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.

Reviewer Thoughts & Tips

APPRAISER SELECTION PROCESS

NOVEMBER 26, 2023 – I received the following question from a staff appraiser with a bank. My answer follows his email.
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I am looking for direction/clarification on the regulations that discuss how an appraiser should be selected (specifically for commercial FRT’s). I work in the appraisal department of a bank and I need to prepare some internal policies/procedures/discussions on selecting an appraiser to engage. Many lenders feel they should be provided three choices and allow them or their customers to select the appraiser based on the lowest fee or the quickest turn time for the appraisal. They think that all that should be done is to not disclose the appraiser names and everything will be okay. However, my interpretation is that the appraiser should be selected based on their experience with the property type and the location in which the property is located. The regulations never appear to be direct enough, or all in one document to show how allowing lenders or borrower to participate in the selection would be viewed by bank examiners and regulatory agencies.
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We start with the following requirement from the 2010 Interagency Appraisal and Evaluation Guidelines (IAEG):

An institution’s selection process should ensure that a qualified, competent and
independent person is selected to perform a valuation assignment. 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 other pertinent quote follows:

Moreover, the Guidelines stress that an institution should not select a valuation method or tool solely because it provides the highest value, the lowest cost, or the fastest response or
turnaround time.

Besides independence, the next most important item is to select an appraiser (or evaluator) that is competent in regard to the property type and subject market. That much is a given. There is no gray area.

So, the question becomes how can we BOTH select a competent appraiser AND allow the loan officer (and usually the borrower) to select from among several fee quotes?

Financial institutions accomplish this by bidding assignments to a group of competent appraisers. For example, the subject is a basic 5,000 SF, owner-occupied warehouse in a city of 100,000 people. It is likely the financial institution has 3 or 5 or more appraisers on their approved list that are competent to appraise this property in this market. So, we send out an RFP to three appraisers. All are equally competent to perform this assignment. We get the following bids:

Appraiser A – $2,500 / 3 Weeks

Appraiser B – $3,000 / 2 Weeks

Appraiser C – $2,000 / 4 Weeks

Over the past 3 decades, 95%+ of the banks and credit unions I have worked with forward the quotes exactly as shown above to the loan officer. The key is to not disclose the appraiser names. Borrowers and loan officers cannot suggest appraisers to use or not use. But, examiners and regulators are ok with them choosing from the anonymous quotes shown above.

Have we met the requirement of engaging a competent appraiser? Yes.

Have we helped the loan officer (and borrower) have enough information to make a time and price decision? Yes.

Are the examiners and regulators ok with this process? In my 30+ years of being involved in the appraisal process with financial institutions, I have not heard of a single objection.

There are two keys to making this acceptable:

  1. You can show that you only bid the assignment to competent appraisers; and,
  2. You do not disclose the appraiser names when sharing the bid information with the loan officer.

Maybe you are asking what the other 5% of financial institutions do. It may be less than that actually. This small group includes how I did things when I was Chief Appraiser. The appraisal department selected the best bid to go with. When requesting an appraisal to be ordered, the loan officer would let us know if time or cost was more important. This method speeds up the process and also allows us to spread the work around to the approved appraisers. The appraisal time is delayed when the loan officer/borrower make the selection. I have seen delays of weeks or longer. Also, through the blind selection process one appraiser may get too many assignments at once. Some appraisers have a habit of always bidding low and quick, even when swamped with work and knowing they cannot meet their deadlines.

As usual, feel free to send me follow-up questions. Or suggestions to add to this post or clarify something I said. My email is GeorgeRMann@Aol.Com.

The Mann


Reviewer Thoughts & Tips

STATE OF WASHINGTON ALLOWS NON-USPAP EVALUATIONS

JULY 2023 – The following is from the Appraisal Institute’s ‘Washington Report & State News.’ A big welcome to appraisers in Washington finally being able to perform non-USPAP Evaluations.
“Washington Gov. Jay Inslee on May 15 signed HB 1797, legislation that allows real estate appraisers to complete evaluations for federally regulated financial institutions. It was amended to include a “trigger” mechanism whereby the bill will not take effect until the state adopts administrative rules related to fair housing and valuation bias established by the Department of Licensing that require appraisers and appraiser trainees to complete nondiscrimination and fair housing training as dictated by the Appraiser Qualifications Board. “

Mann Overboard, Reviewer Thoughts & Tips

IT IS TIME FOR APPRAISALLAND TO FACE REALITY

FEBRUARY 3, 2023 – As I review appraisal reports, I continue to see appraisers remain in the fantasy AppraisalLand regarding cap rates and values. When asked about declining values and increasing cap rates, I get the NIMBY reply. No decline in our market. Must be occurring everywhere else:)
Although the GreenStreet CPPI is for investment-grade properties, it is still an indicator of the overall CRE market.

file:///C:/Users/Owner/Desktop/2023%202%20Feb%202%20-%20GreenStreet%20CPPI%20update.pdf

Overall prices have declined back to pre-pandemic levels. Have you been adjusting 2021 and 2022 sale prices downward at least 10%-20%? Have you been using cap rates 75-100bp higher than those shown in 2021 and 2022 sales? Are you forecasting residential lot and home price declines of 10%-20%+ (should be WAY more for finished lots) over the next 1-2 years? Have you adjusted absorption rates in 2022 downward 50%-75%+?
As me and my wife have joked for decades, in AppraisalLand every subdivision sells out quickly….office buildings in markets that literally haven’t seen vacancy rates below 10% since the 1980’s will lease up to 95%…on and on. Vacant land that has been for sale for 30 years will have a marketing time of 12 months. AppraisalLand is a very, very happy place to be in lol
It is up to reviewers to start pushing back hard on conclusions that don’t reflect current and future market conditions. Market Value is based on looking forward thru the windshield, not looking in the rear-view mirror. Data from the rear-view mirror must be adjusted to reflect current and future market conditions.
The above has been a broken record for my entire 36-year career. You would think the industry would learn from past cycles and change quickly when the market changes. It is not acceptable to wait until sales data is available to show the decline has occurred. Sales volume dries up in a declining market. By the time you have sales data the bottom has probably occurred and the market is starting to turn up. Reports like this one from GreenStreet provide the data needed to reflect current and upcoming market conditions. The data proving a decline has occurred and may continue is readily available. Use it.
I have a dream that one day AppraisalLand will no longer exist.
Shalom,
The Mann

Mann Overboard, Reviewer Thoughts & Tips

STEP 3 IN THE HOUSING MARKET HAS OCCURRED

OCTOBER 3, 2022 – My June 14th post about Step 2 occurring said it would be easy to look back in 3 months and see that the housing market had peaked. Sure enough, 3 months later everyone can now see a top is in place and a correction has been well underway.
Step 3 is an acceleration in the slowdown of price appreciation. A summary of indicators follows.
The American Enterprise Institute’s (AEI) Home Price Appreciation (HPA) Index peaked at 17.0% in March and declined to 11.3% in August. AEI projects it will decline to 4%-6% by December.
The S&P Corelogic Case-Shiller House Price Index fell 0.4% on a month-over-month basis in July for the first time in 10 years. On a year-over-year basis, the increase in home prices decelerated by the most in the index’s history, said Craig J. Lazzara, managing director at S&P DJI.
Lastly, the FHFA House Price Index dropped 0.6% in July vs. June.
These are early signs that Step 4 will be upon us sooner than later. That is when the annual change goes from appreciation to depreciation. With mortgage rates soaring towards 7% the decline in home prices is more certain than ever.
What will baffle people is the continued low supply of available housing combined with prices declining. As I have long said, you don’t have to buy, but often you do have to sell. With a lack of buyers, sellers will continue to lower prices. In September, the number of households likely to buy a house in the next 6 months fell to its lowest level since 2010.
Shalom,
The Mann

Mann Overboard, Reviewer Thoughts & Tips

HOUSING MARKET SHOWING SIGNS OF TOPPING

APRIL 14, 2022 – The housing market has been incredibly strong since the pandemic started two years ago. Prices are increasing at a record pace. The supply of houses for sale is at an all-time low. Of course, what goes up, must come down. But, when…Tops in financial markets take awhile to form. Bottoms are usually a spike panic low – a V-shape.
We are starting to hear of markets where list prices are being lowered in mass. With mortgage rates up from around 3% last Fall to 5% this week, the number of potential buyers has dropped by many millions.
It will take awhile for the momentum to slow, stop, and then reverse. But, the signs of this occurring are in place and starting to mount.
One leading indicator I follow peaked in the 1st quarter of 2006. This was a full 2.5 years before the Lehman Brothers event the public recalls as being the start of the last recession. Of course, the recession started in 2005 and 2006 and Lehman Brothers (and others that went under) was the end result of the decline that had already occurred. In fact, this indicator bottomed in the 1st Quarter of 2009 and turned up from there.
This same indicator peaked in early December 2021. It has declined 29% since then. That doesn’t mean home prices will decline this much. (For perspective, the leading indicator declined about 85% and house prices declined about 30%.) It just suggests a peak in the housing market is on the horizon. The Case-Shiller U.S. National Home Price Index topped out at the end of the 2nd Quarter in 2006. Just a few months after the leading indicator suggested it would. I think the current momentum is too strong to have prices turn down this year. In fact, it will be tough to have prices turn down next year. But, it is now a decent chance of occurring.
Economists will confirm that as the housing market goes, so goes the overall economy. If the housing market slows done and rolls over, expect the same for the national economy.

Shalom,

The Mann

Reviewer Thoughts & Tips

APPRAISAL REVIEW QUESTION

FEBRUARY 22, 2022 – I received the following question:
Q: If I as a bank appraiser chose to do an in-house appraisal, will it need to be reviewed? If so, what is the benefit and why not just use one of my vendors?
As appraisals are rarely done in-house, I have never thought about this situation. I contacted the Regulators and received the following answer.
A: When the residential threshold was increased it also amended the agencies’ appraisal regulations to require regulated institutions to subject appraisals for federally related transactions to appropriate review for
compliance with USPAP. This became effective January 1, 2020 and is now part of the regulation. As such, a bank can be cited for a violation of law if the review is not completed.
We do not dictate who performs the review only that the reviewer is competent and independent of the transaction; the reviewer can be from the same appraisal department as the individual who performed the appraisal. The bank may perform the review internally or out-source the review.

Now we all know. As always, feel free to ask me any question regarding FIRREA. If I don’t know the answer, I will find it out.

Stay well and safe out there,
The Mann

Reviewer Thoughts & Tips

DATE OF VALUE DIFFERS FOR APPRAISALS AND EVALUATIONS

JANUARY 8, 2021 – It only took the Interagency Appraisal and Evaluation Guidelines (IAEG) document being out for a full 10 years for me to be made aware of the difference in Date of Value for Appraisals versus Evaluations.  As they say, you learn something every day!

For Appraisals, the IAEG states:

The estimate of market value should consider the real property’s actual physical condition, use, and zoning as of the effective date of the appraiser’s opinion of value.  (emphasis added)

In my 35 years of doing appraisals and appraisal reviews, the ‘Date of Value’ has always been the last date the appraiser(s) inspected the subject.  Usually, there is only one inspection and that is the Date of Value.  Of course, this is for Market Value and Market Value ‘As Is.’  We are not talking about prospective values.

For Evaluations, the IAEG states:

Provide an estimate of the property’s market value in its actual physical condition, use and zoning designation as of the effective date of the evaluation (that is, the date that the analysis was completed), with any limiting conditions.  (emphasis added)

‘The date that the analysis was completed’ is what us valuers call the Date of Report.  The Date of Report can be the same as the Date of Value, but that rarely occurs.  For appraisals, nearly 100% of the time the Date of Report comes after the Date of Value.

In conclusion, the IAEG wording indicates that the Date of Value for an Appraisal is what it has always been.  However, the Date of Value for an Evaluation is the Date of Report.

For Evaluations, I have always assumed the Date of Report was also my Date of Value.  I am not sure why.  I just felt that my analysis did indeed go thru the day I was finishing the Evaluation.  So, that was my Date of Value.  Blind luck I guess.

As an aside, it has been suggested that Evaluators add an Extraordinary Assumption to their Evaluation Report that assumes no material changes have occurred between the date the subject was inspected and the Date of Report.  Probably not a bad idea.  I won’t digress into my rant that I don’t like including Appraisal/USPAP items (e.g. Certification, Hypothetical Conditions, Extraordinary Assumptions, et al) in Evaluations.  It’s your Evaluation, do what you want to CYA.

Lastly, I have checked with the Regulators and sure enough this is a difference that was overlooked.  Hopefully, in the next revision this will be addressed.

Happy New Year!

The Mann

 

Reviewer Thoughts & Tips

GEORGIA CLARIFIES LAW ON EVALUATIONS

SEPTEMBER 26, 2020 – The following is from the Appraisal Institute’s Washington Report:

The Georgia Real Estate Commission & Appraisers Board on July 30 adopted a rule change that “eliminates language that has caused confusion in the industry concerning when Georgia appraisers can conduct evaluations.” The change addresses the reporting format for evaluations that are prepared by appraisers for financial institutions that are not regulated by a federal financial institution’s regulatory agency.
The previous rule stated that evaluations are allowed to be “prepared in any reporting format, such as, but not limited to, a self-contained appraisal report, a summary appraisal report and a restricted use appraisal report if the reporting format meets the requirements of the nonfederal financial institution.”
The updated rule, which took effect Aug. 19, removes specific references to the transactions for which an appraiser may provide an evaluation, stating instead that appraisers can provide evaluations “for any transaction that qualifies to be performed as an evaluation under the Interagency Appraisal and Evaluation Guidelines.”
The rule also eliminates enumeration of an evaluation’s required content in favor of language that states, “at a minimum, the development and content of an Evaluation Appraisal shall comply with the guidelines set forth in the Interagency Appraisal and Evaluation Guidelines.”
Mann Overboard, Reviewer Thoughts & Tips

THE APPRAISAL OF REAL ESTATE – 15TH EDITION

SEPTEMBER 26, 2020 – The Appraisal Institute has published the latest edition of the industry’s bible.  I will let them describe noteworthy items in the new edition.  See below.  You can purchase it at their website.

“The Appraisal of Real Estate,” 15th edition, is a book that fits current times. It reflects a renewed commitment to the essential principles of appraisal and the sound application of recognized valuation methodology. In addition to updated information on changes in real estate markets and valuation standards, longtime readers of “The Appraisal of Real Estate” will notice these significant changes in this edition:

  • New chapters focused on applications of market analysis and highest and best use analysis;
  • Additional emphasis on identifying the property rights to be appraised in an appraisal assignment; and
  • Deeper discussion of accepted techniques for allocating value among real estate, personal property and non-realty items.

In this book, readers will notice the expanded discussion of market analysis and highest and best use, with new chapters clarifying these important concepts and demonstrating procedures for their application. Readers will also notice the relationship between market analysis and highest and best use is made explicit and described in a step-by-step analytic procedure. Lastly, the major development in this new edition is the emphasis on the necessity of definitively describing the property rights to be appraised in an appraisal assignment to ensure that all the necessary steps are taken to produce a credible value conclusion.

Order your copy today!

Reviewer Thoughts & Tips

WELCOME SOUTH DAKOTA TO THE EVALUATION WORLD

JUNE 29, 2020 – South Dakota has become the 11th state to allow licensed/certified appraisers to perform non-USPAP Evaluations.  We have 39 more to go:)  When we get back to in-person classes, if you are in a state that allows non-USPAP Evaluations, I have a 7-hour seminar on Evaluations and Validations that I will gladly come and teach.  I don’t teach over the web.  I can only share my 28 years of experience with Evaluations in person.  The Appraisal institute’s news item on this follows:

South Dakota Passes Legislation Allowing Appraisers to Perform Evaluations

South Dakota Gov. Kristi Noem on March 4 signed HB 1127, legislation that allows appraisers to provide real property evaluations to federally regulated financial institutions. When the law takes effect July 1, the state will join at least 10 others that allow appraisers to provide evaluation services. Several other states are considering similar laws.
Evaluations provided by appraisers must conform to Interagency Appraisal and Evaluation Guidelines. South Dakota’s secretary of the Department of Labor and Regulation will be authorized to promulgate rules relating to “exemptions and standards allowing appraisers to perform an evaluation for a federally insured depository institution.”
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Everyone stay safe.
The Mann