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Posts Tagged ‘Soapbox Blog’

[The Hall Monitor] The Future of Suburbia

January 10, 2009 | 12:30 pm |

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 Soapbox readers tongue-in-groove insight on appraisal and housing issues. …Jonathan Miller

The pendulum has swung away from “Conspicuous Consumption” toward “Sustainable Living”. “Consumerism” is out and “Green” is in. A quick visit to the New York Times website and the words sustainable living typed into the search engine brought me links to 1,840 articles, 25 of which were published in the last 30 days. Have Americans made a conscious decision to reject our materialistic, “keep up with the Jones’s” way of living and embrace a simpler life with less stuff? Have we really turned against our Hummers and Starter Castles? Or are we simply feeling less wealthy given the recent downturn in the markets? It’s likely that both these things are true, to varying degrees.

Leaving aside the subjective value judgments however, there are demographic realities that suggest the future will not be kind to the more recently built outer-ring suburbs which are located further away from centers of employment, shopping and other amenities, and are thus more heavily dependent on the automobile as the primary means of transportation.

An article in The Real Estate section of the Times from December 28, 2008, Housing Inventories on the Rise, cites a report prepared by Jeffrey Otteau of the Otteau Valuation Group in Old Bridge, New Jersey.

From the Times article:

“Right now we are all focusing on how bad it is,” he said, “but what we are also seeing is a historic reversal of home-buying demand away from suburban and rural areas to cities and inner-ring suburbs that are more walkable than driveable.”

Mr. Otteau says the shift was partly because of higher energy prices. But the dominant reason is that the number of households with children living at home is on a persistent decline.

“In 1985,” he said, “50 percent of households had children at home. In 2000, that was down to 33 percent. Today it is 29 percent, headed to 25 percent.

“That means that 75 percent of homebuyers over the next 15 years will have childless households and within that group are empty-nester baby-boomers, or couples or singles buying a first house. And that means three out of four homebuyers will have no interest in a house in the suburbs with a good school system, which is pretty much what we’ve created over the last 50 years.”

Mr. Otteau’s reference to 1985 and the 50 percent of households with children at home points to the fact that baby-boomers at that time were smack-dab in the middle of the child-rearing phase of their lives. Well, the “pig in the python”, as the boomers are sometimes called, is about done with that part of their lives and this helps explain the decline in the number of households with children.

As Mr. Otteau makes clear, nearly everything we’ve built over the last 50 years was in response to this aging demographic, whose own future needs will not even be met by the very housing model created expressly for them, to say nothing about the appropriateness of the status quo for generations that follow.

Appraisers are trained to analyze the functional utility of improvements and various forms of obsolescence, as they relate to highest and best use. Just for fun, let’s consider the existing “suburban environment” as the subject. What are some of the factors on which its future viability depends?

  1. Transportation: There can be no arguing that the automobile is central to the success of the built suburban landscape. In 1956 under President Eisenhower we began construction on the Interstate Highway System, without which the development patterns of the last fifty years would not have been possible. Keep in mind that the U.S. population was 169,000,000 in 1956. It is now 305,000,000 and is projected to grow to 400,000,000 by 2039. Even if you believe the existing network of roads, bridges, and parking is adequate to serve our current needs, can it possibly be expanded to meet the needs of an automobile reliant population 30% greater than ours thirty years hence? I, for one, think not.
  2. Energy: The current low price of oil notwithstanding, it is unlikely that future oil production will be able to keep pace with worldwide demand as China and India continue to grow their economies. The viability of our suburban model is only possible because of the availability of cheap and abundant energy. The fact that, with only a few minor interruptions, we’ve had access to all the energy we’ve needed up until now is no guarantee that this trend will continue into the future.
  3. Environmental Awareness: Detached single family houses on large lots in sub-divisions not located near jobs or shopping are the antithesis of the desire to “go green” – which seems to be more than just the latest fashion. As Mr. Otteau describes in the Times article, the move toward greater density and mixed use development, new urbanism, walkable communities whatever you wish to call it is already happening.

Ultimately however, it all comes back to the “Pig in the Python”. Boomers are getting on in years and the landscape that for fifty years was first built for them, and in more recent years by them, faces a stern test. For fifty years it’s worked pretty well, I think most people would agree with that. The question is will it work for the next fifty years?

Personally, I think we need to start making other arrangements.


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[Appraisal Contemplations] Quality Over Quantity

November 15, 2008 | 1:09 am |

A native Californian and a certified real estate appraiser, Aaron O. Thomas began appraising in Arizona and eventually ended up in San Diego where he owns and runs San Diego Appraisers. His firm specializes in greater San Diego County area residential properties and his clients include mortgage brokers, CPAs, lawyers, businesses and homeowners. Aaron is very outspoken and passionate about real estate appraising. Colleagues on Appraisers Forum have long known him as “Tucson Appraisals.” Good thing it’s too warm in San Diego to have the wool pulled over his eyes to the unethical business practice of the day: “comp checks.” Like me, he experienced a growing frustration in recent years with the form-filler mentality that many appraisers and users of appraisal services have embraced.

I am lucky to have Aaron contribute to the appraiser dialog on Soapbox.
– Jonathan Miller



Initially and some time after licensing was implemented there was talk of increasing the requirements of attaining a real estate Appraiser license. Regulators had some concern that if the requirements were too stringent, it would create a lack of real estate Appraisers. This of course would have made it a longer process to attain a mortgage. Needless to say, this extra criterion was never implemented until recently.

The real estate boom of 2004/2005 created a situation where there were more appraisal orders than there were Appraisers. This created an influx of Appraiser trainees that eventually outnumbered the amount of licensed Appraisers. They were depended upon to carry the weight of Appraisal orders that were flooding in from the higher rate of mortgage applicants. At the risk of making a generalization, these trainees were not given the amount of attention needed to properly train them because the licensed Appraisers were too busy trying to meet the demand of all the appraisal orders. This out of control situation created numerous appraisals that were inaccurate and in some cases downright fraudulent.

Now that mortgage applications have declined and more strict lending guidelines have been implemented from the collapse of banks across the nation, there are more licensed Appraisers than the market can support in appraisal orders. Appraisers are getting pushed out of the business and they are letting their licenses lapse.

Regulators (and others) have learned their lesson. Now that there is an overflow of Appraisers that can easily meet the demand for Mortgages, regulators are now implementing more stringent criteria on licensing without the worry of creating a lack of Appraisers. But, would they still have implemented these stringent qualifications criterion if there were a lack of licensed Appraisers? After all, we are tied to a larger system that still needs to flow smoothly. We are tied to it and governed by it more than people would like to admit.

Prediction: Licensing criteria will be loosened again when there is a lack of Real Estate Appraisers needed to supply the market.


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[Fee Simplistic] The Greenspan Doctrine: “Protecting The Stockholder’s Interest” Or Watch Those Assumptions

October 29, 2008 | 1:00 pm |

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


For those who saw former Fed Chairman Alan Greenspan’s testimony before Congress on Thursday October 23rd it was almost a mea culpa but no cigar. When queried by Congressman Waxman as to why he did not intercede with regulations to prevent the banking world from continuing its underwriting and issuance of CMBS & CDO sub-prime bonds and their toxic derivative permutations Mr. Greenspan answered that he believed the market would prevail to correct abuses as Wall Street would act to protect its shareholders. Those of us who dealt with the investment banking community knew that it was really the year end bonus pool that governed Wall Street’s actions and not stockholder interests.

The failure of the Fed and the SEC to act in a situation absent loan underwriting standards coupled with off-balance sheet securitization where the underwriters and lenders had no “skin in the game” defied logic and economic reality much less common sense. You did not need a PhD in economics to understand that disaster was lurking around the corner which FEE SIMPLISTIC called attention to on several postings. It was all based on an underlying assumption that the market would be on a perpetual rise and values would escalate so why worry?

All of this pales against more astute commentary from my country weekend neighbor who is employed by a major equity buyout firm. As we were discussing the state of the real estate market this past July I commented on the Blackstone Group’s purchase of Sam Zell’s Equity Office Properties portfolio back in early 2007 and how they immediately sold off groups of properties to other investors at substantial markups. FEE SIMPLISTIC (May 2007) noted it was like buying wholesale and selling at retail. One of the buyers at $7.25 billion for 8 midtown Manhattan buildings was Macklowe Properties who ended up having to surrender title because they could not sustain the debt service. My neighbor commented that the “smart money” guys that he worked for in the buyout firm always said, “when Sam Zell is selling you don’t want to be buying”.

So the question is: after all these years of listening to the former Fed chairman spout his inscrutable prognostications about the economy, the credit markets and interest rates should we have been listening and watching Sam Zell?

And the corollary is: will the recessionary cycle end when Sam Zell starts buying again?


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[Palumbo On USPAP] USPAP, No, You’re Misleading Me.

October 23, 2008 | 11:36 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


Although I am supposed to be managing a process, it is quite often that I “get my hands dirty” and dive in.

Reviewing appraisals and conversing with appraisers keeps me close to the issues of the market as well as helping me get a handle on the realities and challenges of dealing with a nationwide professional vendor panel. Most of the time this is a pleasure and very reassuring: I get to observe new markets, some of which are NOT declining, yes that is correct, not a typo, and I also have discussions with highly skilled appraisers who enlighten me on their markets via articulate thorough (appraisal) analysis so my risk is mitigated as best it can be. To those TRUE business partners I say thanks and I look forward to the next challenge for us to work on TOGETHER.

Unfortunately, like always here are some bad apples. Those who accept appraisal assignments with a sense of entitlement, who also tend to fail miserably in communicating let alone solve the appraisal problem. And just so we are clear here we are NOT talking about questioning someone’s “value”. In the relocation business it is standard protocol to obtain two or three appraisals and then query each appraiser based on what was observed as it relates to facts about the subject, market conditions, trends, common comparables used etc. The summary of responses is recorded so that the “intended user”, an employing corporation, can (try) to make sense of this highly subjective process. A lot of the questions we (in-house staff) ask we already know the answers to and how they impact the analysis (if at all) but we ask anyway so the client and employee can gain some reassurances on some real estate related misconceptions and such. We are not a management company and we pay market fees and allow for ample completion time. All we ask in return is thorough credible appraisals in a timely manner and endurance of the back-end process.

The specifics of my “bad experience” involve my query of an appraiser’s room count as it related to what was reported by the two others. Seems this gentleman included both an above ground laundry and utility room as part of the “room count”, where HIS local peers did not. Item of note here is the both realtors did NOT exaggerate the room count via this method of counting. When I pointed that out and merely suggested that he “clarify, explain why, or possibly modify his room count”, I was met with a terse one line response “per USPAP to change the room that would be misleading”. The terse response to that one question was followed by a petulant response to the several other items noted in contrast to the other reports. Since this is not my first day on the job, nor the first such role I have had as a manager of the appraisal process, I promptly finalized the summary of my findings internally so as to “pull up the anchor” and move on. CLEARLY this is not even a USPAP issue.so I figured I would have some fun with this guy. This kind of response to this kind of issue makes me wonder what some people are thinking and why there is such a sense of entitlement. I wrote back: “thank you sir for your response, I appreciate it. No worries on the room count issue, but I just want to clarify one thing: Acting unprofessional and petulant and providing a response like this the worse USPAP crime going: YOU”RE MISLEADING ME into thinking you belong in the appraisal profession!! Maybe you have done the best appraisal I will ever read, and the valuation conclusion is rock-solid but that gets lost in dialogues like this”.

Don’t get me wrong, I know everyone has a bad day every now and then. Unfortunately unlike my last appraisal management gig where fee panels can cover 90% of the (pre-determined) lending area, I have no idea where the next “move” will be. We qualify and engage within a small window and trust tremendously in those we engage. 2008 has revealed this type of response and attitude more than one would like to see. I get it: is very tough out there right now. Just remember no matter what business you are in that angry and unprofessional does not work. Angry sends a message beyond what you think and begs the question of empathy VS apathy. Also. when you quote USPAP be carefulthere may be a hidden meaning to what you quote.


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[Commercial Grade] I-Rate Over The Agencies

October 23, 2008 | 11:08 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

There is no shortage of villains in this market meltdown (see CNN’s 10 Most Wanted Culprits of the Collapse). Henry Waxman, Chairman of the House Committee on Government Oversight and Reform, even got a concession from Alan Greenspan that he was “partially wrong in opposing regulation of derivatives” and acknowledged that financial institutions didn’t protect shareholders and investments as well as he had expected.”

Though there has been lots of finger pointing, I think that the rating agencies are getting off way to easily. Sure, they’ve been scolded, but considering the extent of the fallout and their role, more than a slap on the wrist is in order. Today’s New York Post reports how the credit rating analysts saw the collapse coming years ago, but did nothing because it was such profitable business.

Over the years, I couldn’t understand how so many inflated appraisals prepared for the investment banks got by the rating agencies, the supposed watchdogs. As I’ve said in past posts, my firm sat on the sidelines when it came to CMBS appraisals because we didn’t play the game, and the rating agencies, who were supposed to be the game referees, were on the take. Where is the outrage over their conduct and why haven’t those senior executives been shown the door?


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[The Navigator] Strategic Planning Can Get Appraisers Under The TARP

October 20, 2008 | 10:13 am | |

Joseph P. Egan is a Massachusetts Certified General Real Estate Appraiser with over 25 years of professional valuation experience. The assignments performed by his firm, Joseph P. Egan & Associates, cover a broad range of commercial real estate properties as well as family and closely-held businesses in Cape Cod, Nantucket and Southeastern Massachusetts. This experience intersects with all major industries such as the automotive, food service, healthcare, lodging, marine, professional services, recreational, and retail sectors. Joe is a thoughtful and thorough writer who draws on this experience when delivering unique insight on issues that impact appraisers in today’s market. I am deeply grateful to have Joe’s to help us “navigate” this challenging environment for appraisers.
– Jonathan Miller



Earlier this month the Troubled Assets Relief Program (TARP) became a done deal and the U.S. Treasury has since been diligently crafting a global strategy to implement the greatest government bailout or rescue since the 1930’s.

Despite the many unknowns of the $700 billion program, one underlying theme being increasingly acknowledged is that TARP related assets will stimulate demand for experienced workout related professionals. Given what we know, it appears the increase will largely concern asset collateralized by commercial real estate and new construction assets.

One piece of evidence of the growing demand are the widely published reports of the FDIC’s efforts to employ more workout professionals beginning with retirees possessing prior on the job experience gained in the prior S&L bailout. In the private sector, Anthony LoPinto of SelectLeaders a leading commercial real estate recruiter stated in a recent blog post that due to “a meltdown of the financial system” and the need to “contend with the large pools and billions of dollars of commercial real estate loans that will be maturing over the next 12 to 36 months”, demand for experienced workout and restructuring professionals is expected to increase. An anecdotal review of available job postings, hiring news, and general industry dialogue all seem to corroborate Mr. LoPinto’s front line perspective.

The positive news is advisory and valuation companies of all types will likely have opportunities to meet the growing need for workout services. Professionals and organizations with prior workout exposure may have a leg up and perhaps be most inclined to seize opportunities. Less experienced professionals seeking to diversify into the arena can still adopt strategic and focused measures to explore opportunities.

Regardless of your level of workout experience, before dipping into this inviting yet clouded pool, it may be best to develop a reasonable short list of what we currently perceive to be in store under TARP and highlight a few differences between the last time workout services was a growth industry. Armed with this perspective (which is being further refined at this moment) a range of possible workout opportunities likely to be offered in the marketplace can be brought into closer focus.

Fully recognizing that the range of differences is an evolving topic, as TARP unfolds the short list of current differences include:

  • The financial and systemic magnitude of the TARP program and the solution it hopes to provide are much larger and more global than the S&L bailout. From a structural perspective, the range and diversity of market participants, stake holders and service providers will be broader as well.
  • Using the establishment of FIRREA in 1989 as the starting point, the S&L bailout lasted into the mid 1990’s. The timeframe for the TARP program is unknown due to dependent variables such as the type of assets to be acquired, price levels achieved, the degree to which assets are performing, holding periods (some assets may be held to maturity), and the manner in which Treasury adjusts their terms over time. Continued bank mergers and failures along with the dysfunctional state of the commercial credit pipeline, thus triggering the degree to which banks will need to participate in the TARP program, all remain significant variables as well.
  • In the S&L bailout, the bulk of assets acquired by the RTC and resold comprised whole asset sales acquired from a neat profile of U.S. banks. A significantly higher percentage of the troubled assets to be acquired under TARP, however, are expected to comprise internationally held whole mortgages and other financial instruments of many blends, rather than primarily hard assets such as real property. In addition, the troubled assets will be divided among the yet to be named asset managers in two groups handling either whole loans or securities backed by a multitude of mortgages.
  • Based on available information, gaining adequate control of securitized assets, aptly assessing risk, and developing reliable pricing and buy/sell mechanisms, particularly for securitized assets, will be the major challenges.
  • Through the consistent introduction of “innovative debt” structures and greater reliance on private rather than institutional capital, a broader pallet of international stakeholders now exists. The consistent formation of new private venture funds keen on opportunities to acquire distressed assets at favorable terms is just one example of how this realm is already expanding. Another stakeholder may comprise tax payers like you and me under a plan being considered where Treasury financing would be provided in selected joint venture transactions. The equity partnerships are aimed at promoting assets sales while providing the opportunity for tax payers to be a stakeholder.
  • Qualifying banks deciding whether to retain or acquire collateralized assets not sold to Treasury will represent another type of potential workout client. Certainly, the relaxing of market to market requirements, changes on the treatment of distressed assets in whole mergers, along with restrictions on executive pay, equity participation, and recoupment could provide incentives for banks to strongly consider holding or acquiring assets, except for the most seriously impaired. As part of this decision making process, banks will require workout related guidance on assets collateralized by real property.
  • The range of sophisticated analytical tools and the level of readily accessible public and proprietary market data, software applications and information technology have significantly increased since the 1990’s. Consequently, on the regional or local level appraisers providing the most sought after workout services will be required to demonstrate the high value capabilities and specialized technical expertise not readily decipherable from third party data sources or based on remotely developed software models.
  • Participating appraisers must fully understand the needs and structure of this evolving process which over time will ultimately become a sophisticated and highly channeled niche market. Consequently, a new long-term commitment to being properly positioned on the right regional and national radar screens will be paramount. Getting there first, establishing your targeted expertise, and being “top of mind” is even better.
  • Due to the magnitude of the current rescue plan as we know it, efficiency and credible assignments results will even rank higher. Project management skills, accountability, the ability follow defined scope of work requirements, and the willingness to provide high touch follow up service will no doubt reign supreme.
  • Given the volume of assets to be managed and Treasury’s emphasis on the “paramount need for expeditious implementation”, asset managers and other workout clients will seek out service providers with the capacity to reliably complete multi-property or portfolio assignments in the most optimum manner possible.

With these observations in mind, in addition to appraisals, some ideas on the types of targeted workout related services to be requested will include:

  • Liquidation Value The ability to estimate reasonable and adequately supported liquidation values will be needed area of expertise. Assisting banks in the development of “fair value” estimates on ORE properties could perhaps be another related service to be requested. (See FDIC, FIL 62-2008, Guidance on Other Real Estate, issued July, 2008)
  • Development Consulting Professionals and organizations with a firm local and regional grasp on absorption rates, development costs, unit pricing, sales concessions, bulk sale analyses, etc. or the more encompassing market and feasibility studies, will be sought out. Depending on your geographic region, through properly developed scope of work scenarios this niche service sector can offer good opportunities for developing a solid niche and attracting ongoing and repeat assignments.
  • Market Analysis Providing market data and specialized analysis to a range of clients are examples of the type of work out related assignments likely to be requested. Possible scenarios include requests for supplemental market data and analysis to be considered by a client in connection with an existing appraisal they are currently reviewing. Individuals and organizations performing advisory or valuation services in a market area where you have superior expertise or better resources may comprise another client group. The need for up to date and reliable market data and trend analyses to be utilized in connection with a client’s internal portfolio review processes is another area where market analysis services will have a good fit in the workout arena. Since the ability to assess a borrower’s capacity to continue to pay on a performing loan will be front and center, one offshoot in this area could possibly involve assignments supporting the underwriting and risk assessment processes with greater precision. Recognizing that the original mortgage was created at both a different time and underwriting scenario, such clients may require more on the ground intelligence addressing critical topics such as the state of the immediate market area and the competitive environment.
  • Property or Subject Specialization Professional advisory and firms with specialized areas of expertise will be sought out to provide reliable solutions concerning unique properties and problems. And based on what we already know about lax underwriting and loose credit standards, there will be many unique properties and problems. In a workout environment, prudent asset managers realize they cannot know every market or every property type and are inclined to turn to specialists for answers. The byproduct — timely and sound decision making is what they need most. One obvious example of specialized subjects involves the broad category of distressed properties with the possibility of further segmentation. Additional examples may include specialization by property type (e.g., gas stations, net leased restaurants, lodging properties, recreational properties, food processing plants, interval ownership resorts, etc.), by region or perhaps based on very specialized knowledge within a closely aligned field (e.g., geology, agriculture, environmental engineering, etc.).

The preceding review of the major aspects of the TARP program and brief list of likely workout services serve as only a brief back drop to the anticipated growing need for professional workout services. Certainly, many other key observations are worth noting and no doubt these waters will become clearer in coming weeks. Nevertheless, the preliminary list serves its purpose of being a vehicle to inspire interested professionals to begin to strategically consider the key questions surrounding the future for workout assignments, essentially the who, what, where, when, how, and why of it all. Naturally, for those among us already experiencing a steady increase in workout related assignments sharing your valued observations would be a true reflection of professionalism as we join together and prepare to meet the serious challenges before us in the coming financial and economic environment.


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[Commercial Grade] The New York City Income Property Market Report – First Half 2008 – is available for download

October 19, 2008 | 11:01 pm | Reports |

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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


The semi-annual market report that I prepare on behalf of investment sales brokerage firm Massey Knakal Realty Services is available for download. This report was particularly interesting in that it reflected the multi-family and mixed-use sales market in New York City post “credit crunch.” We found that the number of sales was down significantly, 31% overall from the same period last year, with the biggest declines in Northern Manhattan and the Bronx. The median price per square foot was $222/SF, down 5% from the prior period, while the median cap rates increased to 5.8% and the median GIM declined to 11.5.

Download full report


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[Straight From MacCrate] What Is Land Worth?

October 5, 2008 | 10:36 pm |

Jim MacCrate, MAI, CRE, ASA has his own firm, MacCrate Associates, but has worn many hats as a Director at PricewaterhouseCoopers in New York City and Chief Appraiser at European American Bank. He is a prolific writer on valuation issues and teaches a number of the real estate appraisal classes through the Appraisal Institute and New York University. I have had the pleasure of taking a number of courses taught by Jim. 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.

…Jonathan Miller

Are Land Investments Frozen or Liquid?

Do the FEDS Know What Land is Worth Now?

By James R. MacCrate MAI, CRE, ASA

Turbulent times are affecting real estate values as the value of homes, apartment buildings, retail facilities, and office buildings fall in most markets. I wonder if the auditors, lenders and investors are going to value development projects correctly.

Land gets hit the hardest, but most lenders and developers do not see it that way. In the real estate market, developers use the three factors of production, land, labor, and capital in order to make a profit. Developers provide the fourth factor in production, coordination.

In the current environment, the cost of raw materials has escalated, cost of capital is increasing, the value of the finished product, i.e., an office building, condominium units, single family homes, is falling. In addition, risk takers or developers want a higher return on their equity capital and coordination. Something must give, and that is land value. In classic economic theory, land has the last claim to the residual income.

Developers have reported that when analyzing land, they determine the appropriate product that the site can support, given the location, development regulations, and market conditions, and then estimate the probable price that will be paid for the final product. Deductions are then made for construction costs, profit and overhead, site improvement costs and, if necessary, cost of approval, to arrive at the price per lot of the site with road and utilities to the property line. Any additional offsite costs to bring the property to that state (extending roads or utilities, or making township contributions) must then be deducted as well. The resulting figure is the residual land value.

Historical Trends

Because real estate traditionally competes within capital markets for funds, we compared the historical expected returns from investments in land found by surveys completed by MacCrate Associates LLC, Price Waterhouse LLP, and the Korpacz Real Estate Investor Survey to alternative investments, including: residential mortgages, Baa Rated Bonds, and the ten-year treasury.

The chart clearly indicates that returns on land investments began to fall before 9-11 and spiked back up after 9-11 and, then, trended downward as demand for real estate increased because of very favorable financing. But, the returns prior to 1997 were relatively constant at just over 20%. It is reasonable to assume that investors will, again, require average returns in excess of 20% for speculative transactions. In fact, back in the early 1990’s many investors wanted a 25% to 40% return or more to invest in vacant land. The spreads between the expected land investment return and the ten-year treasury narrowed during the last few years but will probably widen as land as land investments become frozen or illiquid at any price.

Back in the 1990’s

The following chart, from Price Waterhouse LLP, summarizes the expected return by residential developers from 1990 through 1998. Average expected return declined from 27% in 1990 to 20% in 1998.

By 2002, the expected returns were back above 20% briefly, but declined to lower levels that were expected in the mid-1980s when the market was very strong. Currently the Korpacz Real Estate Investor Survey indicates an average of 17.5%. That won’t last long.

So We Can Only Hope That.

The folks in Washington D.C. who are proposing to buy all these mortgages and closing lending institutions that may be in financial trouble must price the assets correctly to reflect the true risk and return that we deserve as taxpayers and investors. Proper valuations require an appraisal which would include a market analysis to ensure that the risks are captured in the discounting process to estimate value and unfreeze the land investments that have been made.

A simple hypothetical example can see the impact that the current crisis is having on the value of land for apartment projects:

During periods of weakness, vacancies increase. In addition, the cost of utilities has been rising. But, this calculation has not taken into consideration the following:

  • Time value of money
  • Increase in interest carry
  • Time to lease up
  • Increase in marketing costs
  • Real estate taxes, theoretically, could be increasing while the value is declining
  • Possible increase in construction costs, besides interest carry
  • Increased entrepreneurial incentive.

What if the returns regress back to the 1990 returns on vacant land? What if the highest and best use was as condominium project before? What happened to the land value when the condominium unit prices are cut in half? Next time!

Rick Wincott, MAI, CRE and Jim MacCrate, MAI, CRE with the assistance of Scott Koenig, wrote an article on Land Valuation and Purchase Price Decisions. You can obtain a copy from Rick Wincott or Jim MacCrate.

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[Sounding Bored] Valuation Review Interview: “Tightened Appraisal Guidelines”

October 5, 2008 | 10:18 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. Valuation Review gets me to spill the beans on the Brave New World our profession has entered. Believe it or not, I am optimistic.

Here’s my interview with Matt Smith, managing director of Valuation Review, one of the best real estate appraisal publications out there, IMHO:

As Valuation Review has reported, lenders have grown much more conservative in underwriting, and appraisers are feeling it in the form of growing demands for more in-depth market analysis and the inclusion of more recent comps in reports (see “Conditions, stips reach fever pitch for appraisers“).

“I hope it continues forever. It should never have gone away,” said Jonathan Miller, president and CEO of appraisal firm Miller Samuel. “The appraisal profession from 2004 to 2006 which was when the bar for underwriting dropped to the floor became an army of form fillers. The people who were competent either did not fare well during the housing boom or were effectively shut out of their trade. It’s a shame. That will take a while to rebuild.”

He estimated that the appraisal industry has fallen from “80 percent competent to just the opposite.” Miller recently shared his thoughts on how the GSE conservatorship and Wall St. crisis might mean for appraisers.

The most important factor, he said, is the housing market won’t get better until credit is fixed.

“The GSE takeover, in the long run, is a good thing for two reasons. One is they no longer serve two masters — the taxpayer and the shareholder. So they may be able to work out some of the foreclosure volume,” Miller said. “There may be more empathy.”

Also, no one knew how much of their balance sheet contained overstated assets.

“Until all the dirty laundry comes out, you’re not going to see much of a resolution of credit,” Miller said. “There’s no trust in the market whatsoever.”

What’s it all mean?

As the industry purges itself of unscrupulous practices and “professionals,” mortgage lenders might place a new premium on skilled, experienced appraisers at least temporarily.

“I’m skeptical that lending institutions are going to find the new religion tasteful for an extended period of time because it means lower revenue,” Miller said.

In addition, many of the executives and leaders who pushed for reckless behavior are still in place. There’s also another wildcard appraisers must face: The Home Valuation Code of Conduct.

Miller offered no guesses at a possible outcome for the HVCC, but said, “The biggest concern I have in all this and I can tell because I’m being heavily marketed to by them is the proliferation of appraisal management companies.”

Representatives from the mortgage broker industry have reported that with new rules preventing them from ordering an appraisal directly, 60 percent of their members will go under, according to Miller.

“Yes, because that is part of the systemic problem with valuations,” he said. “Lenders have essentially severed their relationships with local appraisers. They’ve gone national (with AMCs). You’re moving from an appraisal product that is biased to make the deal to one of incompetence. Generally, the appraisers willing to work for appraisal management companies are those willing to work for half or less than the market rate and therefore cut corners and turn the product around in 24 hours. The reviews I’ve done for banks suggest those reports generally aren’t worth the paper they’re written on. So how are we better?”

There has been no great solution for making sure appraisers are protected but viable, he said. Real improvements to the system would have to incentivize quality and trust.

“That won’t be accomplished by just making a new laws or regulations saying you can’t pressure appraisers. That’s been the tact in the past, and that really does nothing,” Miller said.

Rather, there has to be incentive on the demand side so that loan products aren’t purchased and securitized until they meet rigorous new standards. The larger trend in the appraisal community is that the intellectual knowledge base is leaving mortgage business for other types of valuation work.

“At some point, you decide whether you’re going to sell your soul or not. I don’t want to sound too cynical, but once you make the business decision to say, ‘I’m going to push the number,’ it’s over. You’re going to be doing that the rest of your career, because that’s what your reputation will be,” Miller said.

His own business has evolved in recent years from 50 percent mortgage-based to just 20 percent or work coming from mortgage companies.

“People that take the long-term view will probably leave the mortgage business as an appraiser and certainly are doing little work with mortgage brokers,” he added.

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[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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[Sounding Bored] Perfect Timing: WaMu Checks The Box With Power To Settle

September 14, 2008 | 6:14 pm | Columns |

Sounding Bored is my semi-regular column on the state of the appraisal profession. This week we get some good news about appraisers who do the right thing.

Earlier this year, I wrote a post about an appraiser, Jeniffer Wertz, who sued Washington Mutual for blacklisting her. She refused to allow the bank get away with directing her not to select “declining” property values on her reports.

I have written about this type of systemic appraisal pressure many times and we have also lost clients this way. It’s important that appraisers are allowed to be the eyes and ears of the lender or they are simply “form-fillers.” The Wall Street Journal covered this point well.

Well, there is rare but good news for an appraiser who did the right thing. Jenniffer told me (and others):

the case has been settled to the mutual satisfaction of the parties.

I am happy for her and proud of her for not accepting the status quo.

WaMu finally let their Chairman go and it has been reported that they are teetering so I suspect the timing of the settlement of this case has something to do with their current situation.

As they say, timing is everything so you can check that box.


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[Musings Of An Appraiser] Disputing An Appraisal

September 6, 2008 | 9:59 pm |

Adam Johnston, SRA, is a long time appraisal veteran, and currently a chief appraiser for a national real estate settlement services company (and a longtime fan of Soapbox). On a daily basis, he speaks with appraisers and lenders across the country having observed the rise and fall of the sub-prime lending market. I am glad to have him share his views with us …Jonathan Miller

There has been some recent discussion regarding the process of disputing an appraisal. As expected, this topic tends to illicit passionate responses.

As a profession, we like to believe that appraisers opinions are formed from a rigorous examination of the market and a boundless understanding of market forces and dynamics. We believe that people should unequivocally respect an appraiser’s opinions. Unfortunately, some appraisers believe that such respect is demonstrated by insulating appraisers from critical questioning or examination. These same appraisers tend to believe that questions pertaining to the accuracy of the value opinion or report content are tantamount to an attack on the appraisers integrity and aptitude. Any such questions are met with moral objection and are viewed as insipid and inherently sinister.

To start, I believe that an appraiser must render appraisal services as a unbiased professional, without advocacy or favor. An appraiser, much like in scientific discovery, must seek the truth from the data. To this end, I believe that the appraiser should independently gather and examine data without the injection of influence during the development of the appraisal. Some entities and organizations offer a codified venue for ostensibly biased individuals, including borrowers and real estate agents, to submit uninvited data to the appraiser during the development process. By doing this, I believe that these entities and organizations are potentially facilitating the co-opting of the appraiser into a suggested outcome. In contrast to this practice, I believe that all petitions and value reconsiderations should be prohibited until the appraisal report has been completed and delivered.
In this way, we engage a process where the appraiser’s opinions and conclusions are based upon an independent data gathering process, unaffected by the uninvited supplications of others.

However, once the appraisal report has been completed and delivered, I fully support a restrained process by which individuals may entreaty the appraiser to consider alternative data and arguments. This would encompass both value reconsiderations and disputes related to any other elements of the appraisal report or development process. I recognize, as should every reasonable professional, that perfection is elusive.
Additionally, maturity teaches us to consider the opinions of others, regardless of how objectionable they may seem. It is my opinion that a prudent and professional appraiser, while acting within the bounds of a proper appraiser-client relationship, should be willing to consider argumentative data and probable conjecture, regardless from whom it originates.

Please understand that I am not suggesting that an appraiser be compelled to consider an endless stream of data and arguments without just compensation. However, because compensation is a matter of business negotiation and therefore subject-to the savvy and preferences of each appraiser, it must be neutralized for this discussion. In an ideal scenario, all value reconsiderations and supplemental data should be screened prior to submission to the appraiser by persons having sufficient appraisal knowledge and training. This method will reduce the incidence of irrelevant and non-persuasive data reaching the appraiser. In addition, threatening or objectionable matter could be censured. I am firmly opposed to commissioned or quota based mortgage salespersons directly interacting with appraisers. In addition, I question the wisdom of empowering anyone with negligible formal appraisal training to interpret, screen or supply data and value appeals directly to the appraiser. Although it may involve additional cost, I submit that regulated mortgage lenders should be expected to employ licensed/certified appraisers to manage post-delivery value reconsiderations and dissenting arguments. Anything less constitutes an unacceptable sacrifice of lending prudence, often for the primary benefit of constricting payroll. As we have seen from the recent residential lending implosion and epidemic over valuations, the cost of lax controls is disastrous and far outweighs the added payroll burden of qualified appraisal staff.


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