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:)

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:)

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!

 

CAN WE END THE DEBATE ON VALUING NATIONAL TENANT RETAIL BUILDINGS

June 29, 2016 – Some people have bucket lists.  I guess I was born to have a list of pet peeves:)

For 25+ years, I have tried to get our industry to identify the correct interest when appraising an existing apartment complex or any property with arm’s-length leases.  It has always been Leased Fee Interest, not Fee Simple Estate.  I can say that finally the majority of appraisers have come to recognize this.  The ‘urban myth’ that we were taught (i.e. if leases are less than 12 months long and/or contract rents are at market, then the interest being appraised is Fee Simple Estate) is almost eradicated.

For 30+ years, I have identified the kitchen and laundry appliances (and any additional common area items that might be in a club house or such) in apartment complexes as FF&E.  Til this day, many appraisers still think refrigerators, stoves/ranges, dishwashers, washing machines, and dryers are real estate!  As a lady on TV many years ago said – Stop The Insanity!

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:)

 

NEW INTERAGENCY ADVISORY ON EVALUATIONS

March 7, 2016 – For the first time since December, 2010, the Agencies have issued a statement on Evaluations.  I will include the FDIC link below, albeit the Federal Reserve and OCC have similar links.

My feeling is nothing new has been added.  There is a bit more talk about how to use tax assessments – hopefully, this will once again become more common now that The Great Depression II has run most of its course.   Also, they make it clear that market value must be of real property only.  FF&E in apartments and going concern properties must be valued separately, just like in appraisals.

Please pass the link below along to your bank contacts so everyone can stay informed.  Thanks.

https://www.fdic.gov/news/news/fi

nancial/2016/fil16016.html

LESS THAN FEE SIMPLE:)

February 15, 2016 – I hope everyone had a great 3-day weekend.

I figure I will share all of the interesting things I run across in appraisal reports from now on.  As many people tell us reviewers, we should write a book that includes all of these things.  We could probably fill an encyclopedia set (note to Millennials – these were hard copies of Google before there was Google).

Last night, I reviewed a report that stated the property interest appraised was ‘less than fee simple.’  What the heck is that!?!  Apparently the subject had an easement across it for another property to gain access.  I think it is still Fee Simple Estate, but…

So as to include a tidbit of useful info in each of my posts, let me note that the correct terminology to use is Fee Simple Estate, Leased Fee Interest, and Leasehold Interest.  While working on The Dictionary of Real Estate Appraisal, it was pointed out to me that only Fee Simple is an ‘estate.’  The others are ‘interests.’  OK, lesson learned on my part.  Always best to show you are up to date with current trends by using the correct terminology in your industry.