Category Archives: Reviewer Thoughts & Tips

The main attempt of this blog is for me to give back to the real property valuation industry. I can’t take my knowledge with me when I leave this world. So, my goal is to share everything I know through writing articles, teaching classes and seminars, and this blog.

I usually receive several questions a week from fee appraisers, appraisal reviewers, and chief appraisers regarding appraisal reports, FIRREA, or USPAP. Hopefully, these will provide most of the content for this blog. In this way, we can all learn from the same issue under discussion. Obviously, items will be redacted as needed to maintain confidentiality.

If I hit a lull in inquiries, I have a huge treasure trove of topics to draw on. I will try to discuss interesting topics I have encountered in international reports. It is a neat world out there and us American valuers should be amazed at how the rest of the world handles various items.

Yes, I will give my interpretation of FIRREA and USPAP. Everyone knows I am not shy. However, to CYA, I need to give the standard verbiage that my interpretations are not legal interpretations….they have not and cannot be approved by examiners and regulators. Each Bank should contact their specific examiner and/or the appropriate regulator in Washington DC that interprets FIRREA.

APPLYING USPAP FAIRLY IN A REVIEW by Ted Whitmer

May 1, 2019 – This thought provoking article by Mr. Whitmer first appeared in WorkingRE magazine earlier this year.  Thanks to Mr. Whitmer for permission to publish it on my web site.

I encourage you to be open minded.  Read it once.  Mull it over.  Read it again and again.  I am thru one reading.  Quite eye-opening.  Definitely interesting information.  I have not formed an opinion, yet.  The one thing Ted does is to ‘prove’ his point with specific quotes.  I do the same when debating or explaining an issue.  I like proof to close a case.  And where there is not proof I like to say hey this is a gray area o choose your side and support it the best you can.

I hope you enjoy this article.  I would be interested in your thoughts.  I am sure Mr. Whitmer would be, too.  Our contact info is readily available on the web.  Feel free to email us.

Applying USPAP Fairly in a Review

By Ted Whitmer, CRE, CCIM, MAI, AI-GRS

The reviewer must correctly employ recognized review methods and techniques. This is not possible if the reviewer cannot distinguish how to apply the Uniform Standards of Professional Appraisal Practice (USPAP) to a multitude of different scenarios. This article sets forth common sense review methods and techniques that should be used by reviewers, as well as educating appraisers whose work may be the subject of a review, either by a client, opposing counsel, or a state board.

An appraisal review is defined in USPAP as “the act or process of developing and communicating an opinion about the quality of another appraiser’s work that was performed as part of an appraisal or appraisal review assignment.” An appraiser is one who is expected to perform valuation services competently and in a manner that is independent, impartial and objective. An appraiser who is in fact objective must learn to apply the standards fairly in the review process.

Where USPAP does not set forth acceptable methods and techniques, it is the intent of this article to do so for appraisal reviews. This will not cover every aspect of appraisal reviews, but sets forth guidelines on how to fairly develop and communicate an opinion about the quality of another appraiser’s work.

Interpretation v. Application
The only entity that is charged with interpretation of USPAP is the Appraisal Standards Board (ASB) of the Appraisal Foundation (TAF). Every other person or entity who uses USPAP applies the standards and does not interpret the standards.

The following is from the Forward of the current USPAP:
The Appraisal Standards Board (ASB) of The Appraisal Foundation develops, interprets, and amends the Uniform Standards of Professional Appraisal Practice (USPAP) on behalf of appraisers and users of appraisal services.

All other persons and entities should apply the standards and not attempt to interpret the standards. In fact, the ASB issues Advisory Opinions (AO) and Frequently Asked Questions (FAQ) as guidance. Even AOs and FAQs are not interpretations, nor are they a part of USPAP. They illustrate the applicability of Standards in specific situations and offer advice from the ASB for the resolution of specific appraisal issues and problems.

It stands to reason that if guidance put out by the ASB is not interpretation, then a reviewer should avoid trying to interpret USPAP and merely apply the standards to a review. Instead of interpreting USPAP, if the standard can be applied in more than one way, then the standard should be applied in the best light of the appraiser and not against the appraiser. Keep this in mind as you read through this article.

One Size Does Not Fit All
Assume the same appraisal and appraisal report developed and written by the same appraiser is reviewed in the following settings: mortgage lending, board enforcement, civil court proceedings, criminal action, experience credits, to secure a job, and to become approved on an appraiser roster (list). This same report should not be reviewed in the same manner. USPAP is the same, as are all the rules contained in USPAP. However, the proof of noncompliance with USPAP should be under different standards of proof. The application of USPAP rules should change depending upon a multitude of factors.

Review Continuum
A continuum is defined as “a coherent whole characterized as a collection, sequence, or progression of values or elements varying by minute degrees” (Merriam Webster Dictionary).

Potential Harm to Appraiser
An appraisal review is an activity that can result in harm to the reputation of the appraiser. Needless to say, reputation is one of the greatest assets an appraiser has in the marketplace. Good reputation must be maintained by an appraiser. Actionable defamation is the publishing of a false fact that damages the reputation of another. Therefore, there are legal consequences to damaging the reputation by publishing false facts. However, the reviewer should go beyond just trying to avoid publishing false facts. Any allegation that the appraiser is in noncompliance with USPAP should never be based solely on the opinion of the reviewer, but should be supported with facts or other objective evidence.

The following are examples of needed facts or evidence to support USPAP noncompliance.

Scope of Work

USPAP states: “the scope of work is acceptable when it meets or exceeds the expectations of parties who are regularly intended users for similar assignments, and what an appraiser’s peers’ actions would be in performing the same or a similar assignment.” A reviewer should not conclude an improper scope of work by the appraiser unless there is a showing that the work did not (1) meet the expectations of the parties who are regularly intended users, and (2) what an appraiser’s peers’ actions would be in performing the same or similar work. It should be noted that a “peer” is on an assignment-specific basis. A reviewer for a state enforcement action should not claim to be a “peer” unless they can establish they are, in fact, a peer. Additionally, even if they are a “peer,” there needs to be evidence that other “peers” would not have found the scope of work acceptable.

Making Client Requirements a USPAP Issue
Many reviewers are critical of appraisers for not detailing client requirements in the appraisal report. This is from Residential Appraisal Review and USPAP Compliance, Student Manual, published by the Appraisal Foundation, 2016: “Reviewers are responsible, as necessary, to address client and regulatory guidelines in addition to USPAP compliance (emphasis added). Some of the entities who have such additional guidelines are Fannie Mae, Freddie Mac, FHA/HUD, and VA, as well as Interagency Group Members.”

Note that the Appraisal Foundation in this publication states that regulatory guidelines are in addition to USPAP compliance. They do not say it is a part of USPAP compliance.

Reviewers often, and incorrectly, make client requirements (FNMA, FHA, etc.) equal to USPAP. The Scope of Work Rule is a development rule, not a reporting rule. The following are the assignment elements set forth in the rule:
• Client and any other intended users,
• Intended use of the appraiser’s opinions and conclusions,
• Type and definition of value,
• Effective date of the appraiser’s opinions and conclusions,
• Subject of the assignment and its relevant characteristics, and
• Assignment conditions.

This list does not include client requirements. The definition of Scope of Work from USPAP narrowly applies to the extent of the research and analysis, not the checking of boxes and inclusion of report elements. USPAP defines it as:
“the type and extent of research and analyses in an appraisal or appraisal review assignment.”

Misleading Report
“Misleading” is set forth in Conduct (Ethics) and in Standard 2. The ASB is clear that the target of the report is the client and any other intended users. As with any document, any other nonintended users, even knowledgeable reviewers, can be misled or may not understand portions of appraisal reports.

“Misleading Conduct” should only be alleged by proving intent of the appraiser to mislead and showing that the client and/or intended users were misled by the report. Standard 2 “misleading” should not be tested against anyone but the intended users. Not even knowledgeable appraisers should conclude that an appraiser was in noncompliance with Standard 2 (misleading) unless the reviewer shows the intended user was misled.

Some reviewers conclude that they are knowledgeable about appraisal theory, standards and ethics and even a particular market or property type, therefore, if they are misled by something in an appraisal report, any intended user would be misled. The reviewer’s conclusion is “intended users may not be informed enough to know they were misled.” This is an incorrect application of USPAP and ignores that the intended user may have thousands of pages of documents concerning the subject, have various studies and considerable research into the market and discussions with those knowledgeable about the property.

Failure to Correctly Employ Recognized Methods & Techniques
A reviewer should cite failure of the appraiser to employ recognized methods and techniques only if they can cite sources showing that what was done is not acceptable. In addition, the reviewer should show that there are no other alternative texts, articles or schools of thought that don’t agree with what they can produce in a text or article. Finally, any text or course that states it is “for educational purposes only” should not be used to impeach the appraiser related to the application of methods or techniques employed by that appraiser.

Wrong Comparables
There must to be a strong showing, not that there were better comparables, but that the appraiser failed to use reasonable comparables. An attorney and a doctor are given considerable leeway in judgment calls on applying trial strategy (attorney) or treatment (doctor). It stands to reason that since an “appraisal” is an opinion of value and the appraiser must exercise judgment, the judgment should only be questioned with a strong showing that there was not a reasonable basis for choosing certain comparables. In addition, the reviewer should always produce “better” comparables before concluding the appraiser chose poor or wrong comparables.

Unreasonable Adjustments
The reviewer should have to show better adjustments, with support, to communicate an opinion that the original appraiser has unreasonable adjustments. As with the choice of comparables, the reviewer should show that the judgment of the appraiser was so unreasonable that other reasonable appraisers would not have applied the adjustments. As previously stated, the appraiser should be given wide latitude to exercise judgment.

Omission of Necessary Information
The reviewer should not only have to show that omission of information concerning the subject or comparables resulted in a non-credible analysis, they should have to show (1) that it is not just a reporting error, where the appraiser did in fact consider the information but failed to report it, and (2) it wasn’t built into the comparables or adjustments and therefore did not cause non-credible results.

Use of the Report to Allege Development Error
One cannot tell from an omission in a report what the appraiser did or did not do in the development of an appraisal. A reviewer should be careful to separate a development error from a possible reporting error. For example, a report may have no analysis of the history of the subject, the highest and best use, nor land value. However, the appraiser may have done all the analysis and failed to report that analysis. A reviewer should not allege a development error when the report is absent a discussion of analysis.

Date of Appraisal Report
I commonly see reviewers apply USPAP rules equally to ten-year-old appraisals and contemporaneous appraisals. The appraiser should be given “the benefit of the doubt” on older appraisals. If an appraiser conducts 200 appraisals per year, then an appraisal conducted five years earlier could have been 1,000 appraisals in the past. To judge that appraisal as though it is contemporaneous makes no sense. The appraiser often cannot remember what was done the previous month, much less answer questions about a five-year-old appraisal. Furthermore, there are a number of factors that cannot be assessed later such as the market, knowledge of the intended user for the property appraised, the factors in reviews contemporaneous at the time of the appraisal and many other factors set forth in this article.

Workfile & Access to Appraiser
This is related to the previous factor; the date of the appraisal report. The appraiser, appraisal and report should not be held to the same application of USPAP rules if the workfile is no longer in existence or is not available to the reviewer. Additionally, if the reviewer cannot interview the appraiser, then the “benefit of the doubt” should go to the appraisal and appraiser without additional evidence to the contrary.

Complexity of the Problem
Almost every appraisal that proceeds through board enforcement involves strange properties or markets. We almost never see an appraisal of a residence in the middle of a subdivision be a problem appraisal for board enforcement.

The following are cases that I was involved in that were subject to Board action:
• A log house in a rural area
• A power plant
• A unique small apartment property
• A subdivision
• A house that was in a gated community that was constructed like an office building
• A house with considerable excess land
• A house in a transitioning area

These are examples of properties that created a problem for enforcement and the appraiser. These properties should not have USPAP applied in the same manner as the house in the middle of the subdivision. However, in all of the above cases, testimony was that the appraiser “did not correctly employ recognized methods and techniques,” the appraiser was not “competent” and the appraiser produced a “misleading report.” These general and broad-based USPAP provisions should not be a fallback to criticism of the appraiser.

Data Availability & Number of Approaches Needed
One appraiser tells his clients that he is really good when he has five comparables that are exactly like his subject, that recently sold, and all for the same amount of money. The truth is, this does not a “good” appraiser make and the lack of data does not make the appraiser incompetent. Lack of data generally means the subject and/or market are unique. The application of the standards should slide depending upon the amount of data that is available and comparable at the time of the appraisal. As a general rule, the more approaches that are used, the better the data in the market. The omission of any of the approaches may mean there is less data available.

Premises of the Appraisal
When there are many premises supplied by attorneys in litigation, there is a greater chance that there will be drastically different values between two appraisers. A Texas case had testimony from one appraiser that a property was worth close to $25 million. The other appraiser, for the identical legal description, testified the property was worth $300,000. The difference between the two were the legal instructions given and the input from other experts.

An extraordinary assumption may be used in an assignment only if:
• It is required to properly develop credible opinions and conclusions,
• The appraiser has a reasonable basis for the extraordinary assumption,
• Use of the extraordinary assumption results in a credible analysis, and
• The appraiser complies with the disclosure requirements set forth in USPAP for extraordinary assumptions.

There is a duty to not just take instructions, but to ensure the use of an extraordinary assumption results in credible analysis. If the appraiser has done this, a reviewer should review the appraisal and report without making their own determination of the side they would be on.

Intended Use of Appraisal
There are five overarching requirements of an appraisal report. 1. It must be consistent with the intended use.
2. It must contain sufficient information for the intended users to understand the report properly.
3. It must not be misleading.
4. It must contain sufficient information to show the appraiser complied with Standard 1 in development of the appraisal.
5. It must, at a minimum, contain the requirements of SR 2-2(a).

If the appraisal assignment is being used for litigation purposes, then the content should be minimal and not detailed. The reason is that the opposing side is going to use the report for discovery and ultimately will use the report to discredit the testimony and the appraiser witness. The opposing side in a court case is almost never the intended user. The intended user is the attorney, their client and possibly the court. Not only is the other side not the intended user but (1) they will use their own appraiser’s appraisal and report, and (2) not only will they not use your report, they will make every attempt to discredit the report, the appraisal and you as an appraiser. This certainly is not an intended use.

Furthermore, in most every case, the appraisal report is not admissible into evidence but the testimony of the appraiser is. When the intended use is for mortgage loan purposes, the application of USPAP is on a sliding scale (continuum). The higher the loan-tovalue ratio, the more complex the property, the higher the risk, the more likely the appraiser would have to expand the scope of the appraisal and be more detailed with the report. If the report is for HUD or FNMA, it is more likely that minimal content is necessary. This is because (1) the intended users generally have significant information about the property and transaction, (2) the appraisal report is on a standardized form, and (3) the participants, including reviewers, are familiar with the forms and property type.

More is required in a report for unsophisticated users of appraisal reports and services and less is required for those who frequently receive reports. A reviewer should apply USPAP differently if the appraisal and report are developed and written for users who daily or frequently read reports and interact with appraisers versus users who infrequently see appraisal reports.

Factual v. Opinion-Based Noncompliance
Not all USPAP rules are created equal. Allegations of noncompliance with USPAP can be either “factual” or “opinion” based. USPAP sets forth reporting requirements in twelve rules. Seven of the 12 start with “state,” four begin with “summarize” and one rule says to “include” (the certification). However, the rules are set forth in compound sentences and there are requirements in the comments that are not in bold rules. All this creates confusion to both the appraiser, who is to apply USPAP as a minimum standard set, and to the users of appraisal services.

If one of the following is missing from an appraisal report, it is factually noncompliant. There are some rules that are conditional. For example, if the value definition is “market value” and there is a reference to exposure time, then a statement as to the exposure time is necessary. If the value definition does not include exposure time, then there is no USPAP requirement for stating the exposure time. The same goes for many other provisions, such as competency. One must look at the conditional precedents of USPAP before applying a rule to an appraiser.

For example, the following 15 items are required to be stated in an appraisal report: Identity of client, identity of intended users, intended use of report, real property interest appraised, substantiation of real property interest by title descriptions or other documents, type of value, definition of value, cite the source of value, if in terms of cash or other non-market financing & summarize terms if not cash, exposure time if developed in compliance with SR 1-2(c), effective date of the appraisal, effective date of the report, use of the real estate existing as of the date of value, use of the real estate reflected in the appraisal, and report option.

The following are required to be “summarized” in an appraisal report: information to identify the real estate involved in the appraisal, physical property characteristics relevant to the assignment, legal property characteristics relevant to the assignment, economic characteristics relevant to the assignment, scope of work used to develop the appraisal (research & analysis used and not used), extent of significant professional assistance, information analyzed, appraisal methods & techniques employed, reasoning that supports the analysis, opinions & conclusions, provide sufficient info to understand the rationale for opinions & conclusions, must contain sufficient info to understand the reconciliation of data and approaches per SR 1-6, results of analyzing subject sales, etc. per SR 1-5, if info for SR 1-5 is unattainable steps taken to obtain info is required.

Another example of this is found in SR 1-4. The rule says that when the sales comparison (cost or income) approach is necessary, then the rules following apply. This means that if the certain approach is not necessary, then the rules don’t apply. The condition precedent to the application of the rules is that the approach is necessary for credible results.

There is one requirement to “explain”: the exclusion of any approaches to value. There is also potentially one requirement to “describe.” This is in the Competency Rule: the steps taken for an appraiser to become competent. There is one requirement to “include” a signed certification that has ten parts. Signed certification in accordance with Standard 2-3:

I certify to the best of my knowledge and belief:
1. Statement of facts
2. Limited by…
3. No interest
4. Prior services
5. No bias
6. No predetermined
7. Compensation
8. Per USPAP
9. Inspection
10. Significant assistance

The following must be “sufficient,” and according to the comment in SR 2-2(a) (viii), the detail depends upon “significance.” Other parts of Standard 1 are arguably in the state and summary requirements of Standard 2.
1. Aware of, understand & correctly employ recognized methods and techniques.
2. Not commit a substantial error of omission or commission.
3. Did not render appraisal services in a careless or negligent manner.
4. Any personal property, trade fixtures or intangibles that are not real property but are included in the appraisal.
5. Any known easements, restrictions, encumbrances, leases, reservations, covenants, etc.
6. Whether the subject property is a fractional interest, physical segment, or partial holding.
7. Determine scope of work necessary for credible results.
8. Effect on use and value of existing land use regulations.
9. Reasonably probable modifications of land use.
10. Economic supply & demand.
11. Physical adaptability of the real estate.
12. Market area trends.
13. If applicable, the assemblage and refrain from valuing the whole by addition.
14. Anticipated public or private improvements.
15. When applicable, personal property, trade fixtures or intangibles.

If the appraisal report excludes any of the above and the condition for inclusion is met, then it is factually not in compliance with USPAP. However, if the requirements above are in the report, then a reviewer could say they are not summarized enough. This is not fact-based but opinion-based. The reviewer could say that the description of the subject is not adequate. It is clear that a property and a market description could take hundreds of pages to write and could include many details of the subject and the market. A reviewer can always find an aspect of the subject, market or data and say the appraisal and appraisal report is deficient and does not comply with USPAP.

Similarly, allegations that the appraisal did not correctly employ recognized appraisal methods and techniques, that the report is misleading or the scope is insufficient are opinion-based issues of noncompliance. A reviewer should err on the side of the appraiser, unless there is little potential harm to the appraiser for such an allegation. For example, if one is reviewing an appraisal for mortgage loan purposes, the reviewer should have greater leeway to be critical of the application of the opinion-based standards versus if one is reviewing for court testimony, civil suits, criminal cases or board enforcement. Those settings should require evidence and not mere conjecture or opinion of the reviewer.

The reviewer should never make an allegation of noncompliance by the appraiser for not employing recognized methods and techniques without citing references to the proper methods and techniques. This should not be done with any text or course materials that warn the reader that the contents “are for educational purposes only.”

The Supreme Court in Alaska in the Wold case said there should not be allegations of violations of USPAP that the appraiser used the wrong comparables or adjustments without showing the correct comparables or adjustments. Even with a showing of a different set of comparables or adjustments, one must keep in mind that an “appraisal” is by legal definition “an opinion of value.” If selection of comparables and adjustments made to the comparables was definitive, then an appraisal is not an opinion of value and could be performed by an algorithm in a computer program. Rather than an immutable mathematical algorithm, as Dr. Charles Gilliland, PhD says, an appraisal is an interpretive art.

A client’s intended use, principals’ motivations, number of competitors and a myriad of other circumstances can impact observed market transactions. All of these factors drive modern appraisal applications. These complicating factors guarantee that no single hard-and-fast formula can reliably produce a credible estimate of market value. An appraiser is called upon to skillfully transform market information into an estimate of value for a subject property. That estimate must reflect the realities of the economic and legal environment of that subject property. The results rely on a set of assumptions and interpretations designed to capture those realities.

Conclusion
The Preamble to USPAP states…”The purpose of the Uniform Standards of Professional Appraisal Practice (USPAP) is to promote and maintain a high level of public trust in appraisal practice by establishing requirements for appraisers.” The frequent practice of applying USPAP the same way to all reviews does not “promote and maintain a high level of public trust in appraisal practice.” This article did not provide an inclusive list of all factors that should be considered in the application of USPAP rules. However, it does provide the basics for a fairer application of USPAP rules.

Click here for Guidelines for Proper Application of USPAP.

About the Author

Mr. Ted Whitmer, JD, MBA is an appraiser, attorney, instructor, asset manager and consultant. Mr. Whitmer holds the MAI & AI-GRS designations from the Appraisal Institute. He is CRE & CCIM member of the National Association of Realtors, a licensed broker and Certified General appraiser.

2019 – THE YEAR EVALUATIONS BREAK THROUGH

April 19, 2019 – It has been exactly 25 years that I have been campaigning for non-USPAP Evaluations to be performed by licensed/certified appraisers.  Most of the time it has been a one-man campaign.  Thankfully, times have changed and appraisers have come around to the need for Evaluations.

It looks like this year will see many States pass the requisite law to allow its most qualified valuers to finally perform non-USPAP Evaluations.  If your State isn’t mentioned below, I encourage you to take action.  For almost 30 years, non-appraisers have been doing all the Evaluation work in your State.   With Evaluation volume about 4x-6x that of Appraisal volume think how much business you have missed out on:(

The following are from the Appraisal Institute:

Utah Allows Appraisers to Perform Evaluations for Federally Regulated Lenders
Utah Gov. Gary Herbert on March 26 signed SB 140, legislation that allows state-licensed and state-certified appraisers to perform evaluations for federally regulated financial institutions.
Under the new law, appraisers who provide evaluations in compliance with the Interagency Appraisal and Evaluation Guidelines are exempt from compliance with the Uniform Standards of Professional Appraisal Practice. Appraisers will sign the evaluations, certifying that they comply with the IAEG. However, they must still abide by the basic elements of USPAP’s Ethics, Competency, Scope of Work and Recordkeeping rules. This concept has been advanced by several Appraisal Institute chapters in recent years.
The legislation takes effect May 14.
• Evaluations
Alabama (HB 304) Louisiana (SB 42) and Oregon (SB 109) are considering bills that will amend appraiser licensing laws so that appraisers can perform for financial institutions evaluations that do not comply with the Uniform Standards of Professional Appraisal Practice when not required by federal law. If the laws pass in these states, they will join Florida, Georgia, Illinois, Indiana, Tennessee, Utah, and Virginia in allowing appraisers to perform these services.

 

New AEI dataset: Housing Market Indicators in the 60 largest US metropolitan areas

April 9, 2019 – In my opinion, the AEI provides the most neutral analysis of the housing market.  They likely have the most data.  Unlike NAR, there is no bias.  Below is their major announcement today.  I hope you find their reports useful.

Just to be transparent – I am not a member of AEI (not even sure if such exists).  I do not contribute to them.  I have attended some of their meetings on housing.

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New AEI dataset analyzes the 60 largest US metropolitan areas

Housing markets are inherently local, making them notoriously difficult to analyze due to the lack of reliable data at the local level. A new dataset from the AEI Housing Center, the first in a series of quarterly reports, aims to fill this void by analyzing housing market data for the 60 largest US metropolitan areas, as well as for the nation as a whole. The current dataset looks at housing data from 2018:Q4.

AEI Housing Center Codirector Edward Pinto and Senior Research Analyst Tobias Peter explain “Our goal is to provide the public, media, and decision makers with accurate and reliable metrics to assess the state of their local housing market in near-real time. A well-informed market place and its participants will aid in promoting sustainable homeownership.”

Among the national Housing Market Indicators for 2018:Q4:

  • Rate of house price appreciation (HPA): 3.9%
  • Mortgage risk index: 11.1%
  • Share of buyers of entry level homes: 55%
  • Average sale price for entry level homes: $197,000
  • Share of new construction sales (compared to all home sales): 11.2%

The Housing Market Indicators for the 60 largest US metropolitan areas, along with all associated data, are available on an interactive website here.

This was made possible by AEI’s new merged property and mortgage financing national dataset, which consists of over 34 million home purchase transactions.

The data are updated quarterly. The next release of Housing Market Indicators, which will analyze housing data for 2019:Q1, is scheduled for May.

Codirector, AEI Center on Housing Markets and Finance
240-423-2848

MARKET VALUE ‘AS IS’ MUST CONSIDER EXISTING LEASES

February 21, 2019 – Every once in awhile the same question arises from several people in different parts of the country.  I wonder if people attended the same seminar and were told the same (erroneous) information.  Or just plain coincidence.

The topic du jour is bank/credit union clients asking appraisers to ignore existing subject leases and appraise Fee Simple Estate only.  There are two main scenarios to deal with – one where such a request is not acceptable and one where it is.

Scenario #1 – The subject has one or more arm’s-length leases in place that are not all month-to-month or say expire within a month.  I just use one month as technically the appraisal will be done by then and the tenants could be removed in that time period (assuming such is legal).  In this case, Market Value ‘As Is’ MUST be of the Leased Fee Interest.  The subject must be appraised as it legally and physically stands today.  If the bank/credit union would also like to know the Fee Simple Estate value, then this can be provided IN ADDITION TO Market Value ‘As Is’ of the Leased Fee Interest.  I would call this additional value Hypothetical Value of Fee Simple Estate.  A Hypothetical Condition is needed as this value assumes the existing leases are not in place.  Now, if the subject is leased to a single tenant and that tenant is purchasing the property…we go to…

Scenario #2 – The subject is leased to a single tenant who is purchasing the property.  Obviously, when the purchase occurs the lease goes away.  Or at least for us appraisers, it is ignored because now it is no longer arm’s-length.  The bank/credit union’s request for Fee Simple Estate only is now acceptable.  With a bit of a twist though….Market Value ‘As Is’ would still be of Leased Fee Interest.  However, this value is not needed.  Why?  Because the loan is not being made until the property is purchased.  Therefore, the appraiser provides a Prospective Value as of say a month or two in the future (whenever a closing is projected to occur).  An Extraordinary Assumption is needed to say that we assume the purchase will occur and the lease will be extinguished in the stated timeframe.  What about the requisite Market Value ‘As Is’ that FIRREA requires?  Well, on the day the property is purchased and the loan is closed, the appraiser’s Prospective Value is now Market Value ‘As Is.’  And now FIRREA is satisfied and all is good in Appraisal Land:)

((As an aside, Scenario #2 is useful when a zoning change is in process.  Until it occurs, Market Value ‘As Is’ must consider the subject as currently zoned.  I encourage banks not to make the loan until the zoning change occurs.  This way an appraiser can provide a Prospective Value ‘Upon Zoning Change’ with a future date and not have to deal with Market Value ‘As Is.’  But, if the loan is being made today, then two difference scenarios must be valued.  Once again, the value difference might not be that much.))

There are likely some other less common scenarios that arise.  But, the above two seem to take care of the vast majority of transactions.

I will quickly mention one scenario that provides an example of why Market Value and Market Value ‘As Is’ are not always the same.

The subject is leased to a single tenant with say 3 or 6 months left on the lease.  The owner or a buyer is going to occupy the property once the lease expires and the tenant has moved out.

In non-bank/cu appraisals, Market Value could likely just ignore the existing lease.  We could argue that market participants don’t care about the next 3-6 months of the tenant being in place.  They know they will occupy the property very soon.  This is ok for Market Value.

However, for a bank appraisal under FIRREA, this is not acceptable.  The lease is in place and Market Value ‘As Is’ is of Leased Fee Interest and the lease must be part of the value.  Obviously, if the rental rate happens to be at market, then there is no difference in value between the Leased Fee Interest today and the hypothetical Fee Simple Estate today.  If contract rent is above or below market, then there is a difference in these two values.  Admittedly, it is likely to be a small amount.  But, it MUST be included in the Market Value ‘As Is’ conclusion.  In this case, Market Value and Market Value ‘As Is’ differ.  And this is one of several examples where USPAP and FIRREA differ.

As with FF&E, please do not pull the ol’ ‘this is absorbed in rounding and thus is not added or deducted’ routine.  Make the addition or deduction to get to Market Value ‘As Is’ and move on.

Please contact me if you have any questions.  Any other scenarios worth me addressing.  et al.  Thanks for taking the time to read my blog:)

Remember, Spend Forward, Use Forward!

The Mann

 

Re-Posted – Apartment Appliances are FF&E!!!!!!!! Not Real Property!!!!!!

February 2019 – This item was originally posted in 2015.  Four years later I still hear that an appraiser or reviewer wants to say that kitchen and laundry appliances are real property.  NOT!  Geez folks, get over this already.  Appliances are appliances are equipment and not real property.  This is basic knowledge.

I will add one suggestion (from my wife when she was a reviewer) for those dealing with this issue.  My wife would tell the appraiser that all they had to do is provide rent comparables of units with no appliances and rent comparables of units with appliances and if the rents were the same, then the FF&E does not contribute to value.  That simple and it would be market evidence.

In our combined 50+ years of reviewing appraisals we have not seen this analysis done.  I have seen many appraisals where a rent adjustment IS made for comps with only washer/dryer hookups versus ones with washer/dryer units.  That has been an adjustment greater than $0 in 100% of the cases I have seen.  Definitive proof that FF&E has a positive value in apartments.

I have not seen any rent comparables that lacked kitchen appliances, so no evidence there that I know of.  In foreign countries this exists.  In some markets tenants actually move their refrigerator and such from apartment to apartment:)

When I started appraising in 1986 in South Florida, my first apartment complex appraisal I separated out FF&E.  It wasn’t a requirement (that I can recall).  It was just obvious.  Common sense.

I do want to commend those appraisers that I review that always value the FF&E separately.  Some go so far as to provide a value even if there is only one or two apartment units in a property (e.g. retail first floor, 2 apartments on 2nd floor).  Might be only $400 in FF&E, but FIRREA doesn’t care about the amount.  Just that it is excluded from Market Value ‘As Is.’

Also, please do not pull the ol’ ‘this is absorbed in rounding and thus is not added or deducted’ routine.  Make the addition or deduction to get to Market Value ‘As Is’ and move on.

Please contact me if you have any questions.  Any other topics for me to blog about.  et al.  Thanks for taking the time to read my blog:)

The original post follows.

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It is 2015 and I continue to encounter appraisers (albeit fewer and fewer thankfully!) who do not value the FF&E in apartment properties.   Since 1990, FIRREA has required this.  This issue should have been settled 25+ years ago.

The most common response I get when I ask an appraiser to separately value the FF&E is ‘In our market these items transfer with the real estate.’  To which a whole list of questions and replies come to mind:

Who cares how the FF&E is transferred – it is still FF&E!

FF&E in hotels transfers with the real estate – how does that differ from an apartment complex?  The same goes for many other property types.

Having been frustrated by this issue for 23+ years as a reviewer, a few years ago I took the opportunity to have this item added to the 14th Edition of The Appraisal of Real Estate.  There is a list of property types with FF&E and that list now includes apartments:)

For bank/credit union appraisals, appraisers need to realize that it is Federal Law that requires LTV (Loan-To-Value) ratios be calculated on the Market Value As Is of REAL ESTATE ONLY.  Examiners have been focusing on this very item for the past 5 years.  It is important that fee appraisers help their clients comply with Federal Law.  Provide a value for the FF&E and be done with it.  And do NOT include the amount in the Market Value ‘As Is’ figure as again it is supposed to be Real Estate Only.

I will agree that in some cases this amount is minimal.  But, Federal Law still requires a separate value.  There are many cases where this amount can be in the millions of dollars – e.g. those high end condo projects that did not sell out before the bubble burst and have been rented as apartments ever since.

Lastly, as one instructor told a class I was in – If I can drop it on my foot, it is FF&E:)

Remember, Spend Forward, Use Forward!

The Mann

RESIDENTIAL APPRAISAL THRESHOLD INCREASE – MUCH ADO ABOUT NOTHING

February 1, 2019 – The Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency proposed raising the residential appraisal threshold from $250,000 to $400,000.

The Appraisal Institute and numerous other groups are opposing this increase.  That is understandable.  But, the hyperbole that these organizations and appraisers put out there is no different than the Fake News problem.

Based on my experience of over 25+ years in banking, I estimate that less than one-hundredth of 1% of residential appraisals will be affected.  Probably less than that.

GSEs are responsible for 90%-95% of residential loans and, thus, residential appraisals.  All such loans are exempt from FIRREA.  So, the Federal Agencies can increase the residential threshold from $250,000 to $1 Trillion and it wouldn’t be noticed by 99%+ of   residential appraisers!  Also, it will have no effect on the national economy.

For the most part, the only residential properties that stay under FIRREA are second/vacation homes, model homes in subdivisions, and rental homes (e.g. an investor rents 20 houses around a city).   Some ‘regular’ house loans remain under FIRREA – this is when the bank does not sell the loans to the secondary market.  Banks typically don’t keep many of these loans on their books.  But, yes, they do keep some.

Appraisers just need to keep an eye on the GSEs.  They are the ones who make decisions that affect the entire residential appraisal industry in a significant way.  Don’t worry about the FIRREA issue at hand.  As they say, it is a nothing burger:)

Remember, Spend Forward, Use Forward!

The Mann

SIGN UP FOR FREE CRE PUBLICATIONS

October 22, 2018 – The Counselors of Real Estate (CRE) has moved its print publications to online formats.  They removed subscription fees and anyone can subscribe for free.

I encourage you to subscribe and to let your peers know about this, too.  I am confident you will find the articles informative.

The web site is https://www.cre.org/

Click PUBLICATIONS and you will see SUBSCRIBE in the drop-down box.  Complete a few items and select one or both publications and hit subscribe and that is it.

Enjoy….

NEW INTERAGENCY GUIDANCE ISSUED

October 16, 2018 – The Federal Agencies have issued an updated guidance titled ‘Frequently Asked Questions on the Appraisal Regulations and the Interagency Appraisal and Evaluation Guidelines.’  This rescinds a similar document issued in 2005.

You can download this 14-page document at the following URL:

https://www.fdic.gov/news/news/financial/2018/fil18062a.pdf

Please pass this document along to your in-house appraisal staff and other bankers.

Reportedly, there are no significant changes.  Simply, an update of a 13-year old document with some needed clarification.

LEASE-UP FOR OWNER-OCCUPIED BUILDINGS – A DEBATE YET TO BE SETTLED

August 9, 2018 – Over my 30+ year career, this question has come up every few years.  When performing the Income Approach for a vacant or owner-occupied building (same thing), should there be discounting for the time and cost to lease it up?

My short answer is – Yes.  However, I would say 99% of appraisers do not make such a deduction.  Why not?

A few notes before I summarize a great response from an appraiser who does make the deduction.

First, America’s definition of Market Value assumes a sale occurs.  Therefore, an owner-occupied property is vacant when it sells.  That occupant moves out so either a new owner occupant can move in or third-party tenants can move in.  I have long argued that EVERY house/condo in America sells vacant – regardless if the owner occupies it right up to closing or it is physically vacant beforehand.  Of course, rental properties are the exception.

Second, the Income Approach assumes an investor owns the property and will lease it up to stabilization to third-party tenants.  The Income Approach does not assume owner occupancy!

Therefore, a vacant or owner-occupied property has to be leased up to obtain stabilization that is assumed in the direct cap method of the Income Approach.  Lease-up is not free and instantaneous that often.  Below is the summarized response that was shared with me.

As always, I welcome your thoughts.  Unlike our cultural and political world, differing opinions are welcome and will not be called ‘tone deaf’ or racist or some kind of phobic and so on:)  If I get enough comments, I will do a follow up post.

(Oh, let me add that the Sales Comparison Approach will depend on what sales are used.  If the comps were 100% vacant and/or owner-occupied, then the SCA already reflects such discounting for lease-up.  If the comps were partially or 100% leased, then….hmmmmm….)

(Second oh….all of this is needed to determine one of the 3 highest & best use conclusion items – type of occupancy.  Sometimes it is Owner Occupancy and other times it is Third-Party Tenants via an Investor owning the property.)

OK, finally to the Anonymous Appraiser Reply:

  1.  For the purpose of our analysis, owner-occupied space is presumed vacant and subject to deductions to reach stabilized occupancy in the “As Is” Market Value.
  2. FIRREA requires appraisers to “Analyze and report appropriate deductions and discounts for proposed construction or renovation, partially leased buildings, non-market lease terms, and tract developments with unsold units.”
  3. The present value of all costs necessary to achieve stabilized occupancy (including rent loss, leasing commissions, concessions, tenant improvements, rehabilitation costs, and/or profit loss) incurred during the lease-up period must be considered in developing the “As Is” Market Value conclusion.
  4. ((In this particular appraisal, )) The sales utilized in the Sales Comparison Approach were all vacant or owner-occupied; therefore, no lease-up adjustment was applied to the Sales Comparison Approach.

I agree with this logic.  Even for non-FIRREA appraisals.

What does the market do?  Well, that is answered in the Sales Comparison Approach as prices for vacant and/or owner-occupied properties reflect how an owner values the property or an investor values it knowing s/he has to find a tenant(s).

Thoughts….

And remember, Spend Forward, Use Forward!

A REAL-WORLD SCENARIO AND HOW FIRREA ADDRESSES IT

August 2, 2018 – First, thanks to a bank client for sharing some real-world situations with me and allowing me to post them to my blog.  Also, thanks to the regulators for providing anonymous explanations of how FIRREA applies.

SCENARIO – Any City USA – We financed one 4-plex (units cannot be sold individually) and eventually there may be more than four 4-plex properties.  At what point do we consider this tract development, therefore would need discounted cash flow analysis completed?

Assumption – Ignore any land for future development

Assumption – All development occurs in same development

FIRREA Application Under Several Situations:

First 4-Plex – This is a SINGLE 1-4  Family residential property.  Therefore, the $250,000 threshold applies and an evaluation is required if the loan amount is $250,000 or lower.  As always, the bank can choose to order an appraisal.  If the loan amount is above $250,000 then an appraisal is required.

Two 4-Plexes at once – This falls under Commercial Real Estate Transaction and the new $500,000 threshold.  A loan amount at or below the threshold requires an evaluation and above the threshold requires an appraisal.

Five or more 4-Plexes – This meets the definition of Tract Development and  would need a discounted cash flow analysis completed.  Some exceptions are possible, but generally a DCF analysis is performed.  The $500,000 threshold applies as to whether the DCF is done in an evaluation or appraisal.

With the new definition of Commercial Real Estate Transaction and the new threshold of $500,000, the above project shows the realm of possibilities.

As always, please contact me if you want  to discuss this.

Also, as always, I encourage you to contact the authors of the 2018 interagency bulletin that introduced the new definition and threshold.  They can give an ‘official’ opinion on how to handle your particular situation.  You do not need to provide a borrower’s name or such.  They simply want to help you follow FIRREA correctly.

I will be posting a few more scenarios over the next few weeks….check back often:)

And remember, Spend Forward, Use Forward!