# Matrix Blog

### [Terra Logic] Understanding The Value of Manhattan Apartment Outdoor Space

May 5, 2010 | 9:19 am | |

Through the process of valuing terrace space in Manhattan since the mid-1980’s we developed a logic or valuation methodology for this amenity. I am asked to explain the process several times a week and it finally dawned on me to write about it (I can be slow to the draw sometimes).

BACKGROUND
Back in the mid-1980’s when we began our company, attempts to value terrace space by the real estate community (appraisers and agents) was approached as a lump sum dollar value rather than establishing a relationship with the value of the interior space of the apartment itself (ie that particular terrace is worth \$50k) which I derided as the PFA (pull from air) approach.

Outdoor area was valued quite primitively as fixed asset, with little consideration to variations in size (other than “small” and “large”) and its relationship to the apartment it was attached to (the same logic was incorrectly used with roof rights). We would see large terraces attached to one-bedroom apartments treated the same as if it were attached to a 12 room apartment. Crazy.

In fairness, this “terra logic” wouldn’t have been possible without the evolution of price per square foot as a core price metric in Manhattan. Market participants were talking and thinking about it but it wasn’t formally analyzed. We were the first appraisers to introduce price per square foot for co-ops in our appraisal reports by presenting all sales within the building to bracket the price per square foot of the subject apartment, and the first to introduce it into our market reports as a formal analysis. It was difficult because square footage is not a matter of public record and most co-op listings did not include square footage. We had amassed the information during our normal course of business.

Gotta love the completely ridiculous valuation metric “price per room” which admittedly we used in the early 1990’s in our first market reports until it morphed into price per square foot. Incredibly, price per room is still presented today. Imagine a buyer telling a broker “I won’t pay a dime over \$135,000 per room.” Good grief.

### Valuing Outdoor Space

METHODOLOGY
We have found that a ppsf analysis on finished terrace space is generally a reliable form of valuation to determine what the terrace area contributes to the overall value of the apartment being appraised. Its a relational value – if the apartment is worth more, that carries over to the outdoor space. This logic applies to patios, garden areas and balconies. Doesn’t matter whether it is a co-op, condo, highrise, lowrise or brownstone.)

Here’s how

• Estimate the ppsf of the property without the terrace
• The general relationship between finished terrace space and interior space – terraces are typically valued at 25-50% of the ppsf of the interior space.

For example – if the interior space was worth \$1,000 psf, without considering the terrace, the outdoor space could be worth as much as \$500 psf (50% of interior ppsf). If the terrace is 500 sqft, the terrace could be worth \$250k (\$500/sf x 500 sq ft).

That’s the basic idea. Simple. Of course there are many other factors such as:

Utility

• Depth – a 500 sq ft could be a deep terrace or a shallow 2 ft deep wrap around – same sq ft but different value.
• Location – a 2nd floor terrace overlooking a busy north/south avenue has more noise and soot as well as a lower perception of security
• privacy – space that is not formally separated from the adjacent apartment terrace space has lower value
• Obstructions – such as a parapet that blocks the view from the terrace. View itself is NOT a terrace amenity since it is considered in the ppsf of the apartment. A skylight or risers are usually deducted from the square footage.

Size

• Oversized space – if the terrace is greater than 50% of the interior space, the ppsf contribution falls off considerably for the additional space over the 50% threshold. For example 700 sq ft 1-bedroom apartment with a 3,000 sqft terrace – only about 350 sq ft has any meaningful value (of course, if the maintenance charges reflect the entire terrace, any value of the terrace would be wiped out.

Association

• Primary amenity – The patio or garden in a ground floor brownstone or apartment – use the same logic as when considering a terrace in a penthouse apartment.

### Comparing apartments with and without outdoor space

One of the reasons penthouse or any apartments with significant outdoor space sell for a higher price per square foot is that the sq ft denominator in the price per square foot equation only considers interior square footage. To create more parity between the two types of apartments for comparison purposes, calculate the adjusted price per square foot of the apartment. In order to do that you need to theoretically convert the outdoor space into interior space.

In the prior example, we said the terrace was worth 50% psf of the of interior space (\$500 v. \$1000). Use the same relationship with size and give the space full credit for interior space by taking 50% of the terrace space (500 sqft x .5 = 250 sqft) and add it to the existing interior square footage: 1,000 interior square feet + 250 interior square feet representing 500 square feet of terrace = 1,250 adjusted square feet.

This makes it easier to compare units with and without terraces and is predicated on the whether your % discount assumption for your exterior space is correct.

UPDATE (May 17, 2016): Although I wrote this post almost exactly 6 years ago, it still represents how my firm and I approach the valuation of outdoor space in New York City. It has been a thirty year run – using the methodology I created in the 1980s that still reflects market conditions today. One new observation – we have seen developers of a few luxury condominiums attempt to market outdoor space square footage on par with the interior price per square foot of the adjacent unit. While there was some random traction a few years ago, it was not adopted as a market wide pattern. Given the current slowdown in the absorption of high end condos, I have not observed this pricing strategy under current conditions and believe it won’t be used going forward. Of course if I observe a market-wide change, it will be chronicled here.

Disclaimer: No comments by an appraiser would be complete without a disclaimer. It is important to note that these are only rules of thumb to guide you – the value of a terrace is not formula driven – these relationships are developed from market data and can vary significantly depending on the combination of amenities and time. If you are unable to grasp this, close your eyes very tightly, think about a cool ocean breeze on a warm breeze sandy beach, while holding a large set of perfect comps, until memories of this post fade completely away.

### I’m Sorry But Don’t Blame Me, I’m Neutral

May 4, 2010 | 8:45 am | |

(courtesy: CS Monitor)

Admittedly I am getting annoyed about the lack of closure on this credit crunch thing. Can’t we simply point fingers, have someone apologize but indirectly deny responsibility and then we can then get back to buying stuff and building extensions on our houses?

Make no mistake, the credit crunch is one big mistake. It’s called a systemic breakdown because so many in the economy played a role in our economic demise. Moral hazard, government backstops, bailouts, stimulus, bonuses, trillions, synthetic CDOs have been placed in the forefront of our thinking.

But no clear financial reform path is being taken – in fact it took an investment bank using swear words in an email to get Washington’s attention and break the political maneuvering. Each party is planning to oversteer the solution to their agenda which was part of the problem that lead to this crisis. While we all worry about “free markets” we have forgotten how important it is to create a level playing field. Without rules, free markets degrade to chaos and lack of investor participation. We are seeing this now within the secondary mortgage market, especially jumbos.

We can never remove the human factor from the problem since regulators were clearly asleep at the switch (since Clinton) compensation had perverse incentives favoring short term profits over long term viability, regulators were neutered by the prior administration (think prior SEC under Bush) so its dumb to have some sort of czar. It’s never one factor – it a combination of people, events, institutions and politics that light the fuse.

I am looking forward to some sort of meaningful financial reform. If neutrality isn’t baked into the system, then this is all a big waste of time. Regulators need authority and can not be influenced and investment banks can’t pick the regulator they want. Rating agencies should not be paid directly by the investment banks whose products they rate. Appraisers can not be fearful of their livelihood because they don;t hit the number, etc.

Here’s what it all boils down to now: blame and being sorry.

Blame
Another Jonathon Miller (no relation, but awesome name) and his wife are suing a large builder for not preventing flipping in their housing development which brought in “irreverent transients” who party loudly, park erratically and install unauthorized satellite dishes.

I’m not doubting those conditions exist and it appears to be a creative way to get your money back.

When the housing market collapsed, some contracted buyers abandoned deals. From the outset, the project exhibited “ghost-town-like” qualities, the suit says.

Looking back, the Millers say the developer should have worked harder to prevent so-called flippers from buying units. Buyers were supposed to stick around for at least 18 months.

Saying I’m Sorry
In particularly interesting Reuters Summit Notebook piece, People make mistakes, take Alan Greenspan and Captain of Titanic

Phil Angelides, Financial Crisis Inquiry Commission chairman, says he’d rather see some taking of responsibility than hear another “I’m sorry.”

“Personally I don’t see my role as … to obtain apologies. What I don’t hear is a sense of responsibility and self-assessment about what occurred. There seems to be a disconnect between the practices that people undertook and the financial collapse,” he said at the Reuters Global Financial Regulation Summit.

“I’m struck by the extent to which all fingers point away generally from the person testifying,” Angelides said.

When it gets to this point, its too late. Let’s try to be proactive with some sort of meaningful financial reform. Not more regulation, not fewer protections for neutral parties.

If we can’t do this as a country, well, don’t blame me.

### [The Housing Helix Podcast] Blatant Lender Pressure on Appraisers is Alive and Well

May 3, 2010 | 10:02 am | |

Think lender pressure on appraisers is a distant memory? Think again. Here is some commentary on a new report that indicates appraisal fraud is up 50% over the past year. It is laid out in Kenneth Harney’s excellent column in the Washington Post.

I also provide commentary on a recent episode with a bank client we now refuse to work with who pressured our firm to raise the appraised value of a property or they would not pay us for services already rendered.

In fact, they didn’t really understand what they were saying.

Check out the podcast

The Housing Helix Podcast Interview List

You can subscribe on iTunes or simply listen to the podcast on my other blog The Housing Helix.

### [Commentary] Blatant Lender Pressure on Appraisers is Alive and Well

May 3, 2010 | 9:07 am | |

### [The Housing Helix Podcast] Tony Pistilli, Certified Residential Appraiser, Vice-Chair Minnesota Department of Commerce Real Estate Appraiser Advisory Board

April 29, 2010 | 3:00 am | |

Last month I spoke to and interviewed Tony Pistilli, a certified real estate appraiser on the Minnesota Department of Commerce Real Estate Appraiser Advisory Board. He’s got a possible solution to the current appraiser – appraisal management company conflict. Its all about conforming to RESPA and preventing banks from shifting the burden to appraisers to pay for bank compliance.

Its the first logical solution I’ve heard. The banks are essentially making the appraiser pay for their RESPA compliance by taking it out of the appraiser’s fee, often 50% of the stated appraisal fee. The consumer is being mislead by the appraisal fee stated by the lender at time of mortgage application.

• – Appraisers and borrowers are paying for services the banks receive, not the bank.
• – Banks should pay for the services received from the AMC’s who manage the appraisal process.
• – Appraiser’s fees should be market driven.
• – Banks should be held accountable for the quality of the appraisal.

He’s been spreading the word through all the channels/usual suspects in the blogosphere. Here’s my original post, including his article:

[HVCC and AMCs Violate RESPA?] Here’s a possible solution

His views seemed to have been picked up by the Appraisal Institute, the largest appraisal trade organization in the US, in their letter to HUD looking for clarification on RESPA and the disclosure of fees paid by consumers. Here’s the FAQ on the new RESPA rule.

Check out the podcast

The Housing Helix Podcast Interview List

You can subscribe on iTunes or simply listen to the podcast on my other blog The Housing Helix.

### [Interview] Tony Pistilli, Certified Residential Appraiser, Vice-Chair Minnesota Department of Commerce Real Estate Appraiser Advisory Board

April 29, 2010 | 12:01 am | |

### [Vortex] The Hall Monitor: Seasonality Should be Considered in Comp Selection

April 27, 2010 | 8:39 pm |

Guest Columnist:
Todd Huttunen

Todd Huttunen began appraising more than 20 years ago with a few years off in between to pursue a career in cabinet making. He relegated that to hobby status and is currently an appraiser in an assessor’s office. His best friend dubbed him The Hall Monitor because of his rigidity and respect for rules. He offers Matrix readers tongue-in-groove insight on appraisal and housing issues. View his earlier handiwork on my first blog, Soapbox

Jonathan Miller

### Seasonality Should be Considered in Comp Selection

April 26, 2010

The Westchester numbers for the first quarter just came out today. Even with the turbulence we’ve seen in the last couple of years, there remains a consistent trend in the median selling prices as relates to “seasonality”.

Not unlike Metro-North or Hamptons rentals, there is a “peak” and an “off peak”.

Whether the overall market is trending up or down, houses that close in the second or third quarters sell for considerably more than those that close in quarters four or one.

Appraisals done “in season” (assuming 60 days from contract to closing, these would be valuation dates in the six months between February 1 and July 31) should rely, if possible, on sales that closed in the second and third quarters, if not from the year of the appraisal then on the prior year. Conversely, appraisals made between August 1 and January 31, or “off season”, should focus on sales from quarters four and one.

Adjustments are required for the difference in market conditions between “in season” and “off season” for single family houses in the New York metropolitan area. What those adjustments should be can be fairly easily calculated by looking at the historical data for median prices. Remarkably, in Westchester at least, the differences are pretty consistent either in upward of downward trending markets.

Check out that serpentine line on the Median Price chart – just for fun, print it out and draw a line connecting only quarters two and three to each other over the years. Then do the same to quarters four and one and watch how quickly that serpentine line straightens out into two lines with much more of a consistent trend to them.

I really don’t understand why appraisers are so stuck on this idea that only sales taking place within six months of valuation date should be used. Six month old sales can be the most misleading ones of all, insofar as market conditions are concerned.

p.s. I know I addressed this issue in a prior post but it bears repeating since it seems almost no one is paying any attention.

### Credit Rating Agencies Finally Get Rated

April 26, 2010 | 12:01 am | |

What’s cooler than watching TV on Friday night? Watching C-Span on Friday night, of course.

Whats been very surprising to me after the unfolding of the financial crisis in 2008, has been how little attention the rating agencies have attracted for their role in the systemic breakdown of the mortgage process.

There was no separation between (church) sales and (state) underwriting. Nothing has changed. Same goes for appraisers and the pressure still being applied by financial institutions.

Its actually a scary since it’s not clear how we get investors back into the secondary mortgage market if they don’t trust the ratings that are issued. That would be an important step in helping ease investor concerns. Again same goes for appraisers operating in a neutral environment.

How can someone with their hand in the cookie jar be trusted with an independent rating system?

Crazy

On Friday night I watched the following panel discussions of former, disaffected employees arguably thrown softballs by the panel. I found it to be riveting because the the agencies were primarily concerned about their market share, not the quality of their ratings and the dollars and ramification were massive. The rating agencies were “enablers” by rating everything “AAA” so countries like Iceland could go bankrupt. Just like appraisers were the “enablers” of mortgage fraud by mortgage brokers.

I remember having lunch with several guys at an investment bank back around ’06-’07 who spoke with disdain, if not venom, at how the rating agencies didn’t understand the products they were rating. More as a respect issue, not for concern of the wrong rating.

There are two other panels for this hearing also worth listening too [Panel 2] [Panel 3]

How can anyone charged with neutral assessment of the value of an asset who is fearful of their ending their career or losing their job, do a proper assessment if they are too “low”? Or someone who can be “morally flexible” and therefore make millions personally.

Human nature.

Good grief.

Here’s a must-read article relating to trust and self-dealing by Michael Lewis:

Bond Market Will Never Be the Same After Goldman

And the closing quote:

Indeed, the social effects of the SEC’s action will almost certainly be greater than the narrow legal ones. Just as there was a time when people could smoke on airplanes, or drive drunk without guilt, there was a time when a Wall Street bond trader could work with a short seller to create a bond to fail, trick and bribe the ratings companies into blessing the bond, then sell the bond to a slow-witted German without having to worry if anyone would ever know, or care, what he’d just done.

Yikes. Maybe there is hope for change after all.

### [Vortex] DUMBO: A Tale of Two Views

April 23, 2010 | 10:46 am | |

Guest Columnist:
Anonymous DUMBO Resident

Periodically I receive insight from people that have spent a lot of time analyzing specific market trends or attributes. In this case, here’s a fascinating analysis about the views in DUMBO by one of its residents. – Jonathan Miller

A Tale of Two Views
April 2010
Anonymous

Introduction
DUMBO. Down Under The Manhattan Bridge Overpass – arguably one of the most hyped neighborhoods of the aughts. I thought I would take a stab at analyzing some of the real estate in the area. It’s always interesting when market reports and news stories quote a price per square foot or median price for an entire neighborhood. I believe that these numbers are not very useful because even within a neighborhood as small as DUMBO, there are still micro markets that exist based on apartment features. Though DUMBO is a cultural and business center, is safe, family friendly, and has access to shops/restaurants/parks/transportation, the main attraction to real estate in the area is for the world class views. There are really two markets cohabitating in the DUBMO market – one for apartments with “wow factor” views, and one for apartments that do not contain them. The existence of two separate markets will be empirically proved and explored in this paper.

The goals for this analysis are 4 fold:
1) Visually display the existence of the two separate markets in DUMBO
2) Quantify \$/PSF value for apartments with “wow factor” views vs those that don’t
3) Assess the effectiveness of an actual DUMBO appraisal
4) Discuss the pricing of apartments currently on the market

Data and Definitions
The area is actually incredibly small with only a few buildings and I chose to look at the two flagships – 1 Main Street (The Clocktower) and 30 Main Street (The Sweeney Building). Both buildings are well established door men condos with views. Other buildings in the area do have views – but I chose not to look at others such as 100 Jay and 85 Adams are new construction, and 70 Washington runs the risk of views being obstructed by the Dock Street development. From 2003-present there were 195 sales in these 2 buildings representing approximately 240 million dollars in value, a large enough sample size for this analysis. The penthouse sale at 1 Main, Cabanas at 30 Main, and one outlier at 30 Main (apt 7G on 9/14/9) were excluded from the analysis

The views I define as “wow factor” contain large windows that have full unobstructed views of the East River + Manhattan Bridge or East River + Brooklyn Bridge + Downtown Manhattan. More specifically these are: 1 Main – Any B, C, D line apartment or an A, J, K, L apartment above floor 4. 30 Main – G, H, A, B apartments above floor 5

All sale price information was taken from ACRIS and square footage sizes were taken from the condo offering plans. It’s important to note that the sale dates represent CLOSING dates – meaning that there can be some noise in the data depending on how long each apartment was in contract. 40 of the sales contain contract date data available from StreetEasy, where the average days between contract and close at 73 days.

Visual Display
The blue line in the graph below represents the average value price per square foot paid quarter by quarter for apartments that have spectacular views. The red line represents the PSF sale price those that do not. Along the X axis is time and the Y axis is dollars paid per square foot (\$/PSF).

You can see that over time there is a clear gap between the blue line and the red line (Aside from Q3 2004). This gap represents the higher value of apartments with spectacular views. Furthermore, since 2005 the red line remains fairly constant with a band around 700-800 \$/PSF, while the blue line spikes and dips with the market.
It’s important to highlight again that the closing price data comes from ACRIS, which means that the dates are closing dates – NOT the dates each contract was signed.

More recent data – zoom on the chart from 2005-Present

Quantification
Here is the same data in table format. You can clearly see the # of sales, total dollar value of sales per quarter, and weighted \$/PSF for each quarter. It’s also interesting to note that though there were 42 more sales of non spectacular view apartments the total \$ value is only 6mm more. The final takeaway from the chart is that that the average weighted \$PSF difference for the entire timeline is ~\$268 PSF.

To extrapolate the \$268 PSF into more real terms – we are saying that having two apartments of the same size, one with a view would cost \$1,000,000 while one without would cost \$732,000. The calculation methodology for PSF calculations were weighted by total square foot. For example, if a 3000 sq ft apartment sold for 1000 psf and a 1000 sq ft apartment sold for 2000 a foot, the avg for that quarter would be 1250. 4000 total sq ft sold – 3000/4000 = .75, 1000/4000 = .25, (.75 * 1000) + (.25 * 2000) = 1250.

Assuming a 20% down payment and 5.5% 30 year fixed mortgage the payments would also work out as follows:

View: \$200,000 down, \$800,000 mortgage, monthly payment of \$4,542 No View: \$146,400 down, \$585,600 mortgage, monthly payment of \$3,325

So we have a difference in monthly payment of \$1,217 per million dollars of apartment value, and an annual amount of \$14,604 per year.

So when you see a graphic like below that suggests the median price in DUMBO is \$1.24 million, you know that value per square foot within that median price is drastically different depending on if the apartment has a spectacular view vs. not.

(Source: The Real Deal)

Appraisal
I got my hands on an actual appraisal for a unit that has a “wow factor” view – and looked at the comps. The first thought is to look at the comps themselves. Understandably, it is very difficult to find true comps considering real estate is such an illiquid asset, but I have highlighted in red the major issue as to why each particular comp loses validity – lets work from the bottom up. If you are buying at 1 Main or 30 Main, you are most likely not considering 360 Furman Street (1 Brooklyn Bridge Park). This is like comparing the Upper West Side and Hells Kitchen – though close in distance, they are just totally different neighborhoods that appeal to different clientele. The Next 3 – 30 Main/7C, 1 Main/5E, and 1 Main/2K – don’t have spectacular views. As we showed in the above chart, there is a significant difference in value when the view is not present and should not be compared. Lastly, though 1 Main/12K could be considered a comparable – I don’t see how it makes sense to compare a sale in 2010 to one that was signed before the Lehman collapse.

Appraisers take these differences into account and thus make adjustments to true up the values of the apartments. In this case, adjustments were made for date of sale, maintenance costs, floor, view, age of building, bathroom count, size in square feet, outdoor space, common roof deck, and garage. Here is a snippet of those adjustments:

If you refer back to my chart above you can see the total appraised PSF of each apartment as well ad the contribution to Total PSF for each adjustment. I’ve left the sign (+/-) off the view/floor and time adjustments, but you can assume that they are positive for the apartments that do not have “wow factor” views. You can see that the View/Floor and Time adjustments are no where near where they need to be compared to the empirical finding

In summary, this appraisal does not take into accounts the severity of difference in price that comes from the nuances of view or timing accurately. More proof that appraisers need in depth local knowledge of the properties they are assessing in order to be able to compare apples to apples.

Current Listings
There are currently 11 units for sale between 1 Main and 30 Main, more important than location, there are 4 with spectacular views and 7 without. The chart below shows those listings and is sorted by price per square foot – looks like the sellers are aware of the bifurcated market as well.

Below is the post Lehman/Financial collapse price per square foot for the area.

You can see that the average for the last 5 quarters comes out to approximately 1118 \$/PSF for apartments with views and 766 \$/PSF for apartments that lack. We also see that the there is a significant upward trend in the spectacular view apartments where 3 units sold in Q1 of 2010 at a size weighted average of 1224 \$/PSF.

Per our earlier analysis with the appraisal – there are nuances to the way these apartments are priced. 1 Main/5D is priced at 1695 \$/PSF due to extensive renovations. 1 Main/6GH is commanding a premium due to its size (3bed) as well as renovations.

View Apartments: Considering the current listings are either below 1118 \$/PSF or very close to the latest quarter’s \$/PSF (1224), the data suggests that all apartments with views aside from 5D are accurately priced.

Non View: We also see that all apartments that lack spectacular views aside from 30 Main/4F are overpriced as they are over the 766 \$/PSF recent average and the data does not suggest any upward trend at the moment.

Conclusion
It’s important to disclose that this analysis is measuring the value of space within the DUMBO area, and assumes that buyers are solely looking at apartments within this area. It highlights how even within two buildings there are many nuances and generalizing apartments across neighborhoods is a very difficult and complex task.

Through analyzing historic closing sale information it is clearly visible that there are two separate markets in existence in DUMBO. Refining the data suggests that the price differential between the two markets is ~268 \$/PSF. Even within the same building there are significant factors that create a drastic difference in value, and breaking down into monthly mortgage payments the price differential for apartments with views vs those that don’t works about to ~\$14,600 annually for a \$1 million apartment.

This analysis has also shown that appraising a property is an extremely difficult task that requires an immense amount of local knowledge and building/apartment features.

Lastly, the current listings in the markets for apartments with views are priced in line with historic \$/PSF as well as recent trends. 30 Main/9A happens to be the writer’s personal favorite and the one I would bet sells next. The data suggests that apartments that do not have spectacular views appear to be overpriced.

### [Money Magazine] Best online real estate expert: Jonathan Miller

April 16, 2010 | 11:09 am | |

I was flattered to be recognized as Money Magazine’s “Best online real estate expert“. It was part of their “100 best money moves you can make“.

I had no idea this was coming. I’m not sure what it means but I’ll take the compliment anyway. 😉

Of course it compounds my blogguilt [defined: feeling guilty about not keeping up with your usual blog content flow] since I have been light on posts this month during my gauntlet of market reports.

Next week we release our Long Island and Hamptons/North Fork reports and THEN I return to more active blogging (until the Q2 gauntlet hits in July).

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### [WAMU Irregularity] Placing Turf Wars Ahead of Common Sense

April 12, 2010 | 3:39 pm | |

Sewell Chan writes an excellent article in today’s NYT: “U.S. Faults Regulators Over a Bank” which illustrates the regulatory disfunction and conflict of interest that lead to the financial meltdown.

In fact, in our firm’s experience as an appraiser doing work for Washington Mutual during their run-up, you’d have to be blind not to see the conflicts and the loss of a sense of risk. The appraisal departments were the last bastion of neutrality in the organization to protect appraisers from pressure by loan officers and they were eventually closed as “cost centers.” Nearly two years to the day that WAMU closed their in house appraisal departments and went with Appraisal Management Companies, they became insolvent.

The two agencies that oversaw Washington Mutual, the investigation found, feuded so much that they could not even agree to deem the company “unsafe and unsound” until Sept. 18, 2008.

And one had an operational incentive:

With more than \$300 billion in assets, WaMu was the largest institution regulated by the Office of Thrift Supervision and accounted for as much as 15 percent of its total revenue from assessments, the report found.

In 2004, while property values were rising at double-digit rates, I remember thinking that my firm would be “out of business” in 3 years if we continued to keep our majority of client base with large retail banks because most were pursuing high risk lending strategies. This meant high-ball appraisal values and little concern about borrowers ability to pay – firms like ours simply didn’t fit in. Frustrated with the insanity of all this, I eventually started up blogging in 2005 – the timing in this article as outlined in the treasury report framed the WAMU debacle perfectly.

The report found that Washington Mutual had failed primarily “because of management’s pursuit of a high-risk lending strategy that included liberal underwriting standards and inadequate risk controls.” The strategy accelerated in 2005 and came to a crashing end in 2007 with the drop in the housing market.

Here are a few simple takeaways that should be considered in all forms of financial regulation.

• Regulators need clearly defined lines of authority – turf wars between all agencies were a distraction – politics not allowed.
• Regulators can not be specifically dependent on income derived from the institutions they regulate – an amazingly large conflict.
• Institutions can not select which agency they wish to be regulated by – wow, common sense.

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### [Valuation Magazine] 1Q 2010 Feature Article

April 6, 2010 | 5:15 pm | |

[click to open article]

In the current issue of Valuation Magazine, the quarterly publication of The Appraisal Institute, the largest US appraisal trade group, featured me in their membership profile feature called “Face Value.” The article is called “Empire Building: an appraiser in NYC takes on \$1 billion conversion venture“. The article covers a venture I am participating in called Condominium Recovery, LLC.

The Appraisal Institute approached me to seek understanding of how I leveraged my appraisal expertise towards a non-traditional use.

Whats great about the article is that I get to use appraisal terminology like “highest and best use” without having to elaborate. Whats great about the venture is I get to work with legendary coop/condo converter, builder and manager Gerald Guterman.

It’s going to be an interesting couple of years.

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