MARCH 19 – I encourage all appraisers to attend this webinar. It should help everyone. Go to this link to register for free.
MARCH 16TH – Here is a link to a great post by VaCAP. This should benefit both appraisers and lenders. Be safe out there folks!
MARCH 16TH – I am seeing appraisal reports that have added an Extraordinary Assumption about the coronavirus. I was asked today by an appraiser if he should add such to his reports. My answer is Yes.
I won’t cut and paste what I have seen in reports. That wouldn’t be cool – and not ethical really. You can come up with something quickly. I would add this immediately.
February 25, 2020 – Most of us know which loans are classified as FRTs. The loans that have caused confusion are those that are under the various threshold levels. Are those FRTs or non-FRTs? So, here is a short explanation that will hopefully be of assistance.
February 3, 2020 – Twice last year I taught this 4-part webinar series for the Appraisal Institute. The intended audience is for bank/credit union employees, although appraisers who run an AMC might also be interested.
Please go to this link for information on content and how to register.
Feel free to pass this along to anyone you think might benefit from this webinar series.
Thanks so much!
January 17, 2020 – I addressed this issue in a June 29, 2016 post. It is sad that almost 4 years later appraisers still do not separate the value of national tenant leases (almost always significantly above market) between Real Property Value and Intangible Value.
Recent examples I have encountered have been extreme. A proposed c-store ground lease had the land valued at $1,000,000 (based on numerous nearby land sales) and the lease valued at $4,300,000. Therefore, Prospective Value ‘Upon Completion’ (of the sitework) was $1,000,000 and Intangible Value was $3,300,000. Several ground leases to fast food restaurants weren’t as extreme. But, still the Intangible Value was over 100% of the Real Property Value.
Although I care less what the market does (See Mann’s Axiom), it is a common argument appraisers like to make when they are arguing that FF&E in Apartments aren’t separately valued by market participants (find me a Balance Sheet that does not have a Short-Lived Assets category…recent purchase contract I reviewed had FF&E separately discussed and one even placed a value on these items!) or national tenant leases sell based on the contract rent, et al. However, I came across the following standard wording in annual reports of several REITs:
So, that eliminates that argument:) In fact, the market does allocate value to above market rent to intangible assets. Case closed on this issue.
What was surprising to me was they also allocate the amount of value due to below market rent to (I assume) liabilities. That is interesting.
My post from 2016 is below.
Happy New Year to all. May 2020 be a great year for you.
Another item I have been shouting about for almost 25 years is the appraisal of drug stores, big box retailers, and other buildings leased to national tenants. Capitalizing these leases does NOT yield Market Value of real estate only. I may have been the only Chief Appraiser that required that the Market Value of Real Estate not exceed the Cost Approach indication with the additional value reflected by the Income and Sales Comparison Approaches having to be identified as an Intangible Asset. I admit that even allowing the Cost Approach indication to represent real estate value is being way too generous. These companies usually pay way above market for the land and the cost to build the improvements is absurd – I have seen costs for these basically shell buildings be more than medical office!
FIRREA and FDICIA require that 1) Market Value be of real estate only, and 2) LTV be calculated on Market Value of real estate only. We all know a shell retail building is not worth $300 or $400/sf as most drug stores have appraised at for 20+ years. Excluding the inflated land purchase price and using the real value of the land, these properties are lucky to be worth $100/sf in most markets. Yet, I am sure the vast majority of financial institutions have used the incorrectly stated Market Value provided by appraisers to calculate LTV and base their loan on. This is similar to those institutions that used, or may still use, Going Concern Value to calculate LTV.
Can we say violation of numerous federal regulations….but I digress.
All of this leads me to two recent articles that I believe finally end this absurd debate. I highly recommend you find the following articles:
David Charles Lennhoff, CRE, MAI, ‘Valuation of Big-Box Retail for Assessment Purposes: Right Answer to the Wrong Question,’ Real Estate Issues (Volume 39, Number 3, 2014): 21-32.
Stephen D. Roach, MAI, SRA, AI-GRS, ‘Is Excess Rent Intangible?’ The Appraisal Journal (Spring 2016): 121-131.
In my opinion, both authors prove beyond a shadow of a doubt that the excess rent present in almost all drug store, and similar leases, is not indicative of the market value of real estate. They use both theory and real data to prove their points. Mr. Roach sums up the logic better than I have ever seen (from page 125 of his article):
- “By definition, the real estate (a property) can produce market rent, but no more.
- By definition, excess rent exceeds market rent.
- By definition, excess rent is created by the contract, not the real estate.
- By definition, a contract is an intangible asset; it’s not real estate.
- Therefore, excess rent is intangible.
Each step in the argument is based on long-accepted definitions and concepts of the terminology.”
I challenge all of the Chief Appraisers in the country to step up and require appraisals of these properties to appropriately indicate the Market Value of REAL ESTATE ONLY with the huge additional amount above this figure being termed Intangible Value (or something similar). It is time both appraisers and lending institutions provide the correct value and LTV.
Plus, this will make the lives of us reviewers easier – it has been frustrating to lower the values 50%-75%+ all of these years! Of course, we could simply order these appraisals from the two authors above and have slam dunk reviews forever:)
September 3, 2019 – As promised a month ago, The ASB has issued their concept paper with ample time for everyone to comment. Also, there will be a webinar on September 10th and a public meeting on October 18th.
The concept paper can be found at:
If this URL is too long, go to the Standards & Qualifications tab on TAF website.
After reading the document, I believe it is well explained and gives everyone a chance to opine. I think a statement or two are slightly misleading, but they explain why they say what they say and that is just fine. If I am up for it one day, I might add a post here listing out the items I disagree with.
My stance will never change. Evaluations need to stay outside of TAF. Just leave this product under the domain of federal regulators who actually do have the power to go after anyone who performs fraudulent evaluations. The federal regulators have enforcement power that TAF and ASB do not have.
Please take the time to send them your comments. They do read everything they receive. Obviously, some meat to your stance will carry more weight. Try to give some factual information. Simply saying evaluations are more risky is factually wrong. People like myself that have ordered and reviewed appraisals and evaluations on all property types, performed due diligence on dozens of good and bad banks, et al, know loans allowing evaluations are, and likely always will be, less risky than loans requiring appraisals.
Unlike our politics, it will help if you don’t say you are a Never-Evaluations person and leave it at that. No need to call each other Appraisalphobic or Evaluationphobic lol
Give the ASB some real substance and they will give your comments significant weight. Give them suggested wording and they will consider it.
Just saying ‘because’ is what a 5-year old says:)
Take advantage of your chance to comment…
August 1, 2019 – I was bombarded throughout the day with appraisers emailing me the ASB announcement that they are going to consider drafting standards for Evaluations. Their announcement is full of blatant lies. It is typical of what the Fake News Media puts out. Therefore, I will list their lies and provide the actual truth below. Too many people who have no to minimal experience with evaluations put out Fake News all of the time. It is criminal. I have ordered and performed evaluations since essentially the beginning of their existence in 1992. The truth follows….
LIE #1 – “Currently, there are no uniform standards for appraisers to follow when conducting an evaluation, ” – THE TRUTH – Since October 1994, there have been uniform standards for appraisers to follow when conducting an evaluation. These standards were updated in the December 2010 Interagency Appraisal and Evaluation Guidelines. And get this, these requirements apply to not only appraisers, but NON-appraisers!!! USPAP only applies to appraisers.
LIES #2 and #3 – “, which leads to greater risk to the safety and soundness of the real estate transaction and diminished protection for consumers….With the increased use of evaluations in the marketplace lenders and consumers are being exposed to an unnecessary level of risk not seen since the 1980s when national appraiser qualifications and appraisal standards had not yet been created….” – THE TRUTH FOR #2 – First, evaluations are only allowed in transactions that are lower risk than appraisals. Therefore, they cannot possibly add risk to lending. In my 27+ years of working for banks, I cannot recall a bad loan that originated with the use of an evaluation. But, all the bad real estate loans I have seen did contain an appraisal. Inflated appraised values alone do not make loans go bad. That is not what I am insinuating. But, I will confidently say that no bank has ever or will ever go under because of the use of evaluations. However, many banks have gone and will go under with appraisals being a contributing factor. THE TRUTH FOR #3 – ‘…diminished protection for consumers.’ Everyone loves to claim they are trying to help the consumer. I guess we can call it using the ‘Consumer Card.’ The ‘consumer’ usually means the general public that buys houses. The fact is FIRREA does not apply to 90%+ of residential loans. Everything that Fannie Mae, Freddie Mac, the VA, HUD, and on and on are involved in is exempted from FIRREA. (If you are honestly concerned about the consumer, it is Fannie Mae and Freddie Mac that must be stopped from loosening appraisals standards…and remember evaluations are not in their world, so don’t get the issues confused.) The consumer BENEFITS from evaluations as they are cheaper and faster than appraisals. It is a flat out, despicable lie to say that the ‘consumer’ is hurt by the use of evaluations. Actual proof has been the real world since 1992. Evaluation volume is estimated to be 4x-6x that of appraisals. Has anyone ever said an evaluation caused a loan to go bad or a bank to go under? NO!
LIE #4 – “This important development by the ASB shows how the Board has their ear to the ground, listening to the concerns of working appraisers in a rapidly evolving marketplace where there is an increasing demand for different valuation products,” said David Bunton, president of the Foundation.” – THE TRUTH – Ear to the ground? What a ridiculous statement! Evaluations were an option when the original FIRREA was placed into law in 1989. 30 YEARS AGO!!! The ASB reminds me of the quote attributed to Mark Twain about one of my favorite cities, Cincinnati – “When the end of the world comes, I want to be in Cincinnati because it’s always twenty years behind the times.” When it comes to evaluations, I want to be the ASB because they are 30 years behind the times:) The demand for evaluations has existed mainly since 1992. (Any of you remember BC-225:) ) Nothing has changed. Except if The Appraisal Foundation will say the truth they are scared to death of a non-appraisal product. They want to control their fiefdom. Hey ASB, the first step is admitting what you are!
LIE #5 – “Currently, the Interagency Appraisal and Evaluation Guidelines for federally regulated financial institutions provide guidance on evaluations, but that guidance is directed at lenders, not appraisers.” – THE TRUTH – OMG, the misleading statements get more ridiculous. This is like saying the 5 appraisal requirements in FIRREA are directed at lenders, but not appraisers. Just not true. Appraisers must provide Market Value ‘As Is’ per FIRREA, not USPAP. That applies to both appraisals and evaluations, BTW. Appraisals must be written per FIRREA, not per USPAP. The IAEG requires the subject property be inspected for evaluations. USPAP doesn’t even require an inspection for appraisals! As a reminder, the IAEG requirements apply to BOTH appraisers and non-appraisers for evaluations. Just imagine if USPAP applied to non-appraisers! That idea is as ridiculous as the ASB trying to provide standards for evaluations.
LIE #6 – “Under federal regulations, evaluations may be performed by non-appraisers who have not demonstrated a level of expertise through education, training, and examination.” – THE TRUTH – Do you ever wonder why people tell a lie that can easily be proven wrong? Here is what the IAEG says about who can complete an evaluation – “An institution should maintain documentation to demonstrate that the appraiser or person performing an evaluation is competent, independent, and has the relevant experience and knowledge for the market, location, and type of real property being valued. Further, the person who selects or oversees the selection of appraisers or persons providing evaluation services should be independent from the loan production area.” The requirements are the exact same for appraisals and evaluations. Shouldn’t the ASB be made to retract their lie? Shouldn’t they have to issue a new announcement with truths, instead of lies? How does a group of people look themselves in the mirror each morning knowing they published numerous lies to the public they love to claim they protect? I have never understood how people live like that.
LIE #7 – “If appraisers are not completing an evaluation, there is no recourse for a lender or consumer to appeal a bad evaluation.” – THE TRUTH – Why not? I have asked for evaluations to be revised. I have rejected evaluations. I have done both for appraisals, also. There is no difference in how these products are treated in this regard. Whoever did the evaluation can be sued as easily as one of us appraisers that did an appraisal. And it is likely an evaluation doesn’t contain that funny limiting condition that many appraisers put in appraisals about their liability being limited to the appraisal fee:) That one has always cracked me up. I am sure lawyers have been stopped in their tracks when they see that clause, not!
Those are what I would label as bald-faced lies. (I learn something every day….there are bald-faced and bold-faced lies and they are different….interesting.) Below are just statements that are hyperbole or unsupported or such.
“Appraisers are valuation experts. When hiring a licensed or certified real property appraiser to develop and report market value, the client should expect the work to be performed in accordance with USPAP,” said Wayne Miller, chair of the Appraisal Standards Board” – COMMENT – No, they should not. USPAP is not a law, as we all know. USPAP has never been the only set of standards for valuation. Many states do not require USPAP for all appraisals. (Read my blog post of a few years ago where I contend that all ‘Mandatory’ laws are in violation of Federal Law. I believe this issue was settled by a Federal Court ruling in 2004 in Pennsylvania.) Many large clients do not either. The Yellow Book (UASFLA as the word police are now wanting it to be referred to) is its own set of valuation standards. USPAP says the following:
“USPAP does not establish who or which assignments must comply. Neither The Appraisal Foundation nor its Appraisal Standards Board is a government entity with the power to make, judge, or enforce law. An appraiser must comply with USPAP when either the service or the appraiser is required by law, regulation, or agreement with the client or intended user. Individuals may also choose to comply with USPAP any time that individual is performing the service as an appraiser.”
It is NOT needed for all assignments. Appraisers do NOT need to comply if it is not necessary. Clients do NOT need USPAP appraisals all of the time.
“The Board is eager to receive stakeholder feedback from the planned concept paper and public hearing on the impediments, if any, to appraisers completing evaluations in accordance with USPAP.” – COMMENT – This one is simple. The lone impediment are the state laws that require licensed appraisers to meet USPAP for ALL appraisals, including those for financial institutions. As I note above, I believe these laws are unconstitutional and have ignored them my whole career. Federal law trumps state law. My grass roots campaign since 1994 to get the Tennessee Law, as I refer to it, passed in all other states has gained traction in the past few years. Numerous states now allow us licensed appraisers to perform non-USPAP Evaluations. That is the solution. Change the state laws, one by one. And keep the ASB the heck out of the Evaluation world! The banking agencies already set the standards for evaluations and they can enforce them. Probably much better than the states have enforced USPAP! People who violate FIRREA are subject to civil money penalties and jail time. That applies not only to lenders or credit people or anyone else in a bank or credit union, but also to appraisers and evaluators!
In closing, let me point out the obvious….remember what the ‘A’ stands for in USPAP, TAF, ASB, et al. Evaluations are NOT appraisals. Appraisals are NOT evaluations. They may coincidentally have some similarities, but they also have significant differences. They each have more than adequate standards.
Some facts that I have had to share over and over for 25+ years….Evaluations have been around as long as appraisals in regard to FIRREA. They are not something new. They have not negatively affected the appraisal industry. The volume of appraisal work has increased significantly over the past 25-30 years – evaluations have been done all along. Mostly by non-appraisers. Passing state laws like TN and GA and FL and LA and VA and others now have is all that is needed to open this world to appraisers. Those who do not want to do them, don’t do them. Your business decision. But, don’t stop your peers from making a living that includes doing them. That is selfish.
I am 100% positive that evaluations have not negatively affected the banking industry or our economy over the past 30 years. They will not over the next 30 years. If you understand the transactions they can be used on, you understand that almost always, if not always, evaluations are involved in lower risk loans than appraisals. If you are concerned about the banking industry, the economy, the consumer, then figure out how to provide appraisals that are more accurate than the plus or minus 20% minimum range of accuracy that numerous studies have proven them to be! How do you convince the public that a professional doing a valuation is adding something of value (no pun intended…or is it) when their appraisal on a $1,000,000 property is not more accurate than $800,000 to $1,200,000? Do you not think that most of the public knows to a smaller range than that what their property is worth?
I am sworn to secrecy about a similar professional study on the accuracy of evaluations that showed the range to be plus or minus 5%. Now, tell the world that there is more risk when using evaluations than appraisals. See how that flies with people that know that plus or minus 5% is far superior to plus or minus 20%.
Folks, know what the facts are versus the Fake News about evaluations that is passed around by individuals and organizations with a bias. I try not to have any bias as I have made my living off of both products in one way or another for 27+ years. I have spent 25 of those years trying to help the appraisal industry see the light and get their state laws passed so they can access the non-USPAP Evaluation world. That is what will help appraisers.
What will not help appraisers is the ASB putting out their own standards for evaluations. Who is going to follow them anyway? The banking/credit union world already have evaluation standards. Why would they want to amend Federal Law to require that evaluations follow some new ASB standards? Hopefully, the ABA, MBA, and others will be sure to squash that idea. The Federal Agencies that have examined banks all along can factually say that although evaluation programs can be improved overall, they have not added any risk to banks or the economy or consumer. They know the most. If there was a concern, it would have been made public already.
What will not help appraisers is appraisers wanting to only provide the Black Model T Ford. If you think evaluations will lower the quality of appraisals, you have been proven wrong for 30 years. If you think evaluations will lower appraisal fees, you have been proven wrong for 30 years. (The continuous decline in appraisal fees is due to many other factors, but I am certain it has nothing to do with evaluations.) If you think evaluations will add risk to the financial industry, you have been wrong for 30 years.
If you think appraisers like yourself are the best people to provide non-USPAP Evaluations and have been missing out on a ton of revenue for 30 years and that clients would prefer to be using licensed appraiser to do non-USPAP evaluations, YOU ARE RIGHT…..
(Obviously feel free to share the above…it is out on the web, not like there is any taking it back lol I will post something new if an error is pointed out or I hear lies about what I said or misinterpretations et al…so check back now and then….and be sure to let the ASB know what you think when they open this up to public comment.)
July 19, 2019 – See the link below for more info about the NCUA’s decision to one up banks and raise the commercial appraisal threshold from $250,000 to $1,000,000. Banks recently had their threshold for this loan category raised to $500,000. The obvious question is will banks be able to get their regulators to follow what the NCUA did….we shall see.
For those who are jumping on my Evaluation bandwagon after 25+ years, this only means more work for you. If your State does not allow licensed/certified appraisers to perform non-USPAP Evaluations, you need to get them moving on this. Can you hear me North and South Carolina:)
June 6, 2019 – Most importantly, my thanks to all past and present Veterans on this 75th Anniversary of D-Day. I visited Normandy and Omaha Beach last year. So serene. Humbling. One of my wife’s uncles was in the second wave that landed at Omaha Beach. He didn’t tell anyone that until a few months before he died in his 90’s. The Greatest Generation rarely talked about the War. But, they saved the World. Literally. We owe those young men everything. God Bless them all and our Country.
Per the Appraisal Institute’s Appraiser News Online, 2 more states will allow licensed/certified appraisers to perform non-USPAP Evaluations. As predicted, this is the year for this to finally take off across our country.
If you are an appraiser in adjacent states, you should start a campaign to get your state to pass a similar law. Else, you are missing out on a ton of business! I hope North and South Carolinas wake up and join the movement. Soon, the entire Southeastern USA will allow appraisers to perform non-USPAP Evaluations. Following is from the AI: