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Reviewer Thoughts & Tips

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.

The Mann

Mann Overboard, Reviewer Thoughts & Tips

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.

The Mann

 

Mann Overboard

R.I.P. Sox – September 28, 2002 to November 26, 2017

My buddy Sox led a good, long life.  We were lucky enough to adopt him when he was 8 years old.  I never had a dog live past 12 years….15+ years was quite amazing.

Sadly for the first time in 25+ years we do not own a bearded collie.  What a special breed of dog.

It is days like today….events like this…..that make you wonder why the heck worry about libtards….why fight the battles for what you think is right.  Just forget everything else and only concentrate on your family, friends, and pets.

I will see you Sox across that Rainbow Bridge in Heaven and we will enjoy eternity together along with my other dogs….love you buddy:)

20151031_120156

 

Mann Overboard, Reviewer Thoughts & Tips

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

 

Mann Overboard, Reviewer Thoughts & Tips

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.

Mann Overboard, Reviewer Thoughts & Tips

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

Mann Overboard, Unlisted1

GUEST POST – STATE OF THE VALUATION INDUSTRY

March 7, 2017 – This post is an email put out by Bruce Cumming, a commercial real estate appraiser in Florida.  As he notes, the email contained some attachments.  I have not included those on my web site – please contact Mr. Cumming if you would like to see the data he has collected.

I hope you find his research interesting.  Our industry faces a lot of challenges.  Bruce has put in a lot of time in doing this research and sharing his results.  As he suggests, please contact him if you wish to discuss his findings.

===============================================

The focus of this document (MS-Word version attached) is CRE (Commercial Real Estate) VAS (Valuation Advisory Services) Industry Trends, Product-Service Quality, University Relations, and Challenges in Recruiting and Retaining Talent.

My abbreviated qualifications and contact information appear at the end of this document.

 At last count I am up to 23 exhibits for another research project of which:

  • 9 comprise primary research (inclusive of the 4 attached)
  • 11 comprise secondary research on the web
  • 3 comprise semi-confidential information from other sources

The first part of this email revolves around my research into “Apex Level,” or Global-National CRE VAS Firms as noted below and attached:

  • Global-National CRE VAS Firms – this list is divided into two groups, the first of which are the Global-National CRE Services Firms VAS Groups and the second are the National Boutique CRE VAS Firms, granted some on both lists are more aspirational, than reality at present.
  • CRE Valuation Professional Requirements – I reviewed a large number of employment advertisements from 4.20.2009 through 2.10.2017 for larger CRE VAS firms and banks.  This research indicates the current professional requirements sought in the marketplace.  I then created Aggregate Professional Profiles for:

o        Senior Professionals

o        Managing Directors/Group Managing Directors (of specialty groups within larger CRE VAS firms)

o        Bank Review Appraisers

  • Global-National CRE VAS Firms Marketed and Promoted Professional Services – I briefed what professional service line expertise and property type specialization these firms are currently marketing and promoting.
  • CRE Valuation Data, Resources, and Software – I reviewed a number of academic and professional sources to generate a fairly comprehensive list of current CRE Valuation Data, Resources, and Software.  I emailed that list in mid-January 2017 to MAI/principals, professional staff, and academics around Florida.  I received a number of good suggestions adding about a dozen items to the list and then I did substantial additional research of what will always be a “work in progress.”

Key Takeaways:

  • Mergers and acquisitions of “local” CRE VAS firms by Global-National CRE Services Firms JLL (Jones Lang LaSalle) and NGKF (Newmark Grubb Knight Frank).
  • Emergence of the CFA (Chartered Financial Analyst) professional designation as a CRE VAS credential
  • Market acceptance of the MRICS/FRICS professional designations as a US CRE VAS credential
  • Demand for advanced MS-Excel (and ARGUS) financial and valuation modeling skills as well as some key online providers of training
  • The Player-Coach Model of management, common in many small CRE VAS firms and typical within specialty groups of larger firms.  The general consensus of the articles that I was able to find is that the skill set between a good player/individual contributor/producer and a good coach/manager are very different and bouncing between the two areas often does not work well in practice (people tend to lean toward either the activities they like best, or the ones with the most immediate economic rewards).  Given that virtually any entrepreneurial start-up is subject to the Player-Coach Model (as are virtually all small professional services firms), I was surprised NOT to have found any information on tactics to successfully navigate the challenges presented of balancing review, accounting/billing, information technology, management, marketing, new business development, and training functions mixed with personal production (see attached CRE Valuation Professional Requirements – Managing Director/Group Managing Director, page 8 for Player-Coach Model articles and links).

o        I have long thought that a CRE trainee appraiser course/manual be developed with a managing director/supervisor track and a trainee appraiser track to facilitate effective on-the-job training.

  • Valuation for Financial Reporting (CBRE and Duff & Phelps both have good online brochures outlining the CRE VAS applications)
  • The Wall Street Oasis website was the second hit when I searched, “Commercial Real Estate Appraisal Business” for another project.  It has a variety of posts on the CRE VAS career (linked later in this document) that largely view the typical CRE VAS career in a negative light.  Granted, Wall Street Oasis has a focus on students of, and graduates from (read Millennials) Wall Street target schools (The Ivy League, top liberal arts colleges, and other elite schools) and semi-target schools (second tier).  The most liberal list of business schools would be students of, and graduates from the “50 Best Undergraduate Business Schools,” http://www.collegechoice.net/top-undergraduate-business-schools/, and equivalent graduate business programs.  

o        CRE VAS was viewed as good training option for 12 to 36 months prior to moving on to a better CRE opportunity.  It was also viewed as consisting of a lot of “grunt work” at “poor pay” with limited long-term opportunities.  The exception being managing directors/ group managing directors (and the principals of the more entrepreneurial/marketing oriented, specialized, and tech savvy boutiques) – “the salesman” – who were primarily rainmakers.

§         Hopeful CRE VAS exit strategies included:  AM (asset management), BB (bulge bracket banking), IB (investment banking), PE (private equity), REIT (Real Estate Investment Trusts), development, and investment properties brokerage.

▫          I remember when I attended the Appraisal Institute’s Leadership Development and Advisory Council (2001 to 2003), which is held annually in DC, that many of the better, large local/small regional CRE VAS firms in Northern New Jersey (and Manhattan) would NOT hire NYU real estate graduates, because they would leave after 2, or 3 years and triple their earnings on Wall Street.

 ▫          The Florida Gulf Coast Chapter of the Appraisal Institute wanted to sponsor one of my Career Forum21’s (expert panel discussion followed by a networking reception) at Florida State University (FSU), which has one of the larger real estate programs in the US (ranging from 80 to over 300 depending upon the real estate market’s current cycle).  I’ve spoken to several classes at FSU over the years.  I could not get a response back from any of my FSU faculty contacts.  When I was attending an FSU Real Estate Trends & Networking Conference, I “cornered” the, then, faculty advisor for the FSU Real Estate Society.  I’ve spoken to his classes before.  He said that he was concerned that FSU would NOT get enough students, specifically, to attend a real estate valuation event to make it worth our while. 

 ▫          When the Florida Gulf Coast Chapter of the Appraisal Institute met in Tallahassee, Florida near FSU we offered a free lunch at our chapter meeting for up to 10 FSU/real estate students.  This yielded 3 FSU/real estate students.  A similar offer near FGCU in Fort Myers, Florida also yielded about 3 students.

 ▫          I know that both the FSU real estate faculty and FSU alumni promote real estate valuation as, at least a very good place to start a real estate career, that message, I have been told by faculty and students falls on largely deaf ears.

 ▫          I met an FSU/real estate senior back at the 2012 FSU Real Estate Trends & Networking Conference.  It turns out that his old high school was my old junior high school.  I got to know him fairly well and I asked him about student interest in real estate valuation, particularly coeds (who, given the relative career flexibility, I thought might be good targets).  He said that they (coeds that he knew) all wanted corporate real estate jobs with benefits.  He had a couple of CRE VAS interviewed, but the compensation was too low.  He is a retail properties leasing agent.

▫          A senior managing director at CBRE Valuation & Advisory Services once told me that the average CBRE appraiser earns about what the average CBRE broker earns, albeit the appraiser has to work a lot more hours to do so.  He was quick to add that the top CBRE brokers far out earn the top CBRE appraisers.

▫          A former managing director at Cushman & Wakefield Valuation & Advisory Services said the he rarely lost an appraiser to another CRE VAS firm, but did lose them to the investment properties brokerage side of Cushman & Wakefield.

o        The first staff professional exception to the poor income opportunity in the CRE VAS Industry included employment at one of the Global-National CRE Services Firms VAS Groups (specifically mentioned were CBRE and Cushman & Wakefield) where low-to-mid six figure CRE VAS incomes were reasonably aspirational.

o        The second staff professional exception to the poor income opportunity in the CRE VAS Industry included employment at entrepreneurial/marketing oriented, specialized, and tech savvy boutiques.

The base requirement to produce a quality work product is a quality professional.  The baseline Aggregate Professional Profile requirement of all the “Apex Level,” or Global-National CRE VAS Firms is:

  • A bachelors degree, or higher from an accredited university (AACSB preferred) in accounting, economics, finance, real estate, or related field; MBA degree, plus

My last survey of Florida university real estate professors relative to recent BSBA/real estate graduate starting salaries was in the fall of 2014:

  • Bachelors degree overall range, $25,000 to $70,000, plus benefits, plus training, plus equipment & tools
  • Bachelors degree central tendency, $40,000 to $45,000, plus benefits, plus training, plus equipment & tools
  • MSRE (Master of Science in Real Estate) degree overall range, $70,000 to $90,000, plus benefits etc. with MBAs higher

My last survey of Florida MAI/principals indicated that CRE state-registered trainee appraisers were paid in the $30,000 to $40,000 range max, often with a minimal (if any) benefits package and minimal (if any) training allowance.

See my article, Houston, We Have a Problem, on page 15 of the Florida Gulf Coast Chapter of the Appraisal Institute newsletter, The Approach (2013:Q3), 

http://www.aiwestcoastfl.org/uploads/3/3rdQ2013Newsltr.pdf, for a more detailed discussion.

Starting salaries for Florida CRE state-registered trainee appraisers are weak when compared with the overall earnings potential of a newly minted BSBA/real estate graduate.  The CRE VAS Industry will be very challenged to recruit and retain quality professionals based upon the current economics of the CRE VAS Industry.

Since founding the Region X of the Appraisal Institute University Relations Program in October of 2003 by regional vote, I have talked to about 3,500 to 4,000 college students at the University of Florida (UF), Florida State University (FSU), University of South Florida (USF) Tampa, USF-SP, University of Central Florida (UCF), Florida Gulf Coast University (FGCU), and New College of Florida and coached about 30 enough on their job searches that we still keep in some level of contact.  There was some interest by students/recent graduates in CRE VAS careers from 2005, when I first started to speak to university classes and student organizations, until 2008.  Then it stopped.

The next student who had a genuine interest in a CRE VAS career who contacted me was in July of 2016 when I was contacted by a 2015 UCF BSBA/finance with a real estate minor.  I met her at the 2015 Appraisal Institute-University of Central Florida Expert Panel Discussion.  She is now located down in the South Florida area.  I have arranged for some of my South Florida AI friends to speak with her and she has attended a South Florida Chapter of the Appraisal Institute chapter meeting.   She has had no luck locating a CRE VAS trainee appraiser role as of mid-February 2017.  We have exchanged numerous emails and she is a very good writer and seems to be enthusiastic and motivated about entry into the CRE VAS Industry.  She is getting frustrated with limited to non-existent CRE state-registered trainee appraiser opportunities after six months in a metropolitan area of about 6,000,000 people.

Next, as previously noted, I searched “Commercial Real Estate Appraisal Business,” for another project, which yielded the Wall Street Oasis website as the second hit and the link (current students and recent graduates (read Millennials) would find this link easily):

  • Jobs as a Commercial Real Estate Appraiser Suck?

http://www.wallstreetoasis.com/forums/jobs-as-a-commercial-real-estate-appraiser-suck

 A further review of the Wall Street Oasis website yields the following posts:

 Appraisal/Valuation Exit Opportunities

http://www.wallstreetoasis.com/forums/appraisalvaluation-exit-opportunities 

  • Commercial Real Estate Appraiser (The Future of this Career)

http://www.wallstreetoasis.com/forums/commercial-real-estate-appraiser-the-future-of-this-career 

  • How is Appraisal Looked Upon

http://www.wallstreetoasis.com/forums/how-is-appraisal-looked-upon 

  • JP Morgan Middle Office in Newark DE Vs. Commercial Real Estate Appraisal

http://www.wallstreetoasis.com/forums/jp-morgan-middle-office-in-newark-de-vs-commercial-real-estate-appraisal 

  • Real Estate Appraisal/Consulting -> Real Estate IBD/PE/AM?

http://www.wallstreetoasis.com/forums/real-estate-appraisalconsulting-real-estate-ibdpeam 

  • Real Estate Appraiser Internship

http://www.wallstreetoasis.com/forums/real-estate-appraiser-internship 

  • Real Estate Appraisal Question?

http://www.wallstreetoasis.com/forums/real-estate-appraisal-question 

  • Transition from Real Estate Appraisal to Real Estate Modeling

http://www.wallstreetoasis.com/forums/transition-from-real-estsate-appraisal-to-real-estate-modeling 

The above posts are the types of things that current students and recent graduates (read Millennials) will quickly find when researching the CRE VAS career.  What do you think most will do?

 Key Takeaways:

  • CRE VAS is great training for 12 to 36 months (BUT have an exit strategy)

o        Be prepared for a lot of “grunt work” at “poor pay”

  • The professional image of the typical CRE VAS firm is generally viewed poorly, as compared with other types of firms:

o        A UF MSRE candidate (Yale University undergraduate) that I knew several years ago, whose entire cohort class had internships at local CRE VAS firms in a wide variety of locations, to an intern, did not care for the less-than-professional grade offices and related professional images that they encountered – none wanted to enter the CRE VAS Industry at the typical CRE VAS firm upon graduation.

o        A more recent UF MSRE who wanted to enter the CRE VAS Industry in South Florida could find no firms that offered health insurance and most were described to me as having “broken chairs and egg crates” to sit on.  He is an analyst with a commercial loan servicer now.

  • Economic opportunity within the CRE VAS Industry is viewed as poor with the following exceptions:

o        Employment at one of the Global-National CRE Services Firms VAS Groups (specifically mentioned were CBRE and Cushman & Wakefield) where low-to-mid six figure CRE VAS incomes were reasonably aspirational.

o        Employment at entrepreneurial/marketing oriented, specialized, and tech savvy boutiques.

o        Longer-term, managing directors/group managing directors (and principals of the more entrepreneurial/marketing oriented, specialized, and tech savvy boutiques) – “the salesman” – who are primarily rainmakers.

Recruiting and retaining quality professional talent in the CRE VAS Industry will, again, prove VERY challenging in light of the career “realities” presented on the Wall Street Oasis website.  A quality work product begins with quality professional talent.

What do CRE VAS professionals do?

  • Research
  • Analyze
  • Quantify
  • Report

This same research and analysis process should be turned on the CRE VAS Industry itself to better understand its current economic dynamics relative to the performance of other CRE professional options for quality new professional talent — and for RETAINING that talent.  A quality work product begins with quality professional talent. 

As I indicated in my previously linked article, Houston, We Have a Problem, research in the form of a “cost approach,” or “feasibility analysis” on the economic viability of CRE state-registered trainee appraisers should be done by one, or more, of the following: 

  • The Federal Reserve
  • The FDIC
  • The Appraisal Subcommittee
  • The Appraisal Foundation
  • The Florida Division of Real Estate/Florida Real Estate Appraisal Board
  • The Appraisal Institute

Based upon my relatively informal research of many MAI/principals around Florida the current fee level is far below an equilibrium required to recruit, train, and retain quality CRE trainee appraisers with the minimum previously researched Aggregate Professional Profile criteria of:

  • A bachelors degree, or higher from an accredited university (AACSB preferred) in accounting, economics, finance, real estate, or related field; MBA degree, plus

A quality work product begins with quality professional talent.

The Project Management Triangle (AKA, Iron Triangle, or Triple Constraint),

https://en.wikipedia.org/wiki/Project_management_triangle, is central to the economic issues of the CRE VAS Industry:

  • Cost
  • Scope/Quality
  • Time

Generally, on the financial side, the CRE appraisal, or valuation product/service, has been commoditized driving the cost down substantially and reducing turnaround times, which, based upon the Project Management Triangle, will substantially erode quality.  This economic pressure also drives down the CRE VAS Industry’s ability to attract quality new professional talent – and to RETAIN that talent.  Economics will largely trump The Appraisal Foundation’s Appraiser Qualifications Board and Appraisal Standards Boards best efforts.  A quality work product begins with quality professional talent.

I have given the above dynamics much thought over the last few years.

Quality must be effectively demanded by and a commensurate professional-level fee paid in order to drive quality upward, that new economic reality would then drive up the ability to recruit quality new professional talent – and to RETAIN that talent, and provide superior risk management tools for financial institutions individually and as a whole.  A quality work product begins with quality professional talent.

The Federal Reserve, FDIC, and other financial regulators could hire enough bank examiners experienced, qualified, and trained in assessing and reviewing CRE valuation reports as to quality and ranking their risk management level.  This could help drive up the demand for true quality CRE VAS products/services at a commensurate professional-level fee.  A quality work product begins with quality professional talent.

Two financial “Carrot and Stick” levers could be engaged to accomplish this goal:

  • The Federal Reserve could raise the reserve requirements of those financial institutions run by lending “cowboys” and “cowgirls” limiting the funds available to lend, lowering profit potential, and lowering the bonus pool and value of stock options.

o        Conversely, those financial institutions run on very sound CRE risk management principles could be rewarded with lower reserve requirements increasing funds available to lend, increasing the profit potential, and increasing the bonus pool and value of stock options.

  • The FDIC could raise deposit insurance premiums of those financial institutions run by lending “cowboys” and “cowgirls” reducing the funds available to lend, lowering profit potential, and lowering the bonus pool and value of stock options.

o        Conversely, those financial institutions run on very sound CRE risk management principles could be rewarded with lower deposit insurance premiums increasing the funds available to lend, increasing the profit potential, and increasing the bonus pool and value of stock options.

Theoretically, this would penalize aggressive, or reckless “cowboy” and “cowgirl” lending behavior and reward prudent lending behavior and risk management; thereby, lowering CRE-related systemic risk.

Capitalism without bankruptcy is like Christianity without hell.

 – Frank F. Borman, II, retired Chairman & CEO of Eastern Airlines and a former NASA Astronaut

Privatizing profits and socializing losses.

A phrase describing how business and individuals can successfully benefit form any and all profits

related to their line of business, but avoid losses by having those losses paid for by society [taxpayers].  Privatizing profits and socializing losses suggest that when large losses occur for speculators or businesses, they are able to successfully lobby government for aide

rather than face the consequences of said losses.

– Investopedia 

I have also thought for many years why the buyer/consumer protection value of an appraisal to help ensure that a buyer/consumer is not over-paying for a property is not advocated by: 

  • The Appraisal Subcommittee
  • The Appraisal Foundation
  • The Florida Real Estate Appraisal Board
  • The Appraisal Institute
  • Individual Professionals

* * * *

 Alternative Case Study:  Superior Selling Skills

 John Henry Patterson . . . NCR . . . and the cash register . . . the product that almost nobody wanted (this, sadly, reminds me of “cowboy” and “cowgirl” lender driven financial institutions and CRE appraisals/valuations to some extent):

*  Honesty store clerks viewed the cash register as an insult to their integrity

  • Dishonest store clerks viewed the cash register as cutting their self-determined bonus program

Before the MBA degree, there was NCR.  Between about 1910 and around 1930, I read, that about 1/6 of US business executives spent some time at NCR.  John Henry Patterson bought what would become NCR in 1882.  He had a knack for hiring good people and then firing them. 

One of the people Patterson hired and fired was Thomas J. Watson, https://en.wikipedia.org/wiki/Thomas_J._Watson, who took what he learned at NCR and built IBM.  Watson created the motto “Think,” at NCR and took it with him to IBM (after Patterson’s death) — that’s where the ThinkPad notebook brand name came from. 

Patterson was the father of professional selling.  There are some interesting articles on him in old Forbes magazines from the 1920s (the USF Tampa library has them on microfilm).  I can’t find any books written by him and few written about him and his methods. 

Your comments, insights, and thoughts ARE solicited. 

You may forward this email at your discretion. 

– Bruce

 J. Bruce Cumming, Jr., BSBA | Real Estate & Urban Analysis | uf

State-Certified General Real Estate Appraiser RZ1639 | f

Licensed Real Estate Broker | f 

941.926.0800 | t

941.926.2880 | f 

813.505.7241 | c

jbcummingjr@gmail.com | e 

Former member, Real Estate Council, Dr. P. Phillips Institute for Research and Education in Real Estate, University of Central Florida (2014 to 2016)

Founding chairman, University Relations Committee, Region X, Appraisal Institute (2003 to 2013)

Former member, Real Estate Advisory Board, Bergstrom Real Estate Center, University of Florida (2006 to 2012)

Former vice chairman, Global Education Research Initiative (GERI), International Valuation Council, The Appraisal Foundation (2009 to 2011)

Former member, Industry Advisory Board, Argus Software (2008 to 2010)

Former chairman, National University Relations Project Team, Appraisal Institute (2007 to 2009)

Former commissioner, Architectural Review Commission, City of Tampa (1999 to 2000)

Reviewer Thoughts & Tips

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.

Reviewer Thoughts & Tips

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.

 

Reviewer Thoughts & Tips

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:)