A seller might think that a purple formica entertainment center in the living is worth another $50 thousand to a buyer when the buyer is thinking it is worth minus $2 thousand for the cost to remove it. Co-op boards are responsible to protect the interests of their shareholders but they can confuse that with market value.

A few definitions of Fair Market Value

IRS: “The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”

Investopedia: “Fair market value is the price that a given property or asset would fetch in the marketplace, subject to the following conditions:
1. Prospective buyers and sellers are reasonably knowledgeable about the asset; they are behaving in their own best interests and are free of undue pressure to trade.
2. A reasonable time period is given for the transaction to be completed.
Given these conditions, an asset’s fair market value should represent an accurate valuation or assessment of its worth.”

Merriam-Webster: “a price at which buyers and sellers with a reasonable knowledge of pertinent facts and not acting under any compulsion are willing to do business”

Tags: , , ,


Manhattan Penthouse Co-op Sold For 2nd Highest PPSF in History

June 9, 2014 | 2:57 pm | Milestones |

960fifthFP

Real estate reporter Katherine Clark at the New York Daily News got the scoop on the $70,000,000 penthouse sale at 960 Fifth Avenue, the highest price ever paid for a Manhattan co-op apartment. Curbed New York lays out all the (pretty?) pictures.

The previous record was held by David Geffen, who paid $54,000,000 in 2012 for the Penthouse at 785 Fifth Avenue. Although the Geffen penthouse was renovated, it was 12,000 square feet, more than twice as large as the 5,500 square feet within the penthouse at 960 Fifth Avenue – that just sold for a record price of $70M.

To further illustrate how much more expensive this new record price actually is, take a look at the two highest Manhattan co-op sales prices achieved, but on a price per square foot basis:

David Geffen paid $4,500 psf for the penthouse at 785 Fifth Avenue for the then record price of $54,000,000.

Nassef Sawiris paid $12,727 psf for the penthouse at 960 Fifth Avenue for the new record price of $70,000,000. On a sales price basis, the new record is 29.6% higher than the old record of 2 years ago.

On a price per square foot basis, the record sale was 182.8% above the previous record sale price set two years ago.

With all the attention focused on the newish or new development residential condo market, the all-time price per square foot apartment record was set 2 years ago, around the time of the Geffen purchase.  A Russian oligarch paid $88,000,000 for Sandy Weill’s penthouse condo that works out to $13,049 per square foot. That record breaking sale was largely viewed as a market outlier, that the buyer overpaid as part of a larger divorce strategy – since it was 31% higher than the previous record in the year prior within the same building.

Some other oddities about this new record co-op sale at 960 Fifth Avenue:

  • The 960 Fifth Avenue co-op board is old world and I’ve heard it is fairly tough. As a general statement, it is not that common to see a foreign buyer at the high end of the market approved by a co-op board.
  • The news coverage suggested the buyer was slow to pay his taxes and negotiated a reduced amount with the government. This would be a concern for most co-op boards in terms of collecting maintenance charges in arrears from a foreign national if they stopped paying.

Since these conditions would probably make any high end co-op board nervous, perhaps this is a sign that shareholders (board members are also shareholders) are concerned about damaging potential property values by limiting the universe of people that would be able to afford these types of prices in this new market condition.

Tags: , , , , , , ,


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

May 6, 2014 | 2:47 pm |

woodfloored

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.

Tags: , ,