A Contrary Response to The Future of Valuation
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Recently an article appeared in WorkingRE about the Future of Valuation.
The author is the President of a large and highly respected Appraiser Peer and Educational Organization. My own contrary response was either too lengthy, or deemed too critical of a big advertiser for publication in WorkingRE. I thank the hosts of this blog for granting the space.
My concern with the author’s views starts with the description of our Real Estate Appraisal profession as ‘valuation.’ The concern is more than mere quibbling over semantics.
Valuation is the phrase preferred by the Business Valuation community. They have long been dominated by the AICPA. AICPA and NACVA are some of the most authoritative voices, or expertise within that profession. The American Society of Appraisers (ASA) also offers highly respected training & designation in that profession. AICPA adopted USPAP, but only after tremendous reported internal opposition.
While a respected and necessary profession that shares certain terms with real estate appraisal, the techniques used in Business Valuation analysis or valuation and real estate appraisal are not interchangeable. Not even when they have the same names.
For those that have never taken or studied a NACVA course or studied Business Valuation under an AICPA member, you’ll have to take my word for it. When I worked in the Treasury Department (IRS) exposure to Business Valuation was routine. Indeed taking the NACVA course was a requirement for real estate appraisers in the Large Business & International Division. I make no claims to special Business Valuation expertise, though for several years after I left IRS, nationally known authors in the Business Valuation community as well as NACVA itself were using my site to understand how IRS treated discounts for lack of marketability (DLOM) in Business Valuation analyses. IRS, out of embarrassment, finally published their own page on this, using the exact information I had obtained from them in the first place – but that’s another story. This brings us back to why I ‘quibble’ over the semantics of how we describe ourselves.
I’m an appraiser. Specifically, I am a real estate appraiser. I am not confused about what my standards are, or who my clients are. My professional services are not commodities to be traded in bulk by Appraisal Institute (AI) owned, operated, ‘advised’ or managed national AMCs. I provide individual professional real estate appraisals in accordance with the laws and customs of the United States of America. Not for foreign investors comfort when investing in bundled securities.
I’m not sure ‘what’ the author is anymore. I know he is an MAI. I know he leads The Appraisal Institute. I know MAI’s have always been (among?) the acknowledged experts in Commercial and industrial appraisal – but that was back when they WERE real estate appraisers. I’ve always thought their courses were among the best, if not THE best in the country. Now I’ll have to double check everything to separate propaganda & fads of convenience from real education.
Some of their C&I folks helped ‘commoditize’ residential real estate appraisal. Though even before that, the MAI macro approach to real estate analysis was often overly broad when applied to specific individual houses. The article infers form appraisal reports are inferior to narratives. My experience in reviewing narratives is that much like the old essay questions in school. They allow a lot of relevant data to be omitted with no one other than a trained appraiser being the wiser. Throw in a bunch of charts and graphs of dubious relevance and no one even notices that the hypothetical condition of some outrageously impossible claim is completely unsupported. Or that H&BU though defined, was actually omitted.
One advantage of forms over narrative formats is that MISSING or BLANK sections are instantly apparent. Or they are to us Luddites.
Business Valuation is far more concerned with the actions of Wall Street, and international exchanges than it is with the actions of Main Street in Enid Oklahoma, or Hudson Beach Florida, Oriskany NY, Grand Junction CO, or Pacoima CA.
The Business Valuation ‘evaluator’ will start with the premise of what Wall Street “requires” as a return in order to project “market rents” for a property. The real estate appraiser will go out in the neighborhood and find out what people are actually paying. As one of my former IRS (MAI) associates who was also a former Board Member of the AI describes it “The blue smoke and chicken bones approach” when applied to a specific individual real estate interest. Apologies to Business Valuation folks! We luv ya, just don’t comprehend your language or thinking!
REAL ESTATE APPRAISAL is less concerned with Wall Street and more concerned with Main Street, USA.
The argument about commoditization, (commodities by the way are in the realm of Business Valuation Analysts) and even more importantly the one about whether a “value today” serves the needs of “the client”, or whether some other form of ‘valuation product’ is needed, go right to the core of this issue. You see, people that promote Mr. Coyle’s specific argument have ceased being concerned about your local bank, FNMA or even the U.S. pension fund that invests in real estate as being “the client.” THEIR argument anticipates that foreign investors in bundled securities or other interests have now somehow become the client. You know. The ‘too big to fail’ over in Germany, France, the U.K., Netherlands, etc.
This article is less about growing with the times or “progressing” in our views of how real estate is “valued”, or the use of new technology and mega data, than it is about the intended future direction of The Appraisal Institute. A very select few are clearly going to become international RE/BV Future Value Analysts. Not mentioned in this specific article, but made abundantly clear at the last TAF/ASB meeting in Redondo Beach in June of this year, the AI sees the need for “a very few” ‘valuators’ to be allowed greater flexibility in international markets. That’s why they seek alternate standards to USPAP. That is why they want contingent fees to be allowed. At least, that is what they testified to at the hearing.
So they can compete on an equal footing with other international investors. You know, Folks for whom mordida or baksheesh or ‘contingent compensation’ are not prohibited.
As for “massive data” being the wave of modern appraisal, I don’t think so. With massive data comes massive error. Just look at FNMA’s database, the one used to compare adjustments of “peers”. They admit that for decades appraisers adjusted to THEIR artificial guidelines rather than market. How then can their database have anything OTHER than erroneous adjustments? Banking’s never ending hope to replace appraisers with databanks reminds me of Monty Python’s search for the Holy Grail. It’s not going to happen.
While they often make the claim of being the voice of appraisers in America, the Appraisal Institute is NOT. In fact they quite often act AGAINST the interests of appraisers in America other than a very select few in their own organization.
I’d like to hear the views of those from ASA, NAIFA, NAREA; & Right of Way Appraisers, Agriculture Appraisers, Assessors, Review Appraisers and the many dozens of OTHER voices of appraisers in America today. We are far more in number, and have many more divergent opinions than those of only the Appraisal Institute.
Again, for the record, the AI does NOT speak for most of us. We respect them, but have not appointed them to be our spokesperson on appraisal issues. Let’s please stop conflating AI goals with American Appraisers goals.