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Posts Tagged ‘Absorption’

[Fee Simplistic] Gunfight At The Appraisal Corral: IndyMac VS. Borrower

September 23, 2008 | 12:07 am |

Fee Simplistic is a regular post by Martin Tessler, whom after 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing the both the trees and the forest. He has never been accused of being a man of few words and his commentary can’t be inspired on a specific day of the week.

…Jonathan Miller


My inclination in most of my Fee Simplistic blogs is to resort to satire in targeting the inconsistencies, foibles and malpractices that have proliferated in real estate lending including appraising. The recent demise of IndyMac Bancorp Inc., however, forces me to turn serious and throw the forum open to soliciting views and opinions on a particular appraisal incident that was only a minor blip in the bank’s implosion but looms large in appraisal management and, most of all, integrity for those of us who still hold to it.

Prior to the bank’s takeover by the FDIC it had been calling on borrowers to make up the difference if a gap existed between market value and the loan-to-value ratio established at inception. A particular incident involved a lawsuit filed by a builder in Los Angeles County Superior Court in April claiming that IndyMac did not act in good faith when it tried to call in a loan where personal guarantees were involved in a 900 acre Joshua Ranch tract in the Antelope Valley north of LA. The background was as follows:

  • In May 2007 the property was valued at $82 million by the bank, and
  • In December 2007 the property value was appraised at $17 million-an 80% decline- with the appraisal estimating that an 18 year absorption period would be needed to sell 539 houses on the tract
  • The builder claimed that IndyMac just wanted out of the loan because of their precarious position and thus wanted the borrower to pay off the difference between the $17 million appraised value and the $27 million loan balance.

Ignoring the bank/builder argument on loan payoff what struck me was the severity of the free-fall in appraised value over a 7 month period assuming the appraisal was arms-length and FIRREA compliant with no lender influence or pressure. It, however, and raised the following questions:

1. Did the bank use the same appraiser in December as in May? If not, did the last appraisal employ any assumptions that were substantially different than the earlier appraisal?
2. Assuming the same appraiser, did the market tank that severely in 7 months or did the first appraisal miss the market dynamics as the sub-prime and loan delinquency downturn was already underway prior to May; did the bank review the earlier appraisal to note any discrepancies between the previous and current market conditions or any major changes in assumptions that would have generated such a major decline in value?
3. Assuming the same firm again for both appraisals did they indicate where and why the market had changed in such drastic fashion from their previous appraisal? It has been a long standing policy in assignments that I have directed that reference be made to any previous appraisal completed within a year prior to the valuation date.
4. If a new appraiser was selected, was it because the original appraiser could “not hit the number” that IndyMac needed to declare a call on the loan?
5. Did IndyMac’s appraisal group compare any of the facts or assumptions between the two reports to support the drastic change in value or were ethical considerations thrown to the wind not to mention FIRREA and USPAP?


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Growth By Mortgage = Death By Mortgage: Was It Worth It?

September 14, 2008 | 9:28 pm | | Milestones |

Well another Friday came and went and more weekend meltdowns were on the agenda. This time it was Lehman Brothers, the second big investment bank to experience trouble. I have friends at Lehman and they have been scared to lose their jobs for months, and yet they had nothing to do with mortgages. I know a couple with a large exposure in Lehman stock and have been paralyzed to take action to move out of the position for the past year. The time came and went, unfortunately. No bailout this time.

During the mortgage hay days, Lehman did a lot of new development deals. They occasionally brought us in for a “reality” consult after reviewing appraisals already done for new deals. We weren’t asked to do any project appraisals, only “reality check” on the price point and local absorption. I suspect they were “arbitraging” the relationship between reality and what needed to be done to make the deal. Smart people too.

When you think about the scope of the mortgage problem that continues to unfold, its pretty scary and likely has quite a way to go. It says a lot about how ridiculous the talk of “bottoms” and “temporary” conditions really are. I mean, the idea that housing is going to be fine in less than a year is completely insane given the damage that remains to be discovered.

I tried to think of the big players in the mortgage market of the past five years:

Countrywide: bought at a discount by BofA (for their technology/servicing)
WaMu: Under legal pressure, removed CEO, stock price fell to the floor, rumors of buyout
Bear Stearns: Big subprime player. Gone for nearly nothing by JPMorgan Chase
Lehman Brothers: Big mortgage player. Lots of development financing. Nearly gone
Merrill Lynch: Just bought by BofA
Barclay’s: Took their licks in write downs and were too undercapitalized to take over Lehman.
Fannie, Freddie: The housing bill placed nearly all it’s faith in Frannie and now the former CEO’s are eligible for $24M in parachutes. A potential for $200B in losses.

Up until now, the billions in mortgage losses were just numbers to me. But now, the numbers are more in context because they have brought down some of the biggest, most profitable financial firms out there.

All because of idiotic lending practices.

Old school leadership at these entities were no match for fast changing mortgage products without meaningful regulatory oversight.

Well, of course it wasn’t worth it.


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[Palumbo On USPAP] Common Sense Not Perfection: Can You Block Tackle And Pass?

July 21, 2008 | 1:25 pm |

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Palumbo On USPAP is written by Joe Palumbo, SRA, a long time appraisal colleague and friend who is also an Appraisal Qualifications Board (AQB) certified instructor and a user of appraisal services. Joe is well-versed on the ever changing landscape of the Uniform Standards of Professional Appraisal Practice [USPAP].

…Jonathan Miller


Appraisal is far from a perfect science. My favorite line in USPAP is one I wish more appraisers and users of appraisal services would take note of. The comment to Standard 1-1 (c) reads:

Perfection is impossible to attain and competence does not require perfection.

Over the past 12-18 months I have heard the current real estate climate described many different ways: depression-like, recession-like, anemic, soft and turbulent just to name a few. Suffice it to say that the national market is generally much less favorable than it was several years ago when the fraternity party atmosphere prevailed. Credit flowed like wine and all involved were happily attending the party. Buyers stuffed as much home as the could into “creative financing”, sellers cashed out or traded up and investors risk was mitigated by the rapid appreciation that even in a short time period paid dividends and made just about every deal worthwhile. The “you can’t go wrong in real estate” cliché’ became the staple notion.

One thing is for certain: today the market is clearly different.

For practitioners such as brokers agents and appraisers the normal market indicators are more important than ever. If these indicators are ignored or misread the likelihood of accuracy will fade. The good news is that what it takes to read and interpret the “good” market is also the same for the “bad” market: supply and demand, absorption, the principal of substitution and good old common sense. Unfortunately it seems as though some appraisers and realtors have forgotten about the basics. Existing supply of homes in relation to demand and in-turn local absorption rates are the foundation for existing market conditions. Coupled with price trending, absorption rates are the backbone of a good “micro analysis”, but it does not stop there. The principle of substitution is fundamental in determining what options exist for buyers in your market. Historical data (closed sales) is relevant to confirm trends and extract adjustments, but the recent and more current indicators of active and pending sale data is where the gold is.

It seems to me that this is not so much a real estate principle as it is common sense The reason is simple: why would a buyer pay your estimated ANTICIPATED SALE PRICE for the subject property when a less expensive alternative exists? Maybe you’re in a sub-market that does not yield a lot of very “truly” comparable listings, still if these are the only alternatives the market sees than it is all relative. Although ERC guidelines do not call for “adjustment” of competing properties, it can be a sound practice as a high benchmark “check” and some relocation companies have asked for such. The trend of requiring and adjusting listings is also becoming more common place in the lending environment.

Clearly the times have changed. As they say though, “the more things change the more they stay the same”.

At Weichert Relocation Resources Inc, we require that the competing listings be adjusted. For the most part our appraiser panel is diligent and understanding in that exercise. I have been personally involved in cases where it is evident that this very basic concept is misunderstood. On those few occasions when I have questioned appraisers whose final value is well above all adjusted listings, I have received responses that concern me very much. “They are just listings” I am told or “they have not sold so they mean nothing”.

They mean nothing? Actually, they mean something: that you, the appraisal professional do not clearly understand the principle of substitution.

Believe it or not football can be like real estate. No matter how complex the situation is winning a game can come down to the execution of the very basics: blocking tackling and passing.

I had a mentor who once told me “don’t be smarter than the market, let it tell you what is happening”. I have tremendous confidence in the appraisal profession. I see hundreds of appraisals via my current job responsibilities and speak with hundreds of students giving classes. Sometimes you have to offer something other than pearls of wisdom to make an impression so I will offer no such thing here. Just a plea to my fellow appraisal professionals: get back to the basics in real estate appraisal: the principle of substitution, your block tackle and pass concept.


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[Commercial Grade] Time To Break Out The Ouija Board

July 11, 2008 | 4:24 pm |

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Commercial Grade is a post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. John is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is, depending on what day of the week it is, one of the smartest guys I know. …Jonathan Miller

Remember the Ouija Board you played with as a kid? It used to be so comforting to know that you could tell the future. With the local real estate market in transition, and everyone trying to understand just what the heck is going on, it may be time to break out the Ouija board again.

Our market, New York City, seems to be somewhat insulated from the woes being experienced by the rest of the country, but experts throughout the City (and the Country) seem to disagree on whether our market fundamentals are just so different from the rest of the country that we will escape the pain, or if it’s just been delayed and around the corner.

Lenders in particular seem to be scratching their heads. Over the past six months or so I’ve received a flurry of phone calls from a number of major lenders interested in retaining us for a market study so that they could, essentially, figure out if it’s safe to continue making loans in the near future.

The conversation usually goes something like this:

Lender: We’d like you to do a market study for us. What would you charge?

Me: Let’s talk about the scope of the study. What questions, specifically, do you want us to address?

Lender: We’d like to know if there’s still demand for new development and what the saturation point is. We’d like to know every project that has come on line and is in marketing, what it’s selling for, and the absorption rates. In addition to what’s currently marketing, we’d like to know every project in the pipeline. We’d like to have that broken out by condo, co-op, rental and by neighborhood.

Me: I see. You realize that there is no central database of such info. It would require all original research with the various community districts, Buildings Department, Attorney General’s office and lots of calls to brokers and developers. This is a large and very complex market and at the end of the day, I’m not sure that this data or any data is really going to answer the demand question for you. We can do the research but it’ll be very expensive and take a couple of months. (I know, I’m quite the salesman!)

Lender: (long pause) OhI have approval for $5,000.

Me: (long pause) Wellmaybe we can revise the scope somewhat

I understand wanting to get your arms around the situation, but the bottom line is that no market study or econometric analysis is going to tell a lender that it’s safe to continue building and making construction loans in this environment. I’ve seen analysts put together pages of formulae and algorithmic theorems trying to quantify demand, but there are so many variables and assumptions incorporated into these models so as to render them (in my opinion) meaningless.

Try as we might to understand the current market, it’s still anyone’s best guess as to where we are in the cycle and how much pain we’ll experience before it’s over. No examination of past performance or theoretical demand projections are going to definitively answer that for us. Back to my original question.

Anyone have a Ouija board that I can borrow?


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State Of New Jersey: Otteau April 2008 Contracts

June 4, 2008 | 10:39 pm | |

This report is provided by Jeffrey Otteau of the Otteau Appraisal Group who also authors a series of widely followed quarterly market reports on the New Jersey real estate market. This information is collected from various sources including Boards of Realtors and Multiple Listing Systems in New Jersey.

I have known Jeff for many years and consider him one of the leaders in the real estate appraisal profession. He has taught me a lot about quantitative real estate market analysis.
…Jonathan Miller


HOUSING MARKET SHOWS EARLY SIGNS OF STABILIZATION

April home sales increased from the March pace for the first time since 2005 in what may be a sign that market stabilization has begun. In April, New Jersey contract-sales activity increased for the 4th consecutive month and recorded a 9.3% increase above the March level. By comparison, sales activity declined during April in both 2006 and 2007.

Also significant is that number of homes for sale rose modestly as Unsold Inventory increased by only 4.5%, less than normal for the month of April. As a result of these trends the Projected Absorption of homes offered for sale now stands at it’s lowest level of the year reflecting a 10.0 month supply. By comparison, absorption stood at 12.7 months in January, 11.0 in February and 10.5 in March.

Any determination as to whether these trends actually signal the beginning of a market recovery hinges on the momentum carrying through for the remainder of the 2008. There are ,however, a growing list of positive factors for the housing market which include increased housing affordability due to lower home prices, favorably low mortgage interest rates and massive pent-up demand due to reduced purchase activity.

To keep things in the proper perspective however, it is clear that the housing market remains in the grip of a dramatic correction and will not see rising prices until Unsold Inventory levels have been reduced significantly. Until then home prices will likely drift slightly lower, although at a slower pace than the past 2 years. But a bottom to the housing downturn may be forming which would be a first step towards recovery. Potential home buyers who have been delaying their purchase in an attempt to ‘time the market’ should consider whether that time has now come. This is because the greater risk in delaying is the likelihood of higher mortgage rates in the future due to the inflationary pressures of high oil and food prices which will erase any potential savings from future price declines. Supporting this view is recent remarks by Federal Reserve Chairman Ben Bernanke indicating that future interest rate cuts are not likely due to a need to guard against inflation. Our analysis of the cost-benefit relationship of delaying a home purchase indicates that the added monthly cost attributable to rising interest rates is likely to be greater than the savings generated by any further price declines. Thus, the next 6 months will present a rare combination of low interest rates, low home pricing and a wide selection of homes being offered by motivated sellers. We’re all likely to look back five years from now and conclude that 2008 was a time when Smart Buyers took advantage of this unique opportunity by locking in both low prices and low interest rates. I’m reminded of the axiom that the right time to sell is when everyone else is buying, and the right time to buy is when everyone else is selling.

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[Getting Graphic] Empty And New And More Of Them

May 4, 2008 | 11:25 pm | |

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).

Source: NYT

Click here for full sized graphic.

In the It’s Newer Homes That Stand Empty as Vacancies Rise by Floyd Norris the sharp increase in vacant houses are more heavily weighted toward new construction.

The Census Bureau reported that 2.9 percent of homes intended for owner occupancy were vacant at the end of the first quarter. That figure had begun to rise even during the housing boom, a little-noticed byproduct of the aggressive construction of homes encouraged by easy credit. Before 2006, that figure had never exceeded 2 percent.

The ease of credit combined with limited underwriting resulted in an excessive level of new construction to enter the market. That’s why the rental market is as weak as the sales market in those areas that were characterized by new development. The speculation drove development beyond the level of reasonable absorption causing investor units to enter the market as competitors to existing rentals.


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[Palumbo On USPAP] USPAP 2008: is it Spring yet?

March 22, 2008 | 9:56 am |

Palumbo On USPAP is written by Joe Palumbo, SRA, a long time appraisal colleague and friend who is also an Appraisal Qualifications Board (AQB) certified instructor and a user of appraisal services. Joe is well-versed on the ever changing landscape of the Uniform Standards of Professional Appraisal Practice [USPAP].

Spring is nearly here, but as more people venture outside, Joe cautions against mob rules: doing things ’cause “everyone does it.” …Jonathan Miller


It must be the “economic climate” that has me a feeling as (blah) as I am. It has to beafter all we did not have a harsh winter here in the NE, although one wonders if the perpetual rains can not fall into that category.

As I prepared to teach my first USPAP class of the spring, I was surprised and pleased to see how “robust” the material is for the 2008-2009 class. Discussion problems, focus on “real-world” issues and clarification on some of those “confusing” everyday issues. this material has it all. Everything from a what is a Federally Related Transaction to Confidentiality.

Still, I wonder if bi-annual mandated 7-hour detention was enough for the masses. To me not knowing the basics of USPAP as an appraiser is like trying to become a doctor and not understanding the skeletal system.

I know.I knowthere ARE some hair splits and some confusing topics in real estate appraisal as it relates to ethical, acceptable or just plain bad practice. The thing that gets me is that no one will argue those points but they will the basics.

Case in pointspeaking of Confidentiality. I friend mine was asked about providing work samples to a potential new client. I told him “make your life easier”. Get permission to use them and put a cover letter stating such permission was granted”. If you do not get permission then you will have to redact the confidential info that is identified by the client (likely the subject) AND the assignments results. Well, in this day and age if you send me the “sample” and redact your FINAL valueI have no use for that sample. Reconciliation is key these days.

Ok more to the pointon what my friend told me happened when the “lender” called to ask for status on the samples. “Well”, he said, ” I need to get permission to use the samples and that may take some time”. “No”, “No”.. stated the lender “just send them alongyou do not need that.EVERYONE just sends them in”, “never redaction..”.

Yepeveryone just does this or thatmaybe it is just ignorance or sending out work samples is no big deal.

There is a much bigger picture here: the guy or gal sending those samples is the same guy who makes the deal, misses the sale next door or the expired listing on the subject cause that is the way he/she thinks.

Professionalism is a way of conduct..not a cap rate with sound data.

It reminds me of when I was in a sales office once and I asked for the typical absorption information. “We never get those questions asked”? “What kind of appraiser are you?” The saleswoman quipped. So I respondedlike my financial advisor”If you do not give me all the info I need to analyze this situation I will give the lender a half good appraisal” (or half- good advice).

Make the most of your 7-hours this licensing cycleeven if all you get is just the basics…….

IS IT SPRING YET?!


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[Curbed] Three Cents Worth: Absorbing Velocity Until We Explode

February 8, 2008 | 10:56 am | | Charts |

Its Friday and the Giants won the Superbowl so its clearly time to provide my Three Cents Worth as a post on Curbed. This week I took a look at V & A of Manhattan co-ops/condos [Velocity & Absorption].

To view Three Cents Worth: Absorbing Velocity Until We Explode

Check out previous Three Cents Worth posts.


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State Of New Jersey: Otteau July 2007 Contract Report

August 28, 2007 | 12:01 am |

This report is provided by Jeffrey Otteau of the Otteau Appraisal Group who also authors a series of widely followed quarterly market reports on the New Jersey real estate market. This information is collected from various sources including Boards of Realtors and Multiple Listing Systems in New Jersey.

I have known Jeff for many years and consider him one of the leaders in the real estate appraisal profession. He has taught me a lot about quantitative real estate market analysis.
…Jonathan Miller


HOUSING MARKET IMPROVES SLIGHTLY, INVENTORY STOPS RISING

The decline in the housing market which began during the 2nd half of 2005 is evidenced by the rising tide of unsold homes on the market. While there are many contributing factors, the supply of competing properties is paramount as it creates a ‘mood of the market’ which determines whether home buyers feel any sense of urgency. For example, as Unsold Inventory declines and a buyer’s choices diminish they are inclined to purchase sooner rather than later driving inventory even lower and home prices higher in the process. Conversely, rising inventory extends normal marketing time causing home sellers to reduce their asking price. In this rising tide environment home buyers adopt a ‘wait & see’ stance due to concern about falling home prices, leading to further increases in Unsold Inventory and thus creating a downward spiral. Any reverse of this cycle is then predicated upon a decline in Unsold Inventory. While this is admittedly a simplistic view which does not take into account corresponding demand factors, the bottom line is that the housing market can not improve significantly until Unsold Inventory declines. And the first step toward inventory decline is for it to stop rising.

The New Jersey housing market provided a glimmer of hope in July as Unsold Inventory declined for the first time since January. That this decline accounted for less than a 1% reduction in Unsold Inventory makes it clear that the housing recession is far from over and will continue into 2008. However, should inventory hold at its present level would signal the ‘beginning of the end’ for the housing recession.

The July housing market also saw an increase in contract-sales activity on a seasonally adjusted basis. As demonstrated in the NEW JERSEY CONTRACT-SALES ACTIVITY chart, July sales were higher than one year ago confirming that while the housing market is weak it still has life. No surprise here as despite the decline in sales activity over the past 2 years the underlying demand for housing is still bubbling beneath the surface. This is because life goes on with continuing household formation, marriages, the birth of children, job promotions, divorce and retirement all leading to changing housing needs which translates into housing demand. Thus, the stage is being set for a rebound in the housing market once the current challenges sort themselves out.

From a market absorption perspective, the Unsold Inventory presently reflects a 9.0 month inventory of homes as compared to 8.9 months in June. This however compares to a 4.0 month supply in July 2005 suggesting that inventory is currently about double where it needs to be before home prices will start rising again. This is important to would-be home sellers who are considering waiting things out before selling their present homes as any rise in home prices is likely several years off.


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[Straight From MacCrate] Wall Street Has Not Learn The Lessons That Created FIRREA And The Debacle of the Seventies In Real Estate Lending and Investing!

June 24, 2007 | 1:54 pm |

Jim MacCrate, MAI, CRE, ASA, has worn many hats in his career. He taught a number of the appraisal classes I have taken through the Appraisal Institute and I think he is one of the few people who actually understands the “J-Factor.” His wife Judy is an SRA and is an accomplished appraiser in her own right, having managed an appraisal panel for a large lending institution throughout its various mergers for a number of years. I can only imagine the riveting conversations at dinnertime. Jim scratches his head as to why Wall Street and accounting firms often don’t see it coming in regard to real estate problems.

It is amazing that the Wall Street firms, such as Bear Stearns and Goldman Sachs, are having problems with their real estate loan portfolios and may be creating a time bomb that may create major problems in the economy. They appear to be repeating the same problems that the banking industry had in the late 1980’s and early 1990’s. I guess the accounting industry has also forgotten what happened because they should have an experienced professional real estate staff assisting the auditors in reviewing the loan packages, real estate appraisals and the like. Clearly, the auditors, such as PricewaterhouseCoopers, Deloitte & Touche, and KPMG, should be right on top of this situation with experienced real estate professional appraisers on their staffs. Investors may suffer losses because these firms may not have instituted proper safeguards, similar to FIRREA and other banking regulations to protect the investors from any losses.

Similar problems will probably occur in the commercial real estate market shortly (in a year or so). The rating agencies, such as Moody’s and Standard and Poor’s, should be right on top of this situation, along with the designated real estate appraisal professionals working at the major accounting firms.

The Federal Institutions Reform, Recovery and Enforcement Act of 1989(FIRREA) was passed to provide standards for real estate-related lending and associated activities by national banks to minimize losses from unsafe and unscrupulous lending practices. Maybe a similar law is required to regulate the Wall Street firms to protect investors from potential losses. Wall Street has an obligation to protect investors from losses due to the complex nature of many investment products and the underlying assets. The SEC and other investors, such as the state retirement systems that invest heavily in real estate, should review their current oversight procedures to insure that safeguards are in place to prevent a repeat of the debacle that occurred approximately seventeen years ago.

FIRREA is suppose to provide protection for federal financial and public policy interests in real estate-related transactions by requiring real estate appraisals performed by a State certified or licensed appraiser for all real estate-related financial transactions with few exceptions. (In fact, shouldn’t all real property appraisals for any purpose be performed by a State certified or licensed appraiser such as divorce, estate tax purposes and the like? That is not mandatory in every state, but it should be to protect the general public).

FIRREA further stated that the appraisal reports conform to generally accepted appraisal standards as evidenced by the Uniform Standards of Professional Appraisal Practice (USPAP) as promulgated by the Appraisal Standards Board of the Appraisal Foundation. Some these standards have been modified in the last several years increasing the risks to investors. The reports must written and contain sufficient information and analysis to support the institution’s decision to engage in the transaction. Appropriate deductions and discounts for proposed construction or renovation, partially leased buildings, non-market lease terms, and tract developments with unsold units must be analyzed and reported.

FIRREA further stated “if an appraisal is prepared by a staff appraiser, that appraiser must be independent of the lending, investment, and collection functions and not involved, except as an appraiser, in the federally related transaction, and have no direct or indirect interest, financial or otherwise, in the property. If the only qualified persons available to perform an appraisal are involved in the lending, investment, or collection functions of the regulated institution, the regulated institution shall take appropriate steps to ensure that the appraisers exercise independent judgment. Such steps include, but are not limited to, prohibiting an individual from performing an appraisal in connection with federally related transactions in which the appraiser is otherwise involved and prohibiting directors and officers from participating in any vote or approval involving assets on which they performed an appraisal.” Wall Street firms should have a similar procedure to insure that the real estate professionals are independent and not pressured to provide unrealistic indications of value just to make a loan package look good for resale to investors.

FIRREA specifically states that real estate loans should reflect “all relevant credit factors, including:

  • The capacity of the borrower, or income from the underlying property, to adequately service the debt.
  • The value of the mortgaged property.
  • The overall creditworthiness of the borrower.
  • The level of equity invested in the property.
  • Any secondary sources of repayment.
  • Any additional collateral or credit enhancements (such as guarantees, mortgage insurance or takeout commitments).”

Real estate markets should be monitored based on a thorough analysis of the real estate cycle, such as Glenn Mueller’s analysis from Dividend Capital so that investors can react quickly to changes in market conditions that are relevant to making investment decisions. Reappraisals may be required. Many factors that should be monitored and considered at a minimum include:

  • Deteriorating economic conditions.
  • Changes in the borrower’s financial capacity.
  • Major change in project design or configuration.
  • Construction delays resulting from cost overruns which may require renegotiation of loan terms.
  • Project target market change.
  • Demographic indicators, including population and employment trends.
  • Zoning requirements.
  • Current and projected vacancy, construction, and absorption rates.
  • Current and projected lease terms, rental rates, and sales prices, including concessions are changing.
  • Rent concessions or more discounts resulting in cash flow below the level projected in the original appraisal.
  • Current and projected operating expenses for different types of projects.
  • Economic indicators, including trends and diversification of the lending area.
  • Valuation trends, including discount and direct capitalization rates.
  • Slow leasing or lack of sustained sales activity.
  • Discovery or change in the environmental integrity of the site and surroundings.
  • The exclusion of excess land.
  • Loan renewals or extension requested.

The loan portfolios require testing to insure that the original appraisals have been prepared correctly and if it is determined to be inadequate or otherwise unacceptable, a new appraisal should be ordered. The real property interests should be reappraised annually until the risk rating improves for that particular loan. Random sample reappraisals should be conducted periodically to identify patterns of over or undervaluation by appraisers and/or firms, property type, location or market segment. These reappraisals should not be performed by the original appraiser.

These firms could improve on FIRREA by requiring a range in value reflecting the best case, most likely case and the worst case performance scenarios. Real estate appraisal is not science, but it is an unbiased, objective opinion of value based on logical reasoning supported by market information. Generally, a range in value is more meaningful because it shows the extremes that might occur and can be developed through a sensitivity analysis of the projected cash flows and valuation conclusions, possibly utilizing Crystal Ball Software. In the current environment a number of forces impact the process of determining the value of real property interests and marking assets and liabilities to market. Maybe Wall Street and their advisors should consider implementing the guidance provided by FIRREA and the banking regulators to reduce the risk exposure for investors.


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The 4Q 2006 RAC Report

February 15, 2007 | 11:17 am | |

I have been a member of Relocation Appraisals & Consultants (RAC) for about ten years. Its considered the cream of the relocation appraisal industry crop and their focus is to bring professionalism to relocation assignments for third party companies who manage employee moves around the world. Some of the best appraisers in the country are members of this organization.

The Manhattan real estate market is dominated by co-ops and as a result, many corporations are afraid of them so relocation volume here is pretty light. Its ironic because the foreclosure rate for co-ops is less than condos. In addition, co-op boards, for all the bad stories than have been said about them, actually filter out marginally qualified purchasers (because lenders have very low underwriting criteria these days) and discourage investors (flippers).

Even with low relocation volume as a firm, we have been rated by various relocation companies as being one of the most accurate. The last report we received a few years ago indicated we were averaged ±3% of the final sales price as compared to our estimate. The next closest appraiser (who was not a member of RAC) averaged ±10%.

One of the neat by-products of getting so many good appraisers together from around the country is an endless source of information and insight from these individuals. Leaders of the organization have been involuable to me for my professional growth as an appraiser. A few names include Chip Wagner (IL), Jeff Otteau (NJ), Butch Hicks (VA), Brad Charnas (OH), Rick Foos, (CA), Jay Delich (AZ), Colleen Welch (FL), Marie Robbins-Marine (CO), Bob Headrick (IL), Howard Babcock (MI), Suzanne Bloyed (OK), Thomas Allen (OK) and Ron Box (TX) to only name a few. There are many others in the organization that I admire and have learned from.

The price of membership, even if relocation work does not dominate your practice, is well worth it (if you are accepted). They are only interested in seasoned appraisers with references and have membership criteria outlined on their web site [pdf].

But I digress…

One of the by products of cooperation has been the RAC Report which is a market by market depiction of areas covered by members that has been standardized to included absorption, prices and volume by price strata. There is a wide array of markets covered (Manhattan doesn’t fit well into the criteria standard in addition to our lack of an MLS). Data on various New York City markets can be culled from my family of market reports available on my web site.


The redesign of the RAC report and site was spearheaded by Lee Burns, a very good appraiser and member of RAC based in Houston, Texas. The report allows the reader to peruse most of the major US markets to get a better understanding of where the risk lies in the market strata the house they are managing in inventory is likely to be.

These are the markets covered:

Akron Metro Area
Atlanta Northeast Metro Area
Boston Metro Area
Canton Metro Area
Chicago Metro Area
Cincinnati
Cleveland Metro Area
Columbus Metro Area
Corona California
Dallas Metro Area
Denver Metro Area
Detroit Metro Area
Greater Pittsburgh
Houston Metro Area
Las Vegas Metro Area
Los Angeles South Bay Metro Area
Los Angeles Southeast Metro Area
Los Angeles Westside to Central (CLAW)
Madison, WI Metro Area
New Jersey-Montclair Line
New Jersey-Summit/Chatham/Madison
Orange County, California
Phoenix Metro Area
San Antonio Metro Area
San Diego Metro Area
St. Louis Metro Area
Tampa Bay Area
Tucson Metro Area
Tulsa Metro Area
Washington, D.C. Metro Area (Suburban VA and MD included)
Wichita Metro Area

I plan on sharing the results every quarter as the reports are released.

4th Quarter 2006 RAC Report


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[Sounding Bored] The RAC Report 4Q 2006

February 15, 2007 | 11:15 am | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week I present RAC’s newest report.

I have been a member of Relocation Appraisals & Consultants (RAC) for about ten years. Its considered the cream of the relocation appraisal industry crop and their focus is to bring professionalism to relocation assignments for third party companies who manage employee moves around the world. Some of the best appraisers in the country are members of this organization.

The Manhattan real estate market is dominated by co-ops and many corporations are afraid of them so relocation volume here is pretty light. Its ironic because the foreclosure rate for co-ops is less than condos and co-op boards, for all the bad stories than have been said about them, actually filter out marginally qualified purchasers (because lenders have very low underwriting criteria these days) and discourage investors (flippers).

Even with low relocation volume as a firm, we have been rated by various relocation companies as being one of the most accurate. The last report we received a few years ago indicated we were averaged ±3% of the final sales price as compared to our estimate. The next closest appraiser (who was not a member of RAC) averaged ±10%.

One of the neat by-products of getting so many good appraisers together from around the country is an endless source of information and insight from these individuals. Leaders of the organization have been involuable to me for my professional growth as an appraiser. A few names include Chip Wagner (IL), Jeff Otteau (NJ), Butch Hicks (VA), Brad Charnas (OH), Rick Foos, (CA), Jay Delich (AZ), Colleen Welch (FL), Marie Robbins-Marine (CO), Bob Headrick (IL), Howard Babcock (MI), Suzanne Bloyed (OK), Thomas Allen (OK) and Ron Box (TX) to only name a few. There are many others in the organization that I admire and have learned from.

The price of membership, even if relocation work does not dominate your practice, is well worth it (if you are accepted). They are only interested in seasoned appraisers with references and have membership criteria outlined on their web site [pdf].

But I digress…

One of the by products of cooperation has been the RAC Report which is a market by market depiction of areas covered by members that has been standardized to included absorption, prices and volume by price strata. There is a wide array of markets covered (Manhattan doesn’t fit well into the criteria standard in addition to our lack of an MLS). Data on various New York City markets can be culled from my family of market reports available on my web site.


The redesign of the RAC report and site was spearheaded by Lee Burns, a very good appraiser and member of RAC based in Houston, Texas. The report allows the reader to peruse most of the major US markets to get a better understanding of where the risk lies in the market strata the house they are managing in inventory is likely to be.

These are the markets covered:

Akron Metro Area
Atlanta Northeast Metro Area
Boston Metro Area
Canton Metro Area
Chicago Metro Area
Cincinnati
Cleveland Metro Area
Columbus Metro Area
Corona California
Dallas Metro Area
Denver Metro Area
Detroit Metro Area
Greater Pittsburgh
Houston Metro Area
Las Vegas Metro Area
Los Angeles South Bay Metro Area
Los Angeles Southeast Metro Area
Los Angeles Westside to Central (CLAW)
Madison, WI Metro Area
New Jersey-Montclair Line
New Jersey-Summit/Chatham/Madison
Orange County, California
Phoenix Metro Area
San Antonio Metro Area
San Diego Metro Area
St. Louis Metro Area
Tampa Bay Area
Tucson Metro Area
Tulsa Metro Area
Washington, D.C. Metro Area (Suburban VA and MD included)
Wichita Metro Area

I plan on sharing the results every quarter as the reports are released.

4th Quarter 2006 RAC Report



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