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.

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!

 

THE ‘ERROR’ IN THE 2010 INTERAGENCY APPRAISAL GUIDELINES

July 30, 2018 – The following wording from the December 2010 IAEG suggests that property value be used to determine if an appraisal or evaluation is needed.  Obviously, this is not possible since property value is not known at the time a decision is made.

The text appears next followed by a reply from G. Kevin Lawton with the OCC.  Mr. Lawton was kind enough to provide the response and allow it to be credited to him.

Text from Item 1 in Appendix A:

1. Appraisal Threshold
For transactions with a transaction value equal to or less than $250,000, the Agencies’ appraisal regulations, at a minimum, require an evaluation consistent with safe and sound banking practices.54 If an institution enters into a transaction that is secured by several individual properties that are not part of a tract development, the estimate of value of each individual property should determine whether an appraisal or evaluation would be required for that property. For example, an institution makes a loan secured by seven commercial properties in different markets with two properties valued in excess of the appraisal threshold and five properties valued less than the appraisal threshold. An institution would need to obtain an appraisal on the two properties valued in excess of the appraisal threshold and evaluations on the five properties below the appraisal threshold, even though the aggregate loan commitment exceeds the appraisal threshold.

Mr. Lawton’s response:

This is one of those areas in the Guidelines where the wording, which mixes the concept of “value” and “transaction value,” can create a problem that is confusing and not consistent with the regulation, and I have had banks and examiners complain about the inconsistency.

The solution is to have banks allocate “transaction value” among the individual properties rather than “property value.”  The bank should allocate the entire aggregate commitment among properties.  Doing this allocation of “transaction value” rather than expected “property value,” sticks to the spirit of the regulation itself.  There is another, bigger advantage of using transaction value as the driver: it avoids the Catch‐22 problem that some banks have brought up: “what if I allocate property value to one property of $200,000, obtain an evaluation, and the evaluation result shows a market value (property value) of $260,000, do I then need to go get an appraisal?”  In other words, “I estimated the property value to be $200,000 and I was wrong. The property value is $260,000 and since, using the “property value” as the driver for what is needed, I now need an appraisal because the property value is above the threshold. This, in itself, is an area where the Guidelines are not consistent with the regulation, since the Guidelines talk about property values “less than the appraisal threshold” (Appendix A, Section 1). That sentence, and the following sentence in the Guidelines mix the concept of “property value” and “transaction value” (last two sentences in Section 1).

The “appraisal threshold” deals with transaction value, not property value.  So, back to the example above, if the banker estimates (allocates) $200,000 of the transaction value to the property (rather than “guessing” a $200,000 property value) then an evaluation is allowable and if the evaluation result shows a property value of $260,000 there is no Catch‐22.  It does not matter what the property value result is because property value does not drive what is needed.  So when a bank addresses “property value” as the driver of what product (appraisal or evaluation) is the minimum product required under the regulation they may need an evaluation (based on a guess of property value of $200,000) followed by an appraisal (because the evaluation shows a property value of $260,000). This is not what the Guidelines intended.

One could probably argue this several ways, but the “allocation of transaction value” among the individual properties, accomplishes the following:  1) it is consistent with the intent of the regulation, 2) doesn’t jumble the concepts of property value and transaction value, 3) avoids the “what if’s” when property value is the driver, 4) is understandable, and, 5) is a practical solution for our bankers.

Hope this provides some clarity to this issue.