Welcome to Life as an Appraiser in 2014
I want to meet the lucky appraiser these days who is getting all of the easy appraisals.
Welcome to life as an appraiser in 2014. It seems every appraisal has time constraints, distance constraints and knowledge constraints. I want to meet the lucky appraiser these days who is getting all of the easy appraisals. Surely it can’t be lenders just getting an AVM. If lenders are using AVMs, the lack of quality comparables out there would lead to lenders just fooling themselves and relying on loss ratios again. You would think someone would say: been there, done that and got hammered. Unfortunately, some of the problems in the market with comparables are similar; mainly junk in, junk out. Another way of saying that would be: bad comparables in, then bad analysis out. In many of the market areas that I am in, it appears to have stabilized; however, these markets are still sluggish with few sales. We still don’t have the upward mobility in the market. The majority of people still don’t take the risk to sell their property and move to a larger home. Even the standard, arm’s length, conventional sales appear to have some distressed background.
So if you do get a standard home to appraise, it becomes difficult to find the quality comparables to justify value. Get used to it, because our profession might be dealing with it for a long time. The only method of protection for the appraiser today is education and time to complete a quality appraisal. At some point in time the market will have to adjust and pay for the amount of professionalism and time to complete the assignments. The government has forced the appraiser to produce a better product, and somewhere down the line they will need to contemplate a cost/value analysis of the product they desire. I believe the scope of work has helped us out tremendously, and we as a profession have to become more proficient in utilizing the scope of work tools to complete work assignments in a competitive marketplace. A word of caution: make sure the client is clear in what they are asking for and receiving.
The three basic items to remember are:
- How do your peers complete appraisals?
- What do your lenders/government look for in a report?
- Is there a correct way to accomplish the appraisal? We definitely need more interaction among our peers to keep in tune with what’s going on.
In reviewing appraisals some of the main concerns are as follows:
- Neighborhood description
- Market analysis and condition
- History of sale
- Lot value
Obviously, there are some other items, such as crazy adjustments and condition adjustments; however, I’ll address a few of those items.
Many of the residential appraisers like to clone this section of the appraisal. Some portions of this description might be able to be cloned. If you completed another appraisal in the subdivision, much of it could be cloned. I have trouble with this section not having real neighborhood discussion. Urban, suburb and rural generally would not have the same description. Does subject back to a highway or railroad and could that be a factor in the valuation of the property? We might see the same description in two appraisals in two separate cities or completely different type of neighborhoods. The style of homes that are in the area, site sizes, distance to commercial or interstate and industry in the community are important items in describing a neighborhood. Is subject near the median in value; if not, is there external depreciation possibly applicable? Does the subdivision have amenities such as a common lake, pool or golf course? Is the subdivision compatible to the area, or is it an over-improvement? Again, this might or might not be an over-improvement for the area.At least discuss the neighborhood particulars.
MARKET ANALYSIS & CONDITION
I have to admit, I am not a fan of the market condition addendum. I believe most of the time we don’t have enough compatible properties to have a quality statistical analysis. The market area can be expanded so there are an ample number of compatible sales and listings, but variations in neighborhoods can distort the analysis.
The market condition addendum does not relieve the appraiser of the duty of developing some type of an analysis regarding a property’s market conditions. We usually do a year-to-year analysis of the overall market area to see if the median sale price has changed significantly. We also look at any considerable change in the days on the market and number of sales.
Other items we might discuss in a market analysis are the availability of funding, REO or short sales in the market. Some of this information can be cloned from appraisal to appraisal; however, with every report there is going to be new data for the market. Without doing some type of analysis, how can an appraiser state whether a market is inflating, stable, or declining? There have been market areas where no one is selling property. Some markets have only REO or short sales. Again, discuss this and describe why you believe this is a distressed market.
Obviously zoning is an important issue. Single Family Residential might not be specific enough in the classification or the description. Most of the forms ask for a zoning classification, which might be R1, R2, etc. We are then asked to provide a description of that classification, such as single family residential, 10,000 square foot minimum site. The main issue with zoning may occur with older homes. If an older home is significantly damaged, the site’s zoning might not allow the same type of structure to be built or same usage of the property. Most zoning descriptions provide the minimum lot size allowable for the usage or structure. Most communities are on the internet with their zoning, and the appraiser is responsible for checking the site. If no website is available, you need to contact the municipality or county. Zoning of a commercial or multi-family property is imperative to developing highest and best use. If a commercial appraiser is not obtaining the correct zoning or making the hypothetical that the zoning is correct for the usage, this would be a major problem at the commission level. If your community is not making it easy to get zoning information, I suggest you become active and make it easy to get the information. There is no excuse if you just have “single family residential” under the classification when the governmental body has specific classifications.
I realize some counties are nondisclosure; however, they all keep a record if the property has transferred. We are required to give a transfer history of the subject property and comparables. MLS will give us some information; however, research needs to come from the county records. It’s black and white. You either did it or didn’t do it. It is a violation by not having the information. It is a possibility that your county might not be up-to-date with the information, which is why they ask the date of the source. The larger counties give the date of the source on the internet. You might want to ask the assessor’s office how often they update. You’re only as good as your source. This is particularly true for a property that may have been “flipped.” I believe many lenders look for any excuse so they don’t have to take the blame for a bad loan. If a property has a large difference in the current sale price or refinance value and a previous sale price, you are supposed to explain the variation. The more description you provide, the better. Protect yourself. A thorough description is your best defense if a loan goes bad and the owner of the note wants to send the appraisal report to the commission. Incorrectly cloned information and a mostly generic description does not help; it only makes the appraisal more difficult to read.
Even if you are not doing a cost approach, you are still required to provide a land value. Most of the time, it would be difficult to complete a cost approach effectively if you did not complete an accurate lot valuation. A site valuation should benefit any necessary lot adjustments in the sales comparison approach. That being said, providing the assessor’s valuation of a site is not an appropriate method for site valuation. The assessor’s opinion on site value might be a good viewpoint if you have a quality assessor, but should only be a viewpoint. Many appraisals state you have completed an extraction approach. Have you really? Many of the lot values we see at the Commission level are ridiculous and have not been achieved by any approach. Go back three years and get some comparables. If there are only a few sales, you will probably use them over and over again. Document them in the appraisal with MLS numbers or sources of the sales information. Was the location and price point for the area similar, topography similar, utilities similar and size similar, and should there be a date of sale adjustment? If you’re in an area where homes are being razed to build larger homes, don’t just take 20–25% of the value and say it is the land value. If you see a newer home in an older, fully developed area, check as to what the original home or lot sold for. A property’s zoning, sale history and lot value are fundamentals for an appraisal report. The basics for an appraisal can be simple, and will help create a better report.
I believe appraisers will always be better than AVMs; however, lenders will continue to push for them because they are faster and cheaper. Putting too much emphasis on AVMs will get the lenders burnt again. It is my belief the best tool an appraiser can have is common sense. Naturally, education, sources and writing skills are necessary; however, the best guide is common sense. Know your limitations and act accordingly. If an appraisal assignment becomes too difficult, either get help or withdraw from the assignment.