Tag Archives: appraisers

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


Mann Overboard

RITE-AID FILES BANKRUPTCY

AUGUST 26, 2023 – Hopefully, it is a full liquidation bankruptcy and its 2300+ stores are closed down. For 30+ years, I have wondered why shareholders didn’t complain about the drugstore chains paying 500%-1000%+ too much for their real estate. The excuse that the business profits would make up for the real estate losses was BS.
I am aware of a situation about 25 years ago where one of the chains wanted a rural site that was worth about $100,000. They gave the site selector instructions to buy at any cost. The farmer that owned it didn’t want to sell and turned down offers of $3 million, then $4 million, on up to $10 million!!!! The market turned down and they ended up not buying any site in the area. But, to be willing to pay ANYTHING for a $100,000 piece of property was insane.
This bankruptcy may be due to the opioid lawsuits. But, it is needed just for the stupidity of real estate purchases over the past 30+ years.
There are modern day companies doing the same. Some pay too much and others land lease at obscene rates. A few years ago I reviewed an appraisal report where one big-name c-store leased a parcel of land that was just bought for $800,000. The capped land rental was $6mm!!!!! Again, why pay a rental rate that is 7.5x market!?!?!? I probably won’t be around to see these companies go bankrupt.
Call me insane for thinking you can buy your real estate at market AND have a profitable business.
Lastly, I hope all the appraisers that use 0% Vacancy for these national tenant leases realize how stupid that is. As I have said for decades, large companies have the best lawyers and can get out of leases easier than local tenants can. Divide the number of store closures over the past 20 years by the number of stores in the country and you probably have a good vacancy factor to use for these leases.
One of the reasons big-time investors have consistently overpaid for real estate by about 20% for the past 30+ years is assuming no vacancy loss. The other two items they underestimate in their assumptions are expenses and cap rates.
If appraisers really wanted to ‘reflect the market,’ they would come in 20% below the purchase prices for national tenant properties. Easy to do by using a realistic 5%-10% vacancy and 100bp higher cap rate.
Alas, it won’t happen. Market Price is what the market wants and what appraisers provide. At least we know for this property type, Market Value is 20% lower.
Shalom,
The Mann

Mann Overboard

FANNIE MAE STUDY CONCLUDES NO RACIAL BIAS IN APPRAISALS

MARCH 12, 2002 – Now, two studies of millions of appraisals by the American Enterprise Institute (AEI) and Fannie Mae have concluded that there is no racial bias in real estate appraisals.
For those involved in the industry, this comes as no surprise. It is essentially impossible for real estate appraisers to be biased. Probably 95% of the time the appraiser knows nothing about the physical characteristics of the borrower. Nearly 100% of the time the appraisal reviewers know nothing about the borrower. And ALL appraisals must be approved by a reviewer.
Also, the market sets prices and all appraisers do is analyze recent comparable sales and arrive at a value for the subject. Which, in purchase situations, is equal to or higher than the sales price 95%+ of the time.
Racist organizations like the Brookings Institution and others that are falsely complaining about appraisal bias need to ‘follow the science’ as they like to say. Scientific studies 100% conclusively say there is no appraisal bias.
Maxine Waters and President Biden owe the appraisal industry an apology. And so does the Appraisal Institute for not supporting its own members.
The real estate appraisal industry is the gold standard for an unbiased profession. We have been the independent referee for 80+ years.
Lastly, we all know about the Fair Housing Act, redlining, discrimination being illegal, et al. To say we need to be educated about such is ridiculous. If you have lived in America since the 1970’s, you know all about fair housing laws and what is and is not discrimination.
The true racists are those that accuse everyone else of being racist. These people need to be exposed and told where to stick their unfounded claims. They should be sued for slander and defamation, also.
Hey, Appraisal institute, get a backbone and stand up for your members! There is no legislation that can change 4,000+ years of economic theory. The appraisal industry does not need to make any changes. It is already fully diverse and inclusive of people of all socio-economic classes (I grew up in mobile homes and am Jewish….I have the low-priced housing and minority characteristics covered!). Remember, skin-color and the only two genders have nothing to do with diversity and inclusivity.
Shalom,
The Mann

Mann Overboard

STUDY CONCLUDES THAT APPRAISERS ARE NOT BIASED

JANUARY 8, 2021 – The American Enterprise Institute has published a study about the possibility that appraisers have intentional or even unintentional racial bias.  Their conclusion is:

We conclude allegation that knowing the race of the applicant results in racial bias by appraisers on refinance loans is uncommon and not systemic. This same analysis supports the conclusion that unintentional bias based on race is also uncommon and not systemic.

You can find the article and link to the report at:

How Common is Appraiser Racial Bias?

It would be nice if the racially biased Brookings Institute would issue an apology to the appraisal industry.  But, racists have an agenda and do not apologize.  Thankfully, there is access to actual data and entities like the AEI can analyze and report the facts.

Basically, it is simply impossible for the appraisal industry to be racial or gender biased.  Probably 99%+ of the time appraisers know nothing about the physical characteristics about the borrower in residential transactions.  Also, every appraisal report is reviewed and I would say near 100% of the time the reviewers know nothing about the borrower at all.

AVMs are often used in the residential arena and they know nothing about the borrower nor the subject’s neighborhood, et al.  To them, data is data.  Finding the best comparables is based on analyzing numbers.  That simple.  And for the most part, it is the same for human appraisers.

There is one group of people in real estate that can have significant bias.  I won’t name them.  You can probably figure it out.  There might actually be a few groups involved in this arena that can have bias.  That is not to say it is widespread and rampant.

For those who want to keep the ‘conversation’ going, provide the AEI report.  You will see how fast the other side wants to stop the conversation and change the subject:)

Great work AEI.  I hope they will now do a study about the 20 million whites that live in poverty and see what it is about their neighborhoods that is common and how action can be taken to improve their standard of living….and housing.  At the same time, I am sure those solutions can help everyone that lives in poverty.  Remember, poverty is colorblind.

The Mann