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.

CORRECTING THE APPRAISAL FOUNDATION’S FAKE NEWS

May 18, 2017 – Today The Appraisal Foundation (TAF) gave a webinar on using Restricted Appraisal Reports (RARs) to meet the need of Evaluations.  As TAF is no longer an unbiased entity, I will correct the Fake News they put out today.  My perspective is based on 23+ years of writing true Evaluations (i.e. non-USPAP) and 23 years of ordering RARs.  I have seen both type of reports all across the nation.  So, here goes…

  1.  FAKE NEWS – Evaluation requirements are more than Appraisal requirements.  Misleading.  TAF listed the 5 appraisal requirements listed in FIRREA.  Then compared that to the 14 bullet points for Evaluations listed in the IAEG.  Of course, one of the 5 appraisal requirements is mandatory compliance with USPAP – which has 12 bullet points in SR 2-2.  A few of those requirements require multiple items.  FACT – As I will explain below, A RESTRICTED APPRAISAL REPORT MUST ALWAYS CONTAIN MORE INFO THAN AN EVALUATION!

2.  Remember USPAP has NOTHING to do with Evaluations.  Only the December 2010 IAEG applies to Evaluations.  Thus, this webinar and the next webinar about writing an USPAP Evaluation (an oxymoron – USPAP has an A for Appraisal in it, not an E for Evaluation! Evaluation requirements are in the IAEG) are not relevant.

3.  IMPORTANT EXPLANATION FROM GEORGE MANN:

A.  Evaluations CAN omit many items that are required and/or reported in the typical appraisal report (I will list many below).

B.  RARs CANNOT omit any items required by the IAEG for Evaluations.

C.  Therefore, RARs MUST ALWAYS CONTAIN MORE INFO THAN AN EVALUATION!

4.  FAKE NEWS – It was insinuated in the webinar that a RAR could have less content than an Evaluation.  A single statement near the end said RARs do need to be beefed up and that will be explained in the next webinar.  That should have been emphasized more.  The sample RAR presented would NOT meet Evaluation requirements.  The IAEG says ‘sufficient information’ is needed.  Simply stating a value is not sufficient information.

5.  Here is a list of items that are typically included in a RAR, but are NOT included in an Evaluation:

2 very important items are Evaluations do NOT require the SR 2-3 Certification, nor do you have a work file requirement.  Those are yuge and bigly!

Reporting-wise Evaluations typically will NOT contain an executive summary, limiting conditions, extraordinary assumptions and hypothetical conditions, intended use, intended user, zoning, tax assessment info, flood zone, detailed property descriptions, prominent use restriction statement (RARs), or listing and sales history.  That is not to say every RAR needs all of those items (many are mandatory though) nor that every Evaluation will omit all of those items (most of them will be omitted though).  Therefore, it is FAKE NEWS for anyone to ever say or insinuate that a RAR contains less or equal detail to an Evaluation.

Remember, Mann’s Law of Evaluations – A RESTRICTED APPRAISAL REPORT MUST ALWAYS CONTAIN MORE INFO THAN AN EVALUATION!

Lastly, not that TAF suggested a bank would use an Evaluation on a $34 Million property, the IAEG makes it clear that as the loan and/or property become more complex, banks need to move towards appraisals.  Nearly all Evaluations will be on properties valued around $1 Million or less.  Some exceptions will exist, especially for the largest banks.  But, not too often will a bank use an Evaluation on properties over $1 Million.  Yes, technically, they make their decision based on loan amount.  But, us appraisers deal with property value.

TAF made a great point that an RAR can be done on any size property.  The amount of work doesn’t change between a RAR and an Appraisal Report.  But, the amount of reporting is less (in a RAR) and that saves a little bit of writing time.

Agencies Finalize EGRPRA Review with Joint Report to Congress

March 22, 2017 – After about 2 years, FFIEC has finally published their report that includes dealing with appraisal issues.

The link is below.   Pages 28 to 40 deal with appraisal issues.  Albeit, appraisals are discussed a bit in a few other places.  As noted, these are NOT final and official changes.

In general, if the proposal does not change, this is a big win for appraisers.  The small increase in a single threshold will not have a major affect on appraisal volume.

https://www.occ.gov/news-issuances/news-releases/2017/nr-ia-2017-33a.pdf?utm_campaign=ABA-Newsbytes-032217-HTML&utm_medium=email&utm_source=Eloqua

USPAP CHANGES FOR 2018-2019

February 24, 2017 – The ASB has posted a summary of changes at the following link:

https://appraisalfoundation.sharefile.com/share?#/view/s305094efde84bbda

For those performing appraisal review, you will want to read about the changes and plan ahead if there will be changes needed for your review documents.

The definition changes are also worth noting.  We have 10 months to get ready for the changes.

TRANSACTION VALUE

February 17, 2017 – I received the following question:

QUESTION:  I had an appraisal/FDIC interpretation question in regards to the $250,000 transaction value from fil10082a and thought I’d reach out and see if you could provide any input.

Example:  An individual identified a situation where there’s an existing $1,300,000 loan and a borrower is requesting another $200,000 for improvements.  Is the “transaction value” (as defined in FDIC fil10082a) $200,000, which is the new subsequent request OR is it equal to the new exposure of $1,500,000?  All else equal (market values have held, no material property deterioration, etc.), no new appraisal would be required if the transaction value is under $250,000.

Any input you could provide would be appreciated.

ANSWER:  The transaction amount is the total $1.5 Million.

Assuming no change in market conditions or collateral protection, an evaluation is permitted and an appraisal is not required.

However, you should consider getting an appraisal if there were potential credit risk management concerns.

Also, regulators want banks to have a policy on when to obtain appraisals even though an evaluation is permitted.

ADDITIONAL NOTE – There is no dollar threshold for loan renewals, refinancings, or subsequent transactions.  The $250,000 and $1,000,000 thresholds only apply to New Loans.

 

HAWAII

January 28, 2017 – The fun part of reviewing is seeing how things are done in different markets.  I ran into two items I have not seen before.

The subject is not within a tsunami evacuation zone.

Well, I guess that is something to worry about over there.  I have not seen such for properties along the West Coast of the mainland though.  Maybe, just not a big issue for the mainland versus Hawaii.

Zone D is defined as areas where there are possible but undetermined flood hazards, as no analysis of flood hazards has been conducted. Not within a Special Flood Hazards Area but within 250 feet of Zone
AE.

I have not encountered Flood Zone D before.  This particular property is in Honolulu.  It doesn’t seem like it would be a tough place to determine a flood zone for.

As they say, you learn something every day.  I learned two things:)

USPAP CHANGES TO REVIEW STANDARDS

January 2, 2017 – Happy New Year to everyone!

Recently, the Appraisal Standards Board (ASB) issued the Third Exposure Draft of Proposed Changes for the 2018-2019 Edition of the USPAP.  Significant changes are being proposed for appraisal review.  As such, fee and staff reviewers should read this draft and send comments on anything that you feel needs to be changed or kept as proposed.  The link is:

https://appraisalfoundation.sharefile.com/share?#/view/s54a2ccba63644aa8

I encourage you to send comments to the ASB.  Yes, they do listen to EVERYONE.  Individuals have as much clout as organizations.  Providing a good comment email/letter with examples and suggestions is the key.

I personally have seen my suggested wording end up in the final version of USPAP.  It can and does happen.  The ASB does not already have their mind made up.  They are looking for help and guidance.

The deadline for comments is January 27th.  Make your New Year’s Resolution to send a comment to the ASB:)

AS AN ASIDE – At my international web site (www.TheInternationalReviewer.com) I have a guest post on my blog.  It is a reviewer’s analysis of an appraisal in South Korea.  I suggest reading it because the same issues can occur in American reviews.

 

I HAVE HIT A NEW LOW :)

September 21, 2016 – Not too many people would use the above as a headline:)  Let me explain…

About 8 years ago today in fact, the last review I did as Chief Appraiser for the fractional bank (as it was called…or Evil Empire by other banks) was an appraisal of a vacant residential lot in Detroit.  The value conclusion was $100.  It was well supported with two sales at $100 and a listing at $200 that the appraiser adjusted downward 50%.

I had spent 22 years appraising and reviewing.  Made it to Chief Appraiser of a $100 Billion bank.  And there I sat making the big bucks to review a $100 residential lot:)  And, yes, the appraiser’s fee was higher than the value conclusion.

I have used that story many times over the years.  Now, I can top it.  I just got paid to review an appraisal of what has to be kept as a confidential property (and client).  The value conclusion was $0!  Yes, I have finally hit a new low! Now, I can finally say I have appraised and/or reviewed properties ranging in value from $0 to over $2 Billion.  That is a resume builder!  It was annoying to use $100 as the bottom of that range.

Oh, and yes again, my review fee was higher than the value conclusion.  Thankfully, USPAP prohibited me from quoting a review fee that was a percentage of the value! LOL

Everyone have a great day:)

OK, IT’S A REAL ESTATE BUBBLE

August 29, 2016 – I have been explaining for the past year that technically we do not need a ‘bubble’ to occur for us to turn down and have a significant correction.  Bubbles are rare.  Declines typically start from normal tops.

However, the exact same things are occurring today that occurred 10 years ago.  Developers are shopping loans on marginal projects to numerous lenders until they get one to bite.  An appraiser friend of 25+ years told me he is getting pressured not to use discounting in subdivision appraisals because builders are once again buying bulk lots without any price discount.  As they say, Deja Vu all over again.

I figure it is time to put my quotes from 10 years ago in one place.  Maybe they will help some of you avoid major loan losses or appraisal mistakes.  Also, I will reiterate the importance of (Level C) Market Analysis.  I didn’t expect us to repeat the exact same mistakes so quickly.  But, alas, greed does that to people.

A list of my personal quotes follow.  Feel free to use any of them:)

“If we will lend it, they will build it.”

“No loan is better than a bad loan.” – I learned from RMA classes that a dollar lost is a dollar lost.  But, a dollar loaned might make you 5 or 10 cents.  Today is not the time to be lending at normal, much less aggressive (!), LTVs or DSCRs.

“Appraisers will stop discounting when banks stop charging interest on loans.” – This one is for the clients of my appraiser friend noted above:)

“It’s not the developer’s project, it’s the bank’s project.” – Borrowers know that if they can get eager lenders to loan them 90% or 100% of their project costs (or Gross Retail Sellout in the case of subdivisions or condo buildings), then the project is actually owned by the bank.  However, the developer keeps the profits if they occur.  If no profits, then the bank gets the keys to the project.

“The public (aka market demand) dictates absorption, not home builders.”

“You aren’t taking that loan from another bank.  That other bank is smart enough not to do this loan!”

“Loan Prevention Department, can we help you?” – This is how most Appraisal Departments want to answer the phone today:)

“Builder takedowns and Letters of Interest are worthless and not relevant.”

“If the market says it is so, it isn’t!” – Mann’s Axiom

And the infamous quote that ended up leading to my very generous whistle blower award last year – “Do you want some cheese with that whine.” :)

On to Level C Market Analysis…. i.e. a look at future supply and demand.

At this point in the cycle, most projects are going to be built without there being an adequate, if any, demand.  Those appraisers who know how to perform a Level C Market Analysis will be able to show their clients that the proposed project is not feasible.  Meaning value will be below cost.

Stephen Fanning, CRE, MAI is the author of the Appraisal Institute’s book ‘Market Analysis of Real Estate.’  If you don’t have this book, please get it asap.  The concept has been out for 25+ years and actively taught by the AI for 15+ years.  There is no excuse for not knowing how to perform a detailed Level C Market Analysis.

Mr. Fanning is the only appraiser I know of with the testicular fortitude to put in his appraisal reports a Market Value and a Market Price.  For almost every appraisal today, both of these numbers are needed.

Mr. Fanning tells the story of performing an appraisal where Market Value was $5 Million and Market Price was $10 Million.  He put both conclusions in the report and explained to the client the difference.  Essentially, transaction prices supported $10 Million.  But, fundamental analysis only supported $5 Million.  Are there any other appraisers willing to step up and do what is right?

In the Summer of 2009, I discussed a real-life example of this situation.  I made up the numbers and did not identify the project.  An excerpt from my article follows, with credit given to Collateral Evaluation Services, LLC.

“The following tables attempt to put into perspective some of what we have seen in appraisals over the past 4-5 years.  For simplicity sake, we’ll assume our subject property is a 100-unit condominium project with $1,050,000 priced units (name your location – Florida, Phoenix, Vegas, Inland Empire, etc).

At the market top, it was common to have such projects sellout in one day.  Also, it was not unusual to see appraisers use discount rates (inclusive of entrepreneurial profit) as low as 15% and minor expenses.  This property likely would have been valued as follows:

1 DAY
Gross Retail Sales $105,000,000
Expenses (5%) ($5,250,000)
Cash Flow $99,750,000
Discounted at 15% annual rate None – 1 Day sellout
$99,750,000 <— Value

In reality, this wasn’t as much an estimate of market value as it was an indication of a bubble price market participants were paying.  At the top, as will occur at the upcoming bottom, most market participants, including appraisers, forget that price does not always equate with value.

A more appropriate indication of market value at the top would have reflected a ‘normal’ 2-3 year sellout, normal expenses of 8%-12% of gross sales, and an IRR of 18%+.  This would have resulted in a value estimate of $74,000,000 as shown below:

 

YEAR 1 YEAR 2 (YEAR 3)
Gross Retail Sales $52,500,000 $52,500,000
Expenses (10%) ($5,250,000) ($5,250,000)
Cash Flow $47,250,000 $47,250,000
Discounted at 18% annual rate 0.8475 0.7182 0.6086
$74,000,000 (RD) <— Value

Obviously this is an overly simplistic DCF for this property type – but the end result is probably close to what a more detailed DCF would conclude.  If a 3-year absorption was more typical for the above market, the value would have been $68,500,000 (Rounded).

The above two tables show that the market had already stretched prices 35% to 45% above market value.  Loans made on inflated value estimates were certainly destined for significant trouble.”

I read that today and am amazed that it 100% applies to the current market.  It is sad we are repeating the same mistakes.

As an aside, I had the opportunity to review an appraisal of the above project around 2013.  In actuality, the project was around 600 units that really did sell out in one day with over 1000+ backup contracts.  When I looked at the 2013 appraisal report, only 2 (!!!) units actually closed and 6 units had sold since then.  8 units sold out of 600+ units.  But, in 2006, the developer, lender, and so on swore that 600 units selling in one day at inflated prices was market value.  NOT!  And thankfully my manager in the credit department turned down the loan.  A few hundred million dollars in losses avoided.

Some appraisers declined assignments in 2006 and 2007 because they knew the projects weren’t feasible and they didn’t want to deal with the client pressure and so on.  I encourage you to consider doing such today.  As I have said since 1992 when I became a review appraiser, you will never see my name on a Walgreen’s (and other national tenant properties) with a real estate value of $300/sf+ (less than $100/sf, yes).  This is not the time to be putting your name on the next big OREO property.

Lastly, let me recommend you purchase and read a book by Bill Pittenger.  ‘Recession Chronicles’ is a collection of his writings during the downturn 10 years ago.  It is rare you get a ‘live’ perspective of a major downturn that will be applicable over the next few years.  The web site is http://recession-chronicles.com/

There are hundreds of quotes I could end with.  I didn’t think this part out when I started writing this post.  But, I believe this quote probably sums it up – better safe, than sorry.

THERE ARE NO MANDATORY STATES

August 23, 2016 – Per the Appraisal Subcommittee’s (ASC) website, ‘State statutes governing appraiser certification and licensing can be characterized in three ways:

Mandatory (Man) – Certified/licensed appraisers required for any service for which an opinion of value (evaluation or appraisal) for real property is developed;

Mandatory for Federally Related Transactions (M/FRT) – Certified/licensed appraisers required to perform appraisals in any federally related transactions and real estate related financial transactions when Federal law requires the services of such appraisers; and

Voluntary (Vol) – Certified/licensed appraisers not required for any appraisal/evaluation assignments. If appraisers wish to perform appraisals in such federally related transactions and real estate related transactions, appraisers can choose to become certified/licensed and submit to the State’s regulatory jurisdiction.’

I contend that there are no Mandatory States because it conflicts with Federal law to require someone be certified/licensed to perform an evaluation.  The States argue they can ‘add to’ the requirements of Federal law (in this case FIRREA).  Myself, and many others, argue they are not ‘adding to,’ but are in conflict with Federal law – Federal law trumping State law.

Per the ASC website, I count 4 Voluntary States, 13 Mandatory for FRT States, and 38 Mandatory States.  The total includes DC and territories.  Everyone can agree that 17 States clearly are not Mandatory.  It is the 38 States that claim to be Mandatory that I contend cannot be mandatory.

The debate comes down to Federal Preemption – the displacement of U.S. State law by  U.S. Federal law.  FIRREA does not require an evaluator be a State certified/licensed appraiser.  The question becomes, can a State require you to be a certified/licensed appraiser in order to prepare an evaluation?

One item that is clear and not up for debate is that FIRREA requires an evaluation provide an opinion of Market Value ‘As Is’ of Real Estate Only.  The key point being an evaluation does provide market value – just like an appraisal.

As to who can perform evaluations, pertinent quotes from the December, 2010 Interagency Appraisal and Evaluation Guidelines follow:

Persons who perform evaluations should possess the appropriate appraisal or collateral valuation education, expertise, and experience relevant to the type of property being valued. Such persons may include appraisers, real estate lending professionals, agricultural extension agents, or foresters.31

31 Although not required, an institution may use state certified or licensed appraisers to perform evaluations.  (Emphasis added)

From here, we are back to Federal Preemption.  Does it apply or not?  I am aware of one case that has decided this question.  I will provide its reference and the Judge’s quotes below.  As with any case ruling, it can be argued that it only applies to this specific set of circumstances, only in this jurisdiction, etc.  However, it is a Federal Judge and it decides if the State of Pennsylvania can require appraisal licensing for people performing evaluations.  And it decides if Federal Preemption applies.  There is a good chance other Judges around the country would refer to his case.

Let’s start with the exact reference from the copy that was provided to me:

2004 WL 764834

Only the Westlaw citation is currently available.

United States District Court,

E.D. Pennsylvania.

FIDELITY NATIONAL INFORMATION SOLUTIONS, INC., Market Intelligence, Inc., and Pennsylvania Bankers Association, Plaintiffs,

v.

George D. SINCLAIR, et al., Defendants.

No. Civ.A. 02-6928. | March 31, 2004.

Yes, this case is 12 years old.  I am surprised it hasn’t been brought up more often in this debate as to who can perform evaluations in each State.   I will let you read the entire document as it is too long to cut and paste it here.  It ebbs and flows and the Judge does a great job of addressing many arguments from both sides.  In the end, Federal Preemption is the main issue and the Judge says this:

‘...The federal financial regulatory agencies, pursuant to the Congressional authority granted under 12 U.S.C. § 3341(b), have exempted federally related real estate transactions under $250,000 from the state certified real estate appraiser requirement. Insofar as these federally related, but expressly exempt transactions are concerned, REACA is preempted by FIRREA. For all other transactions that are non-federally related either because they do not involve a federal financial institution regulatory agency or the Resolution Trust Corporation, or because they have been designated by the federal financial institution regulatory agencies as not requiring “the services of an appraiser” as set forth in 12 U.S.C. § 3350(4), such non-federally related transactions are outside the scope of FIRREA and are subject to state regulation. …’

REACA stands for the Pennsylvania Real Estate Appraisers Certification Act.

So, there you have it.  Federal Preemption DOES apply and States (at least Pennsylvania for sure) cannot require appraiser certification/licensure to perform evaluations.  Therefore, NO State can be Mandatory.  They can require appraiser certification/licensure for most, but not all, products that provide opinions of value.

Although I am not sure where the money is in such a case, I would hope someone would file a suit against all of the so-called Mandatory States and force them to change their laws to note the exception for evaluations.  Maybe organizations like ABA would do it to assist their members.

Lastly, I have heard of some State Attorney Generals trying to strong arm financial institutions into only using certified/licensed appraisers to perform evaluations.  This is laughable and hopefully there can be push back in one way or another.  Legal Counsel at the Federally-Regulated banks I worked at made it clear that no State was going to get into our files anyway since we were regulated by the Federal Agencies.  But, States will be States and try to throw their weight around.

I recall one State who attempted this with me.  They didn’t like us doing evaluations in their State without being licensed appraisers.  It wasn’t Illinois, but let’s just say it was and the property was in that State.  I replied I am located in Ohio.  I am licensed in Kentucky.  The client got the evaluation report off of the internet from a server located in California.  Please let me know when Illinois has any jurisdiction over anything going on in those States:)  I never heard back:)

As always, I appreciate your thoughts.  I would be very interested in any other settled cases that exist and address the issue of Federal Preemption in regard to evaluations.  Email me if you want a copy of the case I have referred to in this post.

 

AN INDEPENDENT REVIEW OF YOUR BANK REVIEWS

August 8, 2016 – I attended the Appraisal Institute’s national conference in Charlotte, NC a few weeks ago.  One of the sessions was about compliance and a topic was called ‘Quality Assurance Reviews – Review of the Review.’

I believe I may have performed the first ever independent review of a bank’s staff reviews back in 2014.  In March, 2015, The RMA Journal published my article on the topic.  It is titled ‘What’s New In Appraisal Review’ and you can get to it on the Articles page of this web site.  (NOTE:  I call these Quality Control Audits (QCAs), but the task is the same regardless of the name.)

One of the slides at the AI session said ‘In layman’s terms, a Real Estate Assurance Review is a third party review, performed by a reviewer not tied to the institution’s review department, of an institution’s reviewer’s review of a real estate appraisal.  This type of external review allows for a variety of credibility checks for the institution, as well as for the governmental banking regulation authorities.’

One of the slides asks the questions ‘How can my institution justify the additional cost?’  In my Chief Appraiser days at two $100+ Billion institutions this question was presented more than once a year by senior management.  How can we recover the expense of the appraisal department?  How can we get borrowers to pay the internal review fee your department is charging the lending groups?

I can see all of the Chief Appraisers reading this and nodding their head and saying yep I do this ever darn year!  As I tried to explain to senior management, the appraisal department can pay for itself many times over by saving the bank a single large loan loss.  e.g. I remember one of my reviewers finding a $4 million error in an ARGUS cash flow.  That paid for the cost of my department for 4 years right there.  And I am sure my staff found many more errors that saved the bank millions of dollars.

In one of my Quality Control Audits for a regional bank, I found a single appraisal report that was approved by the reviewer, but had a $10 million error in it!  I found many other overlooked errors in the millions of dollars.  The cost of a QCA/QAR is nominal in comparison to not doing one.

It is not just about approving erroneous appraisal values.  A QCA/QAR is also about seeing if your internal policies and procedures are being followed.  If they aren’t, you will have a lot of fun answering to bank examiners and internal audit about why not.  Read my RMA Journal article to see the common issues I encounter.

You can try to do this internally.  But, you likely lack the resources.  My experience is it takes 10-12 hours per review – remember, you have to review the review AND the appraisal report.  Only then can you know if the reviewer missed anything.

Not many of us ever have enough staff to just do our day jobs.  Much less try to now perform reviews of reviews.  Outsourcing this task is the way to go.  Also, it provides an independent view of your staff.

Let me answer two questions I often get asked.  Yes, a QCA/QAR can be performed remotely.  This reduces the cost.  No, every review does not need to be checked.  A well-thought out sampling should let you know if there are any areas of concern.

Lastly, this does not apply to just banks/credit unions with internal review staff.  This applies to financial institutions that use Appraisal Management Companies (AMCs).  It would be prudent to know in advance of your next bank examination or internal audit if your appraisal review process is going to get high marks or has issues you can start addressing asap.

My focus is commercial real estate, so the above is mainly about that.  I am sure there are many advanced ways of addressing the quality of residential appraisal reports and residential reviews.

Please contact me if you are in need of a QCA/QAR!