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.

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.

REVISIONS MADE TO TITLE XI OF FIRREA

April 2, 2018 (UPDATED) – The Agencies have finally released ‘The Final Rule’ for updates to FIRREA.  A copy of the document can be found at:

https://www.fdic.gov/news/board/2018/2018-03-20-notice-sum-c-fr.pdf

The main change is increasing the de minimus level for commercial real estate transactions from $250,000 to $500,000.  Although this might seem significant, it is basically an adjustment for inflation from the last change to $250,000 in 1994.

Also, the definition of ‘commercial real estate transaction’ has been updated.

The changes are not in effect until published in the Federal Register,  I will update this post when this occurs.  UPDATE – This document is now live as it is in the Federal Register.

Financial institutions should update their appraisal/evaluation policies accordingly.

 

AGENCIES PROPOSE TO INCREASE ONLY ONE THRESHOLD A SMALL AMOUNT

July 24, 2017 – The Federal Agencies published the following on July 19th:

The FDIC, the Board of Governors of the Federal Reserve System, and the Office of the Comptroller of the Currency (the Agencies) are jointly issuing a notice of proposed rulemaking titled Real Estate Appraisals (Appraisal NPR) that will be published in the Federal Register for a 60-day comment period. The Appraisal NPR proposes to increase the current appraisal threshold for commercial real estate (CRE) transactions from $250,000 to $400,000. The Appraisal NPR addresses comments received during the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) review process, which requires that, not less than once every ten years, the Agencies, along with the Federal Financial Institutions Examination Council, conduct a review of the Agencies’ regulations to identify outdated or otherwise unnecessary or burdensome regulatory requirements.

You can get their full 60-page report at:

https://www.fdic.gov/news/board/2017/2017-07-18-notice-dis-a-fr.pdf

The one thing I found amusing was their statement that it takes about 40 minutes to review an appraisal.  Who did they survey?

I have reviewed over 4,000 commercial appraisal reports for the past 25 years.  I consider myself extremely fast.  Plus, many times I am reviewing reports of the same appraisers I have seen 10 or 20 or 50 times before.  That helps to speed up reviews as we know where everything is in a report.

In all of the time studies I have been part of or heard about for the past 25 years, the average time to perform a Compliance Checklist is 2 hours and to perform a Technical Review is 4-8 hours.

But, that is not an important issue.  The only suggestion being made is to increase the $250,000 threshold for all commercial loans up to $400,000.  The business loan exemption will stay at $1,000,000 and the residential (1-4 units) loan exemption will stay at $250,000.

These are minor changes and quite surprising to me.  Based on inflation alone (which they present in their report), I would increase the $250,000 to $500,000 and the $1,000,000 to $2,000,000.  Based on the stats they present, this would keep appraisal volume at 1994 levels (appraisal volume has increased steadily over the past 23 years).

If I really had my way, I would eliminate appraisals for all business loans and residential loans.  Appraisers know that the value when a new loan is made is meaningless.  These type of loans are based on credit not real estate.  The banks only need to know the real estate value years in the future when a foreclosure might occur.

Which, of course, always brings us back to my call for America to adopt Mortgage Lending Value/Long-Term Sustainable Value…..but, I digress.

Remember, you have the opportunity to send in your opinion to the Agencies.  This is probably the first time in 23 years that your opinion has been asked for in regard to FIRREA.  And, it will be the last time for another 10 years.  Speak up…this is the time to do such.

UP TO 6 STATES NOW, WELCOME TO THE CLUB FLORIDA

May 25, 2017 – Six states now permit licensed appraisers to perform non-USPAP Evaluations.  In those six states, licensed appraisers are finally on a level playing field.  44 states to go.  We might already have another state in the group, but some legal confirmation is needed.  And Virginia is actually delayed a year as they need to change the definition of Evaluation.  But, we are headed in the right direction.  The following is from the Appraisal Institute (but, it omits Indiana which does have this law):

Florida Makes Significant Changes to Appraiser Licensing Law

Florida Gov. Rick Scott on May 23 signed HB 927, legislation that makes significant changes to the state’s appraiser licensing law and requires appraisal management companies to comply with federal minimum requirements for registration and oversight. The law takes effect Oct. 1.

The Appraisal Institute and the Region X Government Relations Committee advocated for two key improvements to the state’s appraiser licensing law, and those provisions were incorporated into the bill.

The first provision defines an “evaluation” as a “valuation permitted by any federal financial institutions regulatory agency for transactions that do not require an appraisal” and clarifies that a state-licensed appraiser may perform an evaluation. Currently, appraisers in Florida are prevented from providing evaluations that are not in full compliance with the Uniform Standards of Professional Appraisal Practice even though federal requirements only call for compliance with the Interagency Appraisal and Evaluation Guidelines.

Evaluation services in the state have been provided by non-appraisers, such as brokers and salespersons, accountants, architects, financial analysts and data providers, all of whom do not have to meet the same licensing and standards compliance requirements as appraisers. State-licensed appraisers will now be able to perform services on these same terms in compliance with federal requirements. Florida joins Georgia, Illinois, Tennessee and Virginia in allowing appraisers to perform evaluations.

The second provision clarifies that the Florida Real Estate Appraiser Board has the authority to adopt rules allowing for the use of standards of professional practice other than USPAP for “nonfederally related transactions.” Such transactions include appraisal assignments for portfolio monitoring, financial reporting, litigation, tax and consulting, among other areas. The law requires appraisers using development and reporting standards other than those contained in USPAP to comply with USPAP Ethics and Competency Rules and other requirements adopted by the Board by rule. The law clarifies that any valuation work performed per standards other than USPAP cannot be used to satisfy the experience requirements for any Florida appraiser credential.

In 2015 and 2016, the FREAB undertook a rulemaking proceeding that would have allowed the use of standards other than USPAP if additional standards “meet or exceed” USPAP. The provisions in HB 927 remove that arbitrary threshold and grant much broader authority to FREAB to consider standards other than USPAP. Further rulemaking proceedings will need to be undertaken by FREAB to fully implement this new provision.

The Region X Government Relations Committee, under the leadership of Chair Wesley Sanders, MAI, advocated for this legislation, meeting with the state’s Department of Business and Professional Regulation about these two provisions. Additionally, AI professionals in Florida participated in Region X’s ValuEvent on Feb. 14 in Tallahassee, meeting with many legislators to urge support for the provisions.

View a copy of HB 927.

5 STATES DOWN, 45 TO GO

May 19, 2017 – I was notified this week that Illinois has had a law on their books that allows licensed appraisers to perform non-USPAP Evaluations.  I have no clue how long it has been there.  Maybe someone from Illinois knows and can tell me.  So, we are actually at 5 states now, albeit Virginia has a technical glitch that will delay the law for a year.  Following is an excerpt from the law (I will add emphasis to the key words) and additional explanation I have received from my ‘sources.’  (oh geez I sound like the Fake News Media!)

225 ILCS 458/5-5a – “It is unlawful for a person to …. (ii) develop a
real estate appraisal, (iii) practice as a real estate appraiser… without a license issued under this Act.”
225 ILCS 458/5-5g – “This act does not apply to”….
[1] an employee, officer, director, or member of a credit or loan
committee of a financial institution or any other person engaged by a financial institution when performing an evaluation of real property for the sole use of the financial institution in a transaction for which the financial institution would not be required to use the services of a State licensed or State certified appraiser pursuant to federal regulations adopted under Title XI of the federal Financial Institutions Reform, Recovery, and Enforcement Act of 1989… (emphasis added)
The state board has confirmed to several people that state-certified appraisers are permitted to perform non-USPAP compliant evaluations when engaged by an institution.  The only caveat is that the appraiser cannot sign as an appraiser, reference their state credential or any appraisal related designations.

MLV TRAINING COMING TO AMERICA – FIRST TIME EVER

May 17, 2017 – As most of you know, I have been promoting Mortgage Lending Value (MLV) in America since back around 2009.  For the first time ever, HypZert is going to offer the course in America.

Information about the course is below.  The cost is $3300, which is a lot cheaper than the $20,000+ I spent on courses, travel (to Berlin), and the exam.  This is a great opportunity to learn new appraisal theory as it is introduced to America.  It is spreading in Europe and I believe it will be commonplace in America within 10 years.  I encourage you to go for it!

Training Course „Mortgage Lending Valuation“, Sep and Nov 2017 in New York – Please Register before 30 June 2017

 German Pfandbrief banks have recently intensified their activities in the U.S. real estate markets. This results in an increasing demand for real estate valuers with local market expertise who are qualified in Mortgage Lending Valuation (MLV) according to the German regulation (BelWertV).

 The vdpPfandbriefAkademie offers a compact training unit covering the methodology of MLV. The training consists of 4 seminar days in New York City including extensive study material and prepares for the corresponding certification as a HypZert Real Estate Valuer for Mortgage Lending Valuation.

The CIS HypZert (MLV) certification guarantees that its holders fulfil, without restrictions, the legal requirements for valuers according to § 6 of the German Regulation on the Determination of the Mortgage Lending Value (BelWertV).

 HypZert is Germany’s leading recognized institution in the area of certification of real estate valuers. HypZert certified experts are appreciated by clients and employers in the finance and real estate industry.

 For more information on the Seminar and Certification, please contact Nadine Roggendorf at roggendorf@pfandbriefakademie.de