Tag Archives: AMC

I have Google Earth and know how to use it

This post was originally published in Appraisal Today magazine and is republished with permission.

I have Google Earth and know how to use it

Seriously though, as a reviewer, it is one of the first tools I reach for when I look up the property that is the subject of the appraisal I am reviewing. Assume all reviewers do. We use it to make sure that the property does not back up to, side against, or face some type of externality such as a major 8-lane freeway, massive shopping mall or toxic waste facility. Hopefully the appraisal that has one of these externalities addresses it. Sometimes the appraisals go to great length to discuss externalities and any effect on marketability and value. Sometimes there is a sentence or two. Sometimes crickets.

Yesterday I pulled up GE on the house that was the subject of an appraisal I was reviewing and it backed up to a bunch of buildings. Looked possibly to be a school, but the street view maps took me around the side and to the entrance of what turned out to be a large condominium complex. Absolutely no big deal, but there wasn’t one single word related to this in the appraisal. I asked a group of appraisers whether they would make a comment if their subject property backed up to a condominium complex, and the responses ran the gamut from “of course”, to “no way, it is already covered in the neighborhood check boxes”.

While the check boxes for the neighborhood include multi-family, they do not include condominium, and in this instance, there was nothing in the appraisal even hinting that there was a mixture of single-unit uses in the area. This property didn’t raise a red-flag insomuch as backing to a freeway, commercial shopping center or toxic waste facility, but it did raise a question and warranted a bit more research. This is fine as it part of my job, but as someone who actually reads the reports in front of me, I was just left confused as to why it wasn’t even mentioned. I was even more confused by why so many appraisers say that it is not worth mentioning.

Maybe it is being old fashioned, but I grew up with the understanding that an appraiser was the eyes and the ears of the client, and that anything that would likely raise a question for the client should be addressed. Of course the freeway, mall and toxic waste facility are givens, but wouldn’t anything that was literally in the backyard also be something that would get questioned? How many minutes does it take out of the process to write a few sentences about a condominium complex? Couldn’t it be as simple as saying “The subject backs up to the XYZ condominium complex and has a seasonal view of some of these buildings. There is no negative effect on marketability or value of the subject property related to its location adjacent to this residential use” or some such rot?

While it is easy to overlook potential concerns due to the amount of reporting we have to do (and remember, there is no such thing as a perfect appraisal), stepping into the mind of the client and asking yourself “what would the client be concerned about” is a very useful exercise. While the client may not care about the house backing to a condominium complex because it is a residential use like the subject, they may care about it backing to the complex if for some reason it does affect marketability and/or value. It is up to us, as appraisers, to report and analyze what it is we see, and although we can never catch every little thing, our value is partly measured by our ability to communicate and to analyze these nuances.

Remember, reviewers have Google Earth and other tools at their fingertips, and most use them.

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CU and Me: Let’s Be Practical For A Moment -Part 2

February 13, 2015

Editorial by Woody Fincham, SRA 

woody CU

Over the next several days I will be posting up my thoughts on the recent Fannie Mae Lender Letter Lender Letter  LL-2015-02.  This is part 2.  Part 1 is here.  

So let us dive in to looking at that Lender Letter.  Each of the quoted sections comes from the Lender Letter, which is cited above this. Following each are my thoughts on the quoted section.

“CU does not accept or reject appraisal reports or characterize an appraisal as “good” or “bad.” The CU risk score and messages pertain to risk and identify potential defects in the appraisal report. The lender is not obligated to “clear” or “override” the CU messages. The messages are meant to be used as red flag messages that lenders should use to assist with their appraisal analysis and inform their decisions based on a complete analysis and understanding of the appraisal report.[1]

I think this clarifies some of the biggest concerns to what CU is and is not.  Most large lenders and appraisal management companies (AMCs) have been using all sorts of third-party review rule sets and data pools for many years.  So this is nothing new under the sun. It really is the first time they are pulling in data that is verified by appraisers.  It has the potential to be a good thing, but it could very well be a bad thing.  It will depend on how the lenders use it in their respective review processes.  It is certainly bad for appraisers if they approach it the same way that they approached the 15% and 25% adjustment guidelines. I will not get into the old adjustment guidelines to deeply yet, but we all know that many lenders were set in stone about the 15% and 25% guidelines when Fannie Mae was not.  Yet lenders and AMCs still required adherence to those guidelines in some cases as hard and fast rules.

Working in a market as I do in Charlottesville, VA I understand where some concern would come from in the appraisal community.  Much of my personal work involves complex residential assignments.  From what I gather from those I have spoken to at Fannie Mae, and what information I have read about CU, I imagine many of my reports will become a four or five in their system.  I deal with properties that require regional research because they are status homes: essentially unique and custom to the market.  I would assume that these types of properties represent less than 5% of that MSA, and transfer infrequently.  The market is also small on the urban-side and voluminous in the rural and transition from suburban to rural type properties; acreage varies greatly.  The fact the MSA is in the Appalachian Mountains and that Fannie Mae requires segregation of finished basements from above grade living area; an overwhelming number of homes are built on slopes that have basements. I think you see that unless I am in a planned neighborhood or condominium development, it is unlikely my work product can be seen as conforming.  By circumstance, these properties will rate high in risk.

If I felt like my ability to perform work would be affected by the CU rick scores, then I would be up in arms as well.  Many of my colleagues believe that the CU risk score will affect them.  While I cannot say that it will (or will not), if AMCs/lenders decide to use the information to benchmark appraiser quality it could be a nightmare for some appraisers.  When you get to my thoughts on the 15% and 25% adjustment guidelines, later in this piece you will see more of my perspective on this.  I could be wrong, but I am not going to be overly concerned… yet. Until I see things happen contrary to Fannie Mae’s stated position, I will defer on an alarmist attitude.

“CU does not provide an estimate of value to the lender. CU provides a numerical risk score from 1.0 to 5.0, with one indicating the lowest risk and five indicating the highest risk. Risk flags and messages identify risk factors and specific aspects of the appraisal that may require further attention.”

I know many appraisers were convinced that this was not the case.  Many were positive that Fannie Mae was going to assign scores to the individual appraisers.  It is easy to see why that would be a concern, as the last major Fannie Mae policy change dealt with the Uniform Appraisal Dataset (UAD).  Appraisers are directly monitored on consistency of data for comparables with the UAD, but not with CU.

It is easy to mix it all up.  If you submit data in violation to their UAD standards, that does affect you.  The CU rating score does not.  It is relative to the report itself, not to the appraiser. With that stated, AMCs and lenders COULD use consistent high-risk scores on reports as a means to stratify appraisers as problematic from those that get lower ratings.  If this type of comparison was made a tracked, it could affect me.  I do not compete with the typical mortgage-use appraisers in my market.  Plenty stay in homogenous subdivisions and I cannot do the work that they do at the price points they do them.  If their resulting reports are lower-risk scores by the nature of the conformity these properties present versus the types of properties that I typically work with, I will be seen as an inferior appraiser.  Fannie Mae may state their position on such things but that does not mean the lenders and AMCs will not distill and extend the information they see further.

This is getting into the realm of conjecture; as such, there is not a whole lot of merit to it at all.  It does make one stop and ask questions though. I try not to worry about things that I cannot control so I will leave such thoughts alone for now.  But I will come back to the way lenders took the 15% and 25% adjustment guidelines out of context and altered the profession. I will have some more on that later, of course.

“CU’s selection of comparable sales considers the relevance of each potential comparable sale based on physical similarity, time, and distance. The selection process is not based on the relative “risk” or sale price of a comparable sale nor is there a “lower is best” approach. In fact, CU may assign a high risk score to an appraisal when the model identifies alternative sales that are potentially more relevant than the comparable sales used by the appraiser, regardless of whether the alternative sales are higher or lower in price.”

This certainly is concerning for appraisers.  Appraisers are paid to perform the research and when we do it, we can get defensive about someone questioning it.  Call it professional pride, but this can be a catalyst to incite negativity among us quickly. It is probably a good idea that appraisers write their reports with the above in mind.  Part of this may be addressed by including commentary regarding ideal and typical improvements for the shared competing market.

Since the risk flags are triggered by not using properties that are more similar on paper, commentary may need to change to deal with these items in mind.  Canned commentary certainly will not work in many situations. I know this means taking the time to write custom commentary in every report, but with enough foresight, it is easy enough to build a template that is set up as a skeleton to which specific report comments can be added. I have also suggested to a few colleagues, when asked, that they approach this similar to ERC (employee relocation) reporting.  Possibly embedding a chart of all the comparables surveyed from MLS prior to distilling then down to the comparables in the actual report. I realize this is more work, but if we start seeing lots of kickbacks on this issue, this might be a way to avoid it.

The way CU is setup, at least how it has been explained thus far, is that data is stratified by census block groups (CBG), which goes into the next quote…

“CU takes location into account using Census Block Group levels, which are subsets of Census Tracts. This is the most viable proxy for location in the absence of standardized neighborhood definitions, and more effective than use of arbitrary distance guidelines. Fannie Mae is not suggesting that appraisers use Census Block Groups to define comparable search areas, but appraisers remain responsible for indicating when comparables are from outside of the subject neighborhood and for addressing any differences.”

This has caused quite the banter in social media appraisal groups and pages. There are all kinds of issues with this concept.  The most obvious one is that appraisers do not stratify by CBGs normally.  It would be great if the software companies could create or add a way to also tag which CBGs each comparable comes from or address it in the rules set reviewer in each of the form packages.  This would at least allow a streamlined tool to allow the appraisers to comment on this item.  Perhaps even a data point that could appear in MLS data.  Most addresses are geo-coded now, so it would be an assumingly easy thing to do by over laying the CBG maps to existing maps.

Obviously, Fannie Mae chose this methodology because neighborhoods will vary market to market.  My concern with it comes from the staff reviewers at lenders and AMCs (Quality Control or QC Staff) that are not familiar geographically (geo competency) with the area. This certainly gets back to USPAP regarding writing the report at level commensurate to the intended users.  Explain away would the obvious answer, but that also require the readers and QC Staff to read the reports thoroughly.  I often hear from folks involved in QC review that they prefer cogent writing and brevity.  From some of the reviews I have personally gotten from lower-level QC staff (unlicensed appraisers); it seems many struggle with common terms in real property economics.  I struggle with dealing with those that gloss over when I use terms such as linkage, commercial zones, obsolescence, etc.

This also still sets up the appraisers to deal with non-appraisers applying arbitrary guidelines.  While distance guidelines are now going to be relaxed, in their stead I dread the likely possibility that QC Staff will want CBG differences addressed.  A bit later, I will address the sun setting of the 15% and 25% adjustment guidelines, but one has to see the possible pitfalls with CBGs that the lender-leveraged adjustment guidelines created.  QC staffs need to be well trained to deal with this.  Nothing prevents individual lenders and AMCs from requiring more than Fannie Mae’s suggestion as to how to implement the CU into their work processes.

“The risk analysis performed by CU is for exclusive use by the lender in their analysis of the appraisal report. After completing a thorough review, a lender should be able to have constructive dialogue with the appraiser to resolve specific appraisal questions or concerns. Although the lender may use output from Collateral Underwriter to inform its dialogue with appraisal management companies and appraisers regarding appraisals they supplied, the CU license terms prohibit providing these entities with copies or displays of Fannie Mae reports that contain CU findings, including without limitation the CU Print Report, the UCDP Submission Summary Report, or any other CU report. The lender must not make demands or provide instructions to the appraiser based solely on automated feedback. Also, the CU license terms prohibit using it “in a manner that interferes with the independent judgment of an appraiser.” Fannie Mae expects the lender to use human due diligence in combination with the CU feedback, and will actively follow up with lenders who are reported to be asking appraisers to change their reports based on CU feedback without any further due diligence.”

Fannie Mae is pretty clear the impetus is not to strong-arm appraisers with the feedback and analysis done by the system.  There is a real desire to keep human beings in the mix from Fannie Mae’s side.  The possible disconnect I see will be on the competency of the QC Staff.  The way many AMCs and lenders approach QC reviews is by hiring unlicensed staff people and expecting them to understand what valuation professionals do. Each appraisal is different and finding comments buried in a 20-50 page report is arduous at best; I can struggle with it and I have performed hundreds if not well over a thousand reviews in my career. The tactic that most QC staff uses now is simply kick to out a report because they cannot find a comment, or how the appraiser addresses the issues up front, and rely on the appraiser to point it out.  There are already copious examples of appraisers stating they are often already addressed in the original report.  Unless there is some reengineering of the process, this will only get worse as now the QC Staffs will be armed with more data.

One thing that we have already seen from CU is the copying CU comments being sent to the appraisers.  I have seen several examples from colleagues where something was flagged in CU and no human review was done.  No dialogue was attempted between the QC staff and the affected appraiser.  Fannie Mae has made it clear that the CU scores and flags are meant to be dealt with by QC staff actually having dialogue with the appraiser.  Instead, what we are seeing so far is many QC Staff people are simply copying and pasting CU comments and sending them as a standalone engagement for revision or commentary for the appraiser to deal with.  That is not creating dialogue; it is asking the appraiser to the work for the QC Staff.  One would think, after reading Fannie Mae’s letter that the expectation is for the QC Staff to check the report in question before calling on the appraiser to do anything.  If the appraiser has reasonably commented or dealt with the issues of concern, they should be good to go.

Much of this is going to remain an issue with AMCs and lenders that continue to utilize the services of uneducated and undertrained QC Staff.  Large lenders and AMCs that process lots of volume expect an awful lot of their QC Staff.  Each appraisal, if written well, is stand-alone research project. It should be read and understood with the same care it was prepared.  Pulling in someone that has never read an appraisal report as an hourly reviewer and expect them to get through the jargon and concepts that are summarized in a mortgage use report is counter-intuitive.  Either the Lenders or AMCs need to start hiring competent and credentialed valuation professionals, or spend the resources needed to train raw talent.  Both aspects are expensive, and neither is an option with the current compensation structures in the mortgage and valuation overlap of space.  We will certainly discuss fee levels in depth a bit later.

“Fannie Mae does not instruct or suggest to lenders that they ask the appraiser to address all or any of the 20 comparables that are provided by CU for most appraisals. It is also not Fannie Mae’s expectation that appraisals should contain only CU’s top-ranked comparable sales. In the majority of cases, there may be no material difference between comparable sales utilized by the appraiser and those identified by CU. Before asking the appraiser to consider any alternative sales, it is imperative that the lender analyze the relevance of the sale and determine if the use of such sale would result in any material change to the appraisal report. If the lender determines that there would be no material change, then they should not ask the appraiser to make revisions. Fannie Mae expects CU to enable lenders to accept appraisals “as is” with greater confidence.”     

The previous comments I have made are applicable here, too.  The disconnect lenders had, again the adjustment ratio guidelines come to mind immediately, understandably make appraisers wince at this idea.  The biggest concern, here again, is that QC Staff must be at a level of competency to understand that suggested comparable sales are just that, suggestions.  The way this was handled pre-CU was to send an appraiser comparable sales that were not used and ask the appraiser to then comment on not using them or to possibly also include them.  Of course, the comedy often ensues when the appraiser replies back that, “Two of the three comparables you sent me to consider are already in the report.”  This type of real world scenario proves that where Fannie Mae may need to concentrate some of this reengineering of the process is on those that do review and QC work.

Not to plug the Appraisal Institute (AI), but this may be the very reason that the AI created the new review designations, AI-GRS and AI-RRS.  Review is a completely different animal than Standard-1 and Standard-2 reporting.  I understand that hiring such professionals is a higher cost, which means more cost to the consumer, but let us face it; you get what you pay for.  At the very least, if the lenders want to have a positive outcome from the QC side, it should be built around utilizing well-trained professionals and the review designations are a step in the right direction in my opinion.  And it really may not need to be at the consumer’s dime so much as maybe it should come from the lenders.  The last I looked the larger lenders have no problems posting profit reports.

I spoke with a chief appraiser with a major AMC last week.  He informed me that they have three levels of human reviewers.  The first level is a combination of using technology to flag potential issues and areas that may need more in depth analysis. If there is enough need to elevate it upwards, it is then looked at by a non-licensed staff person.   On the next and final level, a human being that is licensed is involved.  It is apparently an effective way to do things, but even their internal processes still leave some room for improvement.  When so much volume is handled by any given entity, and cost is always the biggest concern, it is impossible to hire but so much real talent.      I will come back to cost a little later when I discuss fees and compensation.

End of part 2.

Stay tuned more to come over the next week. If you have any suggestions or want to share some war stories, please send them over to woody@woodyfincham.com.

[1] “Lender Letter  LL-2015-02,” Fannie Mae, https://www.fanniemae.com/content/announcement/ll1502.pdf (February 2015)

CU and Me: Let’s Be Practical For A Moment -Part1

February 12, 2015

Editorial by Woody Fincham, SRA 

woody CU

Over the next several days I will be posting up my thoughts on the recent Fannie Mae Lender Letter Lender Letter  LL-2015-02.  This is part 1.  

On February 4, 2015, Fannie Mae released a new Lender Letter[1].  This was a full week and two days after they kicked off the Collateral Underwriter (CU). Many things in the residential valuation profession can create a stir, but few things create quite the clamor that a major government sponsored entity (GSE) policy change creates.  I helped co-write[2] an article on depreciated cost to support adjustments last week. As always, there are interesting comments on anything that gets published in our profession. Most have been very supportive, a few less so.

In the comments for that article, a pro-appraiser commenter was defensive of appraisers regarding the balance of how much work that can be done at such low fees for the mortgage clients.  His supposition is that the topic of the article was great but that appraisers could not possibly be expected to do that much work for the fee levels that are so common in the profession. I share that empathy for fee appraisers. I truly do.  I came up through the fee side of things, it is in my DNA and I will forever think of myself as an appraiser from that light.

I also share in the reality that some of my colleagues in the residential mortgage space are not doing much of anything to support adjustments.  Many have relied on “professional judgment” and “experience” when it comes to addressing adjustments, and sometimes that is offered in lieu of actual support.  I agree that both of these things have some merit, but often they are used in lieu of doing deductive research to support how much something is adjusted for in the grid.  They both can work when it comes to knowing something should be adjusted or not, but how much is sometimes thumb nailed or otherwise guessed at with no real support.  Before that sets off a bunch of personal barbs towards me, if you are doing your job in a manner that you are happy with, then keep doing that.

Of course if someone is reading this and my comments offend you because you do not support your adjustments; please be aware that my intention was/is not to do so.  I tend to be a bit of a purist when it comes to developing and reporting valuation services and that is for me and those that I manage.  What works for you is between you and the USPAP police.

I realize as a businessperson, there has to be a sweet spot between quality, speed and price.  That can be a hard thing to figure out.  If you focus on speed too much, quality tends to decrease. The same is true of price, if you can only get a low fee for your work; it becomes more difficult for some to rationalize not cutting corners to do it for less money.    If you focus on writing a demonstration-quality report each time out of the gate, you will go broke because you take too much time and if you charge at a commensurate level, you cannot be but so competitive. Balance is key in this space, and it will vary from practice to practice and market to market.

When we wrote that piece, it was a suggestion to ferret out support by using something many of us are familiar with but may have not used in a while.  It was also written to introduce the topic to folks that have never used it or thought to use it.  This approach was offered in because many colleagues were being pushed towards alternatives that are being sold as expensive “wonder approaches”.  Rather than seeing honest people buy a bag of magic beans, we offered another less expensive alternative.  So the article was written with empathy towards fee appraisers.

So as these few pieces roll out over the next few days, I hope that my perspective adds some food for thought.  This is certainly not an attack piece on Fannie Mae.  Fannie Mae work is an important part of residential valuation, one that is much too big to shrug off and say, “Well, smart appraisers shouldn’t do lender work.” This sentiment is simply not possible for everyone, and we need to all voice our concerns for all of our colleagues in the profession. Residential lending work is a lucrative part of the valuation profession, a low hanging fruit if you will.

This will also not be an attack piece on AMCs as they serve a function to our mutual clients.  Whether we like or dislike AMCs, they are here and will remain a part of the landscape for the foreseeable future. Instead of wallowing in the pig pen of discontent, we need to figure out how to make the best of the situation.   There has to be some sort of symbiosis attainable, so that everyone can get what they need and can reasonably attain some of what everyone wants.What I hope this is seen as is a common sense observation based on how all three entities, appraisers, AMCs and lenders can coexist. No one has the perfect answer but I hope this might add some positive discourse.

balance

Balance

Stay tuned more to come over the next week. If you have any suggestions or want to share some war stories, please send them over to woody@woodyfincham.com.

[1] “Lender Letter  LL-2015-02,” Fannie Mae, https://www.fanniemae.com/content/announcement/ll1502.pdf (February 2015)

[2] Rachel Massey, Woody Fincham, and Timothy Andersen, “Depreciated Cost, a Test of Reasonableness,”

http://www.appraisalbuzz.com/depreciated-cost-test-reasonableness/ (February 2015)

Depreciated Cost, a Test of Reasonableness http://goo.gl/dysa1o

http://goo.gl/dysa1o

All Three of us worked on this piece.  I won’t post it in the entirety yet as it’s brand new today and should be given full look at through the publishing site.  But if you happen across it here, please click through to read it.

Unraveling CU: DYI

By Timothy C. Anderson, MAI, Msc., CDEI, MAA

In my on-going attempt to unravel some of the mysteries of real estate appraisal, as well as to give appraisers an idea of what it is that CU is and does, I have studied some actual sales in a mid-western state and then summarized those sales data, in graphic form, in the Figures below.

The exhibits that appear below are from the statistical functions in Excel®.  There is some rather scary looking algebra on them.  But do not worry: most of it is for comparison purposes.  You do NOT have to understand how the computer arrived at those formulae (i.e., the algebra and calculus behind them) to understand the topics in this article.  The math behind what those formulae tell us is not really all that difficult, but it is for advanced classes.  This is an article, not an advanced class.

To understand this article, you do not even need to understand statistics.  Just follow the narrative and the thrust of the charts will become clear to you.

First up is an explanation of the data the chart’s use.  These data are from 2013 and 2014, so are recent.  The appraiser who amassed them knows what s/he is doing, so there are no reasons to question his/her professional integrity or ability.  These are actual sales data, culled from the MLS.  All have closed escrow and transferred title from the seller to the buyer.  The sales prices are all cash equivalent (i.e., adjusted for non-realty concessions as necessary). All of these sales data are from the same subdivision, but that subdivision has houses of varying ages, sizes, qualities of construction & maintenance, and so forth.  In other words, the houses here are all subject to the same market forces, but clearly differ one from another.

Since the data were not property-specific (i.e., not all of them would be applicable to a hypothetical subject), what we look at in this article are the subdivision’s trends.   Specifically, we analyze if there is any correlation between (a) the sales price per square foot and the year built; (b) between sales prices per square foot and total size; (c) between sales prices per square foot and the date of sale; and, finally (d) the correlation (if any) between the absolute sales price and the days on market.

Just to jog your memory about statistics, in any comparison there has to be a basis for that comparison.  This basis is called the independent variable.  It is always shown on the graph’s x-axis (e.g., the horizontal line or the base line).  The dependent variable is always shown on the y-axis or the vertical line.

This article’s topic is the correlation between the dependent and independent variables. On the Figures that follow, you will see lots of blue dots and then lines of various colors.   What you are looking for is how well the lines (specifically the red line) track with the blue dots.  When the (red) line and the blue dots are close to each other, there is what is called high correlation (as well as low variance).  All other things being equal, we look for high correlation, typically above 50% (and really, a correlation close to 90% is more-or-less ideal).

When there is a high correlation it means the data explain will the relationship between the independent variable and the dependent variable. When that correlation is low, however, it means the two variables really do not explain each other.  We will see examples of these relationships as the article progresses.

Another purpose of this article is to illustrate (but not explain – too short for that) what it is CU does with all that data with which we have provided it in the past.  When CU flags an appraiser’s entry in a field, it is because it has gone thru an analysis such as one of these (although far more in depth, breadth, and width), and then determined that the appraiser’s response did not correlate properly with the other data it has in its database.  This lack of correlation does not mean the appraiser is “wrong”.  It merely means the appraiser needs to explain how/where s/he derived that particular response.  While there are many ways to respond to such a request, a graph such as one of those below, goes a long way toward that explanation.

Take a look at Figure 1.

figur 1

It looks at the relationship between the sales price per square foot of the properties (y-axis) and the year in which a particular house was built (x-axis).

First, look at the red line.  Notice its trend is slightly uphill from left to right.  This means that newer properties tend to sell for more per square foot than to older properties.  All other things being equal, you would expect this relationship.  However, as you will also notice, relatively few of the blue dots (the sales price per square foot of the component sales) touch the red line.  This means there is a lack of correlation (i.e., a high variance) between the two variables.  In fact, the formula at the figure’s upper left-hand corner shows a correlation of only 1.85%, which is essentially no correlation at all.

What this statistical analysis tell us is that, assuming a particular property were to have been constructed between 1999 to 2007 (and all 77 in the sample were), its age at the date of sale really has nothing to do with its sales price per square foot, since they do not vary in all that much.

Therefore an age & condition adjustment for a property built within these years is likely not necessary.  True, this contradicts the traditional thinking of many appraisers.  But are appraisers incapable of change when the need for that change stares them in the face?

Now look at the purple line (ignore the green one, since it is a variation on the red one).  While the math behind the purple line is more demanding than the math behind the red line, it is more explanatory, too. What this says is that the market current as of the date of appraisal was willing to pay more for houses built in 2002 that for houses built much before or after that date.  However, they do not explain why this is so.

However, despite the fact the purple line touches more of the blue dots than the red line, it shows a correlation of only 13% between year built and sales price per square foot.  While this latter line explains the market better than the red line, it does not explain it all that much better.

This Figure, therefore, indicates that, given solely these data, there really is no compelling reason to make an adjustment based solely on a house’s date of construction.  Given different data, or using less than 77 sales, the graph might have indicated a different result.

Figure 2, however, tells a different story. Looking solely at the blue lines, it is easy to deduce that as size increases (the x-axis), sales price per square foot (the y-axis) decreases.  From looking at the dots, however, that there is an overall decrease is clear, but the rate of decrease is not.  Now look at the red line (ignore the other two since they are essentially the same as the red line).  You’ll notice that, not only does the red line touch a lot of the blue dots but that, of the blue dots that don’t touch it, a whole bunch of them are really close to it.  This indicates that, given this sample of data, there is a high correlation between a house’s square footage and its sales price per square foot.  In fact, the math behind the red line (not shown here, but included by reference) shows there is an 82% correlation between the two.

figure 2

In fact, the formula in the far upper right-hand corner of the Figure quantifies that change in value.  It says that there is a $0.0302 change in sale price per square foot for every 1 square foot of variance in size from the average square footage of this sample (in this case, the average size is 1,998 square feet).  In fact, these data indicate that for an average size house (i.e., 1,998 square feet in this sample), the market recognizes an adjustment of $91 per square foot [(-0.0302[1]x * 1,998) + 151.25 = $90.90].

Therefore, were an appraiser to make an adjustment of $15 per square foot for size differences in this market, based on these sample sales transactions, then CU would (rightly) flag it.  Why so?  Because the market data clearly indicate this market does not support an adjustment at $15 per square foot for this difference.  This analysis is based on these sales, not on traditional rules-of-thumb.  Obviously, using different sales, or using less than the 77 sales here would provide different results.

Now let us consider changes in sales prices per square foot as they relate to changes in sales dates.  In other words, as time progressed over the time period these sales covered, how (if at all) did sales prices per square foot change?  Since the sales date is fixed, it is the independent variable (the x-axis), whereas the sales price per square foot is the y-axis.  See Figure 3.  For purposes of this discussion, we ignore the really funky formulae and concentrate on the “simple” one (the one that calculates the red line).

figure 3

Note in this Figure there are lots of the blue dots that are relatively far away from the red regression line.   Again, this indicates the data were all over the place, thus show a great deal of variance[2] or error. Therefore, in Figure 3, there is a lot of error.  It also means the data are not really reliable at predicting anything other than a trend (i.e., as time passes, value per square foot increases).  The red regression line also shows the correlation of these data in predicting anything is really low at 4.2%, which is no correlation at all.  So these graphs, and the data behind it, are something you would toss into the workfile and forget.

Now move on to Figure 4.  It shows the relationship between total sales prices and confirmed days on market.  Look at the red regression line.  Not a lot of the blue dots touch it, so there is a lot of error there.  Its correlation of <1% indicates there is no more linear correlation between these variables than the operation of mere random chance would explain.

figure 4

However, look at the green regression curve.  This is a lot more complex to calculate, but as you can see it touches a lot more of the blue dots (approximately 26% of them, as a matter of fact).  What this graph demonstrates is that relative inexpensive properties (<$150,000) spent a lot of time on the market before going under contract, whereas more expensive properties ($160,000 to $200,000) spent relatively fewer days on the market before they sold.  Then, at about $200,000+, their higher prices meant they appealed to a smaller submarket of buyers, thus their days on the market increased back to between 140 and 160 days.  So what does this relationship mean to an appraiser?

On page 1 of the 1004 form, it means the “typical” range of values in the neighborhood is from about $160,000 to $200,000, with the sales outside of this range as outliers.  It also means that, were the appraiser to conclude a value outside of the $160,000 to $200,000 range, the appraiser would also be concluding a longer-than-average sales period (here the average was ±61days). However, given the low correlation coefficient of 26%, it also means that there are reasons other than days on the market, that explain difference in sales prices. Thus, whatever conclusions the appraiser were to draw from this graph merit the use of a liberal seasoning of salt.

So what are the take-aways here?  The only graph that really tells us anything is that of Figure 2, given that it shows an 82% correlation.  Therefore, the appraiser can confidently conclude that mere square footage alone accounts for 82% of prices differences.  Further, given this high degree of correlation, the appraiser could use the regression formula (-0.0302x * 151.25)[3] as one fairly accurate tool to use in forming a value conclusion.  Note, however, it is no more than a tool.

What does all of this have to do with CU?  CU’s built-in algorithms[4] do all of the above, plus a whole lot more, and have millions of data points to draw on, not 77, which is what we had here. It can compare all of these data points with each other one variable at a time, or it can look at the “big picture” and compare them all at once via a multi-variable regression analysis.  While a multi-variable regression analysis is far from infallible, and will not work under some circumstances, if FannieMae can use tools such as this one, why should appraisers not use a similar tool, too?  (If you have Excel®, then activate the statistics pack, and you will have all of the statistical computing power and potential you will ever need).

Although some of the regression tools that are popping up all over the web are appealing, Excel® offers everything you need, right at your fingertips. All you will need is a few hours study time to get up to snuff on it, and then it is virtually free. There are courses that are available with different education providers that can walk you through learning how to use it if that is the way you learn best, and even some online tools not related to appraisal that are very inexpensive and accessible (think udemy as well as Microsoft itself).

On a closing note, note the technology to take the appraiser out of the mortgage-lending picture has been in FannieMae’s hands for at least the last five years (and the math has been available since the late 1700s).  The data and technology to do so exist now, and will only become keener in the future.  This article was written with the residential appraiser in mind, to offer a simplified version of how Excel works and a sample from the real world where it is applied.

If appraisers do not start to adapt and change, and keep to the status quo of three or four sales on a grid, without providing some support for their analysis, why should FannieMae and local lenders continue to pay appraisers millions of dollars per year to do what FannieMae can already do essentially for free with literally a few keystrokes of CU?  Algorithms already “grade” our appraisals.  Right now they have the capacity to do everything we do now (for the most part), but CU can do all of this much faster, cheaper and more compliantly.  FannieMae is well ahead of is in this race.  We appraisers can catch-up with technology and thereby show our clients we are the ones to be doing their appraisals.  We should be doing them, not brokers, not AVMs, not unlicensed desk-monkeys, and most certainly not FannieMae whose lenders have a vested interest in getting the numbers it needs to make the loans. 

[1] The fact that this coefficient is negative means the line slopes downward from upper left to lower right.  If this coefficient were positive, the opposite would be true.

[2] In stats-speak “variance” is also called “error”.  This does not mean there is something amiss or the math is wrong somewhere.  It means, instead, that when a point falls well above or below the regression line, it is in error by that distance from the regression line.

[3] In this formula, the “x” is the square footage you want to insert.

[4] Without going into a lot of calculus or philosophy, an algorithm is a “set of rules that precisely defines a sequence of operations”. A computer program is an algorithm.  CU uses algorithms.  Fortunately, appraisers do not have to write these algorithms since they are built into Excel®.  See  http://en.wikipedia.org/wiki/Algorithm.

Highest and Best Use is More Than Just a Check Box

This originally appeared over the Appraisal Buzz on Wednesday, December 3, 2014

http://appraisalbuzz.com/buzz/features/highest-and-best-use-is-more-than-just-a-check-box

As review appraisers, one of the issues that we see all the time is the failure to analyze highest and best use for a market value opinion related to mortgage lending appraisals. This makes sense to a large degree, because many appraisers believe that providing the “yes” answer relieves them of further analysis and communication. We wanted to address this topic and offer some insight as to why one may want to rethink their approach to this common issue. In that light, we thought that we would look at a key part of the valuation process, but one that often gets overlooked in residential reporting: Highest and Best Use. With the majority of reports being written on pre-formatted reports from Fannie Mae, many appraisers skip over this section as nothing but a box to check.

A required characteristic of any valuation professional is the ability to learn, and not just occasionally, but to continuously do so through one’s career. Look at any successful appraiser that you know; chances are that he or she makes time for classes. Many of the leaders in the profession are even known to write course work or review it for publication. So do not look at this article as us telling you that the sky is falling, but rather as a perspective that many of us have adopted in our evolution as valuation professionals. I know that we both will periodically look back at past work and reevaluate how we approached a specific problem. After all, as we learn and experience more, we learn new ways to do things or ways to improve upon what we already do. The goal is continual improvement.

As appraisers, we are by nature opinionated. We have a tendency to believe our way is the only way, or the best way, and although we may expect perfection, none of us come into the world knowing how to appraise. Appraisal learning is life-long, and perfection is not possible, although we strive for it by continuing to have an open mind to gaining new insights. The Uniform Standards of Professional Appraisal Practice (USPAP) even addresses that perfection is impossible to attain, and competence does not require perfection.1 The Standard Rule 1-1 (a) comment also addresses how the principle-of-change it continues to affect the way that appraisers perform their work.2 These items are under the development standard with which we all abide, and are the set up the point we are making – which is that none of us are perfect, and hopefully we all simply try and improve our skillset, each and every day.

The Valuation Process is an eight-step procedure that starts with the identification of the problem to solve; flows on to the determination of the appraiser’s scope of work; data collection and property description; followed by data analysis (see figure 1). Data analysis includes the market analysis as well as the Highest and Best Use Analysis – considering the land as vacant; what the ideal improvement would be, and the property as currently improved. Next, is the land value opinion; application of the approaches to value; reconciliation of the valuation approaches as well as a final opinion of value followed by the reporting of that defined value.

Clearly, the data analysis section requires a highest and best use analysis related to a market value opinion. This is also succinctly addressed in The Appraisal of Real Estate, 14th Edition on pages 42-43 for further reading.3

Figure 1: Courtesy of the Appraisal Institute (used with permission)

The 1004 form, which is the most common report form for residential mortgage assignments, specifically asks the question “is the highest and best use of the subject property as improved (or as proposed per plans and specifications) the present use?” followed by a check box for yes or no, and if no to describe (see figure 2).

Figure 2

4

As Standard 1-3 (b) in USPAP exhorts us to develop an opinion of highest and best use of the real estate when a market value opinion is developed (page U-19 2014-2015 USPAP), and Standard 2-2(a)(x) states specifically “when an opinion of highest and best use was developed by the appraiser, summarize the support and rationale for that opinion” (page U-24 2014-15 USPAP), checking the box without any further discussion is not adequate. Perhaps it is the lack of description in the box next to “yes” that throws appraisers off, but USPAP is clear that when it is developed, a summary for the opinion is required.5

To even start to address Highest and Best Use, the appraiser needs to have at least visited the zoning ordinance to not only understand what is an allowable use, but also what the minimum site size requirements are; what width is required; what the setbacks are, etc. Often we see zoning mislabeled, and more often than not, no information about what even the minimum site size is for the use. Without this basic information, it is not possible to start analyzing the highest and best use.

Discussing this issue with some appraisers online it was apparent that many do not believe any additional summation is required in the form other than checking the yes box, with the argument that as zoning is reported as either legal or not, meets the legally permissible criteria. That a house is built (or proposed) tests the physically possible criteria, and that reporting of functional depreciation in the cost approach or sales comparison approach addresses overall conformity and therefore financial feasibility, and that finally the remaining economic life provides for highest and best use as currently improved. While this may seem like a reasonable argument, we do not believe it is sufficient for a number of reasons, including it being nothing but an executive summary of real work and does not rise to the level of summation.

In addition, when doing work for a lender client, one must ask, “What is the purpose of this report?” The obvious answer is to determine market value, but the lender uses it as a risk assessment tool. They are trying to ascertain if the property is atypical to the market in any way and if so, how does that affect the value, and ultimately the ability to free them of the collateral in the event the loan goes sour. While an appraisal cannot answer that question in the entirety, it does help them assess their full risk by lending on a specific property.

Since the majority of appraisal work related to mortgage lending completed on form reports is for an improved property, much of the time the conclusion is that the highest and best use of the real property is that which is already in place. How difficult is it to flesh out a short paragraph related to this analysis? Given what we are seeing on a routine basis, it is apparently a monumentally difficult task given that it is rare for us to see anything beyond the “yes” check box.

What we are suggesting is that appraisers take a few extra minutes to summarize the highest and best use analysis. It can be done in as little as a sentence, but usually no more than a paragraph. One of the biggest reasons that we suggest it is that it will force you to slow down and look at your data. There have been instances where one of the authors has found out that some appraisals under review were in an illegal or a legal non-conforming use. During the review, it was discovered that the appraiser did not stop and do the analysis or did not really understand that they should look at it or report it. This puts a lender in a sticky position as they may have to shelf the loan and will not be able to sell it on the secondary or worse, have to buy it back.

In such instances, it may require several pages to support the highest and best use. Once it becomes something more complex, due diligence is paramount. The biggest reason appraisers should care about this is that it puts the appraiser in a more defensible position if something awry happens down the road with the loan. By attempting to address this directly up front you are less likely to be discredited for skipping or going too quickly through a section of the report.

One of the authors has done litigation review work where this specific issue was used by the attorneys as part of their strategy to discredit the appraisal report. In litigation, attorneys will often go to the fundamentals to challenge the appraiser’s work. To a judge or a jury it easy to make the connection that if the report is short on a fundamental concept then it is easy to assume it is also short on the section most scrutinize the heaviest, the sales comparison approach. We have both seen reports that have great sales comparison approaches, but little else in the way of a well-written report. Those are the reports that can hurt you in situations where you must defend your work.

So there you have it folks. A seemingly simple thing that really is not so simple. If anything, we hope this offers you something to think about when you are writing your reports and developing the analysis. We are sure this will create some interesting comments as well. Please feel free to share your thoughts as discourse helps us all learn more.

– See more at: http://appraisalbuzz.com/buzz/features/highest-and-best-use-is-more-than-just-a-check-box#sthash.kXUgU1Qb.dpuf

Appraising The Right Way Part 1: Requiem for a Dream

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We are two appraisers separated by a three- hour flight or a nine-hour car ride.  We have never met in person, but have come to know one another through social media.  We are designated and recognized experts in residential valuation in our respective regions; both have had successful careers working in various positions within the profession; we are separated by enough distance that we experience completely different market stimuli.  We subscribe to doing valuation work the right way.  The way it should be done: defensible and well supported. Yet, we (and many others in the profession) are watching it being dismantled by the lenders, appraisal management companies (AMCs) and even from within the profession itself.  This is not the way that it should be, yet we still stick to our guns and we dream about how it should be regardless of the present reality.

We share a dream:

Like any great dream, it is lofty, challenging and worthwhile. We dream that we can make a living as fee appraisers, doing our jobs the proper way. The dream is to take the time to analyze the problem to be solved; research the market thoroughly including market trends; interview the market participants; analyze the sales and extract market adjustments; and then report  the opinion of value  in a way that the client can understand the  thought processes. Within this, there will be good support for conclusions and the appraisal will make complete sense to the reader. It will not leave gaping holes or questions. The opinion of value will be well supported by sales that are both inferior to the subject as well as those that are superior (and ideally equal). The appraisal will address the current market conditions and the active competition as well as the closed and pending sales.

Analysis is what we do, refined by the appraisal process, tempered by ethics and integrity all rounded out by participation in a profession that is carried out by like-mined and well-intentioned practitioners.

The dream continues:

Our clients  will truly care about the analysis and it will be meaningful to them. They need something of substance, and not simply paper for a loan closing package, or simply a report for a divorce or bankruptcy proceeding. The client understands that the valuation is based on fact, but in the end is an educated and well-supported opinion. The client understands that each report is a unique and extensive research project that is custom designed. The client is comfortable with the opinion of value because they reached out to a well-qualified and experienced appraiser; one that is rewarded the report because they are respected professionals, not just another step in a loan closing process or the cheapest one they could find.

Prologue:

We realize this is getting into the lofty and idealist side of things, hence the title of the blog.  What this series is going to focus on is some of the challenges appraisers face, and how we should handle them.  There is constant pressure on appraisers to adhere to scope of work enhancements from clients.  While we may mention customary and reasonable fees and the dynamic that the cost of business plays in the appraisal process in the course of this series, this is about what appraisers should be doing after they accept an assignment.

Rachel has years of experience reviewing appraisal reports working within the lending world as a staff reviewer and manager, and in the fee world through her private practice. Rachel has recently earned the new residential review designation with the Appraisal Institute.  Woody has been doing private fee review work for years and also has to review reports for tax assessment appeal as part of his position within the assessor’s office in Albemarle County, VA.  Between our combined experiences, we will focus on some issues that we see pop up repeatedly throughout various reports that have made their way across our respective desks over the years. 

RIP Appraisal Advisor

By Woody Fincham, SRA

Reprinted from Appriasl Buzz

It is with a good deal of lament that I am writing this post. I opened my email this morning to see an announcement from Appraisal Advisor (AA) stating that they that would be ceasing operation as of February 1, 2014. For those that did not know about them, they were, to my knowledge, the only source for appraisers to post reviews about working with Appraisal Management Companies (AMCs). AA also developed credit ratings based on appraiser reviews of working with each rated AMC. Appraisal Advisor was truly a tool that was of great use to me and many other appraisers that worked with the AMCs.

This tale is common in the appraisal profession. Appraisers can be a testy lot to deal with, even more so when they are asked to pay for anything. I am an appraiser, and I get that money is tight in the profession. My comment is not an admonishment to appraisers, but rather a fact. In this case, I see where the thousands of appraisers have signed up but have failed to participate. Matthew Biggers, Co-Founder of AA, wrote in his announcement of the forthcoming shut down:

“Unfortunately, the lifeblood of Appraisal Advisor – appraisers submitting client reviews – fell prey to the age-old “80/20” rule. Over 79% of our many thousands of ASC-verified appraiser members submitted zero reviews, while only 3% submitted more than five reviews.

That was far below what we needed to support a revenue model of non-appraisers paying to access and advertise on the site. And since appraisers had already spoken loudly that they wouldn’t pay directly for it either, that cut off the only two sources of funding for Appraisal Advisor (Biggers, 2014).”

I wish it were not so, but we must bid adieu to yet another concept that is designed to help the profession at large; mostly, as a group, we cannot see the forest for the trees. The AMCs won out here at the expense of residential appraisers. Matt did share some interesting information about a yet unnamed AMC that was very pleased to know that AA was going off line. If I ever get a chance to update this blog with that information, I will share the relevant information pertaining to it. I am sure many AMCs will be happy to see that as well because the less transparency between independent professionals means more fracturing. More fracturing means more leverage for the AMCs.

Thanks for Trying Mr. Biggers!!

Works Cited
Biggers, M. (2014, January 21). Important announcement about Appraisal Advisor; Email. Atlanta, GA, USA.

– See more at: http://www.appraisalbuzz.com/buzz/blog/2014/01/21/rip-appraisal-advisor#sthash.HMidn7gu.dpuf