We are fairly near the end of the continuing education cycle for appraisers in my home state of Pennsylvania. Among other topics, I’ve been presenting changes to laws and regulations, which include the new Appraisal Qualifications Board (AQB) standards that go into effect in January 2015. You can find the regulations here: http://www.appraisalfoundation.org/
The overwhelming response from existing appraisers is: “Do they just want to make us go away?”
The new requirements will include a bachelor’s degree, as well as — in most states — 2,000 hours of experience under a state-certified appraiser (the number of hours varies, but the requirement to gain experience under a state-certified appraiser is found in all states), plus another 75 hours of specific appraisal classes, including the 15-hour basic Uniform Standards of Professional Appraisal Practice (USPAP) course.
CHANGE—THREAT OR OPPORTUNITY?
I had the opportunity yesterday to do a webinar for the NAR Appraisal Section, for the RAA and GAA members. The webinar was: “Beyond HVCC”, and for me, it was fun to do because it was positive and embraced change. I certainly know how HVCC has turned appraisers’ lives upside down, as well as agents. But this gave me an opportunity to talk to appraisers about their business and how to think about their business in a different way.
Appraisers traditionally have not had to market the way agents have. An appraiser got established, got on the ‘lists’ of lenders, and the work came in. Lenders shared lists, and life was good. Occasionally there was a bump in the road if your favorite lender merged, closed, sold out, or your best contact there got another job, or retired. But pretty much, for many of the years I was doing lots of residential appraisals, the work just came in.
It’s a different world today; there’s pressure on fees, on turn-around time, and competition. To that end, in the webinar, I talked about ideas of other types of appraisal work that appraisers can pursue. Successful agents are into niches; appraisers should be as well. And the successful agents who get into niches realize that they are picking their own clients, instead of the other way around.
The ideas I brought forth were all types of appraisals, or types of value, or specific clients or situations. We talked about everything from learning how to do appraisals for trust work to assessment work. NAR will post the webinar shortly on their site, for interested viewers; the first time through it was available only to RAA and GAA members.
In my career, which is now primarily trainer/writer as opposed to appraiser/ agent, I find it is useful to be able to communicate to both groups. Agents don’t understand always what appraisers do; appraisers have (up until now) been able to avoid defining their market and pursing it. I still have both an associate broker’s license and an appraisal certification. At one time, I took any work in either field I could get. But when you do that, you end up either bored, resentful or both. It’s better for your clients—and much better for you—if you can focus on the work you really love—and do an outstanding job.
This world of real estate is not the one I entered in the mid 1970’s—it’s much more challenging; requires more skills; has more competition; and is simply not as easy as it used to be. But these changes are an opportunity to grow—and prosper.
I just finished my month as the “Ask the Expert” for REBAC. Since I am also an appraiser, valuation questions were my assigned topic. First of all, I have to say it was so much fun I’d do it again –in a heartbeat! Second of all, I was very impressed by both the thoughtful questions I received and the obvious genuine desire on the part of agents to understand pricing and valuation, and do it right.
There were some themes that several questions returned to, so I’m going to recap here (not word for word), one of the major issues, in an effort to help both sides of this aisle—the agents and the appraisers.
Without a doubt, one of the number one myths some agents have is that appraisers don’t ‘count’ finished area below grade. We most certainly do! The big issue is an understanding of Fannie Mae guidelines. When I teach anything to do with financing or appraising to agents, I always refer to Fannie Mae as the ‘eight hundred pound gorilla’. That’s because it is—in the sense that most residential mortgages are going to be done to Fannie Mae guidelines. The application will be taken on a Fannie Mae form; the borrower will meet Fannie Mae Guidelines; the appraiser will be asked to complete a Fannie Mae Appraisal Form (including, these days, the troublesome 1004MC) and the appraisal must be done to Fannie Mae Guidelines. Fannie Mae has always had the same position on square footage: the appraiser is to measure the exterior of the house above grade to calculate the living area. All of this area must be totally above grade. So, if the house is a split, or a bi-level, or another local term you use for a home where part of the living area is below grade—it doesn’t count—in the above grade living area. It does count as “finished area below grade”. This usually gets the ‘but what if’ questions, as in: “What if the house is walk out at the rear?” Answer: “What is the front like? In the typical walk out at rear house, the opposite side is either completely or partially below grade, depending upon the grade of the lot. This particular issue causes a lot of ill will between appraisers and agents. Here’s the agent side, possibly learned at the feet of the broker: “We are selling finished square footage, so count it all and put it in the MLS. Don’t measure the house, that is too risky!” My answer: “Hello????? You are competent enough to take and pass a real estate test and you don’t think you can measure the outside of a house? Get a grip!” Furthermore—by ‘counting’ all the square footage and putting it into the MLS that way, you create false information for an appraiser. Furthermore, if you took that 30 x 40 house with a finished basement, and called it a 2400 square foot house, not a 1200 square foot house, and compounded your error by developing a CMA by comparing this 1200 square foot house (with a finished basement) to houses that really have 2400 square feet (above grade), you will get the wrong answer. That’s math, folks. If you start with a flawed assumption, you get a wrong answer. Here’s the appraiser side (hold on to your hats, I’m paraphrasing many, many appraisers (I teach them as well) and they aren’t tactful): “These @#$%^*+ agents don’t know a $#@% thing! They can’t measure a house to save their lives, and everything they have in the MLS is wrong! How can we do our job if they keep putting the wrong data into MLS?”
Sigh! We have some issues here folks. And, we need each other. I personally am both of you—I’m an active agent, and an active appraiser—and an instructor, to boot, so I get to hear your unvarnished opinions of each other. Here’s the deal, folks. Agents, you need appraisers. Without loan approval, we don’t have closings; without closings, we don’t get paid. Getting approvals, followed by closings and commissions, is a good thing. Appraisers need you for information that you may not put in the MLS. I constantly tell appraisers you are often the first group to feel the tremors of a changing market—you are ‘on the ground’. Appraisers, you need agents. As I just pointed out, they can be wonderful sources of information that may not be in the MLS. I have discovered a changing market through discussions with agents, as well as the ‘real reason’ a house didn’t sell—which can be anything from a strong cat smell to an uncooperative seller. Without agents selling houses, we are stuck with non-brokered sales, and those things are nightmares to use as comps because of the problems verifying the data. So, here’s my proposal: agents—can you start trying to measure houses—and get it right? Report below grade area as below grade—the appraisers promise they will ‘count it’. Appraisers, educate the agents in your area about how you come up with adjustments and why. Use the ‘better information’ I hope you will soon get to do your work, so that loans will close, agents will have commissions, you will have fees, and comps. After all folks, at the end of the day—we are all REALTORS®–or at least I hope you are.
The 1004MC form has been a hot topic this late winter and early spring, as I travel around teaching. I even ended up talking about it at the RSPS (Resorts and Second Properties Specialist) Symposium in Naples, FL.
Of course, the elements on the form have been ‘hot topics’ all over the place–supply and demand, absorption rate, etc. Most MLS services seem to have quickly gotten on board with revising their search functions so that appraisers can find the data easily. My local REALTOR(R) Association has had their MLS system revised, and earlier this week, I gave a presentation, with some other appraisers and tech experts, on using MLS and filling out the form.
We are a small association (240 members) in a rural county–Lycoming County has about 130,000 residents, and is the largest sized county in Pennsylvania. We invited affiliate members, including lenders and our local chief assessor. He came, as did several lenders.
One of the things on the form appraisers find confusing is the apparent disconnect between the inventory in the neighborhood (as listed on the top of the second page of the 1004) and the ‘pool of properties’ which goes into the 1004MC. Fannie Mae’s instructions are fairly clear: the appraiser is to consider the pool of properties that the borrower ‘would consider’ as well as the subject property. In our rural area, this can mean a lot of territory. If we restrict our search, in some cases, to only a township, we come up with incredibly low numbers–2 sales for a twelve month period, in one notable case.
We asked the chief assessor, Jim Carpenter, what he considered to be a reasonable number of properties to have in a universe before, statistically speaking, the numbers would make sense. His reply was “Fifty”. We have many instances where we simply will not have that much data. In one market in which I do appraisals, the ‘market that borrowers would consider’ includes three townships. Research for a twelve month period will reveal sales, literally from $65,000 to $650,000+! That is a special part of the county (lots of second homes, cabins and camps), but it illustrates how ‘one size does not fit all’ with any form—including this one. One lender indicated that he thought that the form was ‘a waste of time’ and he doesn’t anticipate asking appraisers to complete it—his bank does almost exclusively in-house loans.
Some take-aways I have from conversations with students, and my own research:
Use a disclaimer about your MLS data. You are relying on it, because (per USPAP) you consider it to be a reliable source, but you are unable to confirm all of the data in the MLS. CYA.
Remember if your data is expressed as an average, you can use it but you must explain it.
Don’t use ‘N/A’—explain your efforts to obtain the information.
If you throw out the outliers in your statistical analysis because they don’t make sense, and furthermore, they skew the data, comment on it and explain it.
If your pool of comparables encompasses more than the neighborhood, explain.
As usual, more words are usually better than fewer words—providing the user of the report is literate and will actually read them.
I’m doing a webinar on the 17th about the use of this form. If you are interested, click on this link and join me.
https://www.learninglibrary.com/AspDotNetStoreFront70/p-275-how-to-properly-use-the-new-fnma-1004-mc-form.aspx
I just returned from the NAR Convention and Meetings in Orlando Florida. One of the meetings I attended was the Appraisal Committee. There, I learned to my disappointment that the talks which had gone on for two years between the Institute and NAR had broken down. Although we were given scant information, with NAR citing confidentiality agreements that they had entered into with the Institute, Joe Traynor, who was on the task force, bluntly said: “Let me assure you, it was not NAR’s fault”. We heard from Laurie Janik, who was able to tell us that after much effort, and with NAR thinking that an agreement was extremely close, the Institute came back with over twenty demands, some of which would have called for changes to NAR’s Constitution and/or bylaws. The sense we got at the meeting is that staff and past leadership at the Appraisal Institute did not want the merger to happen.
The history of this relationship, for those who are newer to the business is that at one time we were one big happy family. Then, the Institute left NAR. In a nutshell, the Institute is known for education and educational products (and high dues, in my opinion, but that’s another matter); NAR is known for political clout. NAR wanted to add good educational opportunities for its appraiser members. Appraisers, for the 25+ years I have been one, and have been teaching them, desire political clout.
What is inexcusable to me, as a member of both the Appraisal Institute and NAR, is that I got, as a member of the Institute, no information about this merger. I was never asked my opinion, nor was I asked if the merger was important to me. The other appraisers present at the committee meeting, who like me, have membership in both groups, confirmed this; they were never consulted either. We did get some information from NAR, albeit not as much as some of us would have liked. This begs the question: “Does an organization exist to serve its members, or do the members exist to serve the organization?” Shame on the Appraisal Institute for not finding out what members think about this, and if the scuttlebutt is correct, shame on them for continuing for two years, only to throw unreasonable, ‘deal-breaker’ items on the table at the very last minute. That’s not negotiating in good faith. The Appraisal Institute has had a very good corner on education, but they don’t have the entire corner. NAR has a great track record of finding and hiring good educators to develop courses, and great instructors to present them. As an appraiser, REALTOR®, and educator, I hope this happens. Competition is good; and if you can’t get them to join, well, maybe you have to beat them.
Any organization is only good when it serves all the needs of their members, and when those in charge realize the members are their clients. Appraisers need a lot of things from an organization: they need education, they need networking, they need political clout. NAR can, and should provide all three. Two years were spent chasing a dream; it is time for NAR to just respond to their members and give them what they want.
“Come and listen to my story ‘bout a man named Jed, poor mountaineer, barely kept his family fed.” I can’t get the theme song from “The Beverly Hillbillies” out of my head these days.
What’s putting it there is all the hoopla and activity in Lycoming County, Pennsylvania, where I live (and other counties, as well) over natural gas. The gas lease folks have been diligently tracking down owners of land, trying to sign them up for leases. There are rumors of large ‘signing bonuses’ and royalty payments in excess of 15%.
It has made our once quiet county courthouse Recorder’s Office a hotbed of activity, and there are rumors Mrs. Annabel Miller, the Recorder of Deeds, actually had to tell some of these folks how to behave. (!) New computer terminals were added; and the title searchers who work there all the time mutter about books being misplaced, some say on purpose. All the gas company representatives are looking for the same thing—parcels of land, the larger the better, which still have gas and oil rights intact. That in and of itself is interesting—the title searches go back 150 years for this stuff, and I am told that on several parcels, the rights have been sold or leased more than once. Whoops!
Why here in north central PA? Well, we sit on Marcellus black shale, which runs from the southern tier of New York into West Virginia. According an article online from Penn State University, the Marcellus shale could (optimistically) contain 516 trillion cubic feet of gas. The other attractive part of the Marcellus shale is that there are fractures in it. The fractures allow drillers to drill vertically, but then branch off horizontally, and this is considerably cheaper ($800,000 versus $3 million), according to PSU geoscientist Terry Engelder. The article I found you can read as well, at: http://live.psu/edu/story/28116.
The big news locally, and of interest to you and me, is what it is doing to our real estate market. There are rumors on top of rumors about lease prices, sale prices, estimates of royalties, etc. I can affirm that I know of two sales that were upset at the last minute by an owner deciding maybe he didn’t want to transfer those rights. A parcel priced for $190,000 one day jumped in asking price to $5 million after an oil and gas company rep talked to the owner. So, owners are sitting tight, preferring to gamble on the future value, rather than sell today.
Brokers and appraisers with a grain of sense are refraining from trying to value these rights; just last week I appraised a 40 acre farm for an estate. Thankfully, the decedent had already leased the mineral rights—but I had told the executrix going in: “I don’t value minerals, gas, oil, or timber.”
I know the theory of how to value land with and without mineral rights; but my problem, and one my fellow appraisers share, is an absolute lack of market data. What we need, as all appraisers know, are some nice paired (or almost-paired) sales–land with mineral rights intact versus land without mineral rights intact.
We won’t know the value of these rights, as it affects market value, until we can observe parcels sold with and without the gas and oil rights. Adding to the general furor is that within the past month, virtually all of our local governmental bodies woke up and smelled the gas–or smelled the problems. You see, to extract that gas from the Marcellus shale requires water. Lots and lots and lots of water, which they want to take from our streams and rivers.
One gas company, rumor has it, has applied to take 90 million gallons of water out of Pine Creek everyday. It’s almost September, and Pine Creek is low. I have no idea where they’d find 90 million gallons. The gas companies return the water when they are done with it and they have cleaned it back up–but only about 65% of it actually comes back. The balance is lost to evaporation, or drains deep into the ground. This puts the nascent gas industry up against another strong industry in north central PA–farmers. Our farmers have for years irrigated using the water in the West Branch of the Susquehanna River. Our local municipalites are busy passing permit requirements, limits on how much water can be taken, etc. in order to stay ahead of the curve on this boom.
So, if the cost of extraction goes up, logic would say the royalties offered would go down. But who knows how it will play out? I’m reminded of another thing I observed a few years back as an appraiser. As we all know, appraisal theory says that if a ‘stick’ from the bundle of rights is removed, the value is diminished.
Well, a few years back, several farmers in the Nippenose Valley of Lycoming County opted to sell their development rights through the local county ag office, which implements the Commonwealth of Pennsylvania Agricultural Conservation Easement Purchase Program. When farmers sell their development rights, they are selling them forever. They are granting a permanent agricultural easement on their land. I sit on the local ag board for my county. Well, some of our farmers went right ahead and sold the rights. Then they turned around and sold their farms–at top dollar–to Amish Farmers moving to our county from Lancaster County, where the price of farmland is now prohibitive. The fact that they couldn’t develop the land didn’t bother the Amish buyers one bit. It sure as heck bothered me and other appraisers. Here are comps that don’t have development rights–selling for essentially the same price per acre as comps that do. It reminded me ever so much of the arrival of our first baby, twenty-some years ago. I diligently read Brazleton and Penelope Leach, plus any article I could get my hands on. However, to my great consternation, our new daughter didn’t comply at all. She didn’t do what the books said she was going to do; and she did things they didn’t say she would do. My husband’s pithy response to my distress: “I guess she hasn’t read all those baby books yet.” Well, here’s the problem we have as appraisers—the buyers in the marketplace haven’t read all those appraisal books yet. Some of them continue to act contrary to the way we think they should.
Sometimes what they do appears to make little sense. And, at the end of the day, our job is to take the market data and make sense out of it. So, I’m sitting back and watching my market with respect to the gas leases. I’m waiting to see if some semblance of a pattern emerges. I’m reading all I can get my hands on about this, from other industry experts. And, I’m wary….because at the end of the day, the consumer hasn’t read all those appraisal books yet.
Melanie J. McLane, ABR, CRB, CRS, ePRO, GRI, RAA, SRES, 32 year veteran of the real estate industry. Offering training, speaking and consulting throughout the industry, I teach everything from ABR to USPAP. Certified ePRO Instructor. To contact me, email me at: melanie@TheMelanieGroup.com or visit my website: www.TheMelanieGroup.com
This is the text of a blog I wrote last fall. Sadly, things have gotten even worse since then. However, I stand by my original assertions–there is enough blame to go around. The vast majority of REALTORS and Appraisers who are REALTORS are fine, upstanding folks. But, it’s the same battle, year in and year out–a few bad apples in the industry, even if they are not REALTORS, just licensees, wreak havoc for us all.
As we all watch the sub-prime market crash and burn, we need to recognize that there is enough blame to go around. More than enough. The federal government is in the process of dreaming up ways to help solve this problem, (note, since I wrote this blog, the Feds made several decisions, some of which do not appear to be helpful to the industry as a whole) but a big part of this problem is unadulterated greed, followed by stupidity and laziness, although not necessarily in that order. Let’s start with greed. The predatory lenders had more than enough of this to last a lifetime. Many consumers, and agents, were blissfully unaware of predatory loan practices such as yield spread premiums. This is a practice where the loan originator gets a bonus for selling the consumer a product with a greater yield to the investor–good for the investor, bad for the consumer. There are some fine, upstanding mortgage brokers out there. There are some bad ones, as well. Some of the companies that have failed, like Ameriquest, deserved to. Ameriquest, after all, entered into a huge consent agreement in my state (Pennsylvania) as well as other states when their predatory lending practices, including pressuring appraisers, were revealed.
Then we have the investors on Wall St. The underwriters packaging mortgage backed securities for resale were greedy also. Per the Wall Street Journal, back in 2000, Standard and Poor decided that ‘piggyback mortgages’ –80/20 loans where the consumer has none of his own money in the deal were no riskier than regular loans. What were they thinking? In 2006, some genius at S & P finally decided to check it out, and found that the foreclosure rate was actually much higher on these loans. DUH! At this point, they changed the rating, but the damage was done. Then, there’s the consumer. Did none of these people ever hear the expression that begins: “If it sounds too good to be true…”??? Instead, we had lots of consumers who blithely took loans out with teaser ARM payments who never asked “How high can my payment go? How soon? What’s the worst case scenario? Is there a pre-payment penalty on this loan? How much is it?” Finally, there is blame enough for the agents to join in. There was a time in this industry when agents were much more hands-on with respect to their client’s financing. Real estate agents actually pre-qualified buyers themselves, running their income and debts through a worksheet, applying the appropriate ratios (different ones for FNMA, FHA and VA) and told the buyer what he could afford. The agents also recommended lenders, and were knowledgeable enough to compare products. We’ve gotten lazy. We hand them over to lenders and say: “Call us back when you have a loan.” Instead, we should be doing our own pre-qualification, giving the buyer questions to ask, and helping them to compare loan products. Should the Feds bail us out? On the one hand, we have hapless consumers who may lose their homes. On the other hand, you can’t fix stupid. I’m in favor of very limited support–options that would help homeowners refinance, but would not make other taxpayers essentially pay off their ill advised mortgages for them. As far as the predatory lenders go, they are getting what they deserve. In many states, no license is needed to be a mortgage broker. That’s something the Feds should fix. The FBI has gone on record as saying that the reason we have so many predatory lenders out there is that a business that generates as many billions of dollars a year as the mortgage business does has, and is, attracting career criminals. You know–former drug dealers. After all, rarely do mortgage brokers get shot when a deal goes bad. The sophisticated Wall Street crowd certainly knew they were blowing smoke when they decided 80/20 loans weren’t risky. They deserve to go without their six or seven figure year end bonuses. Sadly, some investors at the end of the food chain are already being affected–those securities were bought for them and put into portfolios. And, as far as the agents go, we’re due for a correction in our ranks. There are a lot of agents out there who are going to leave the business–and many of them should. They aren’t competent; they aren’t prepared for the market we are in, and it’s way too much like work for them. Bye-bye–this is a serious business, and be in it to not only succeed, but to serve the consumer. If you can’t take the time to learn about financing, or learn to qualify buyers, then leave now. Then we have appraisers. Again, the vast majority of the appraisers are honest, hardworking folks–but then, there are the target hitters. 80% of the mortgage fraud, in the US, per the FBI, is fraud for profit. To do this, you have to have helpful people–appraisers, title companies, mortgage brokers, real estate agents–or, shall we say, “Let round up the usual suspects”? We all know appraisers get pressured; we all know about being blacklisted as an appraiser. But pushing values was never a good solution to those problems. Let’s strive to get our industry back on track from the inside out. We need to be competent, and we need to identify competent lenders we can honestly recommend to our clients. We need to understand that not all consumers can be home owners, and some that can be someday can’t be today. We need to take charge of our business, and move forward. We need to enforce our Code of Ethics, and if we know of people in our industry who are breaking the law, we need to turn them in. Our integrity as REALTORS(R) depends on it.
Melanie J. McLane, ABR, CRB, CRS, ePRO, GRI, RAA, SRES, 32 year veteran of the real estate industry. Offering training, speaking and consulting throughout the industry, I teach everything from ABR to USPAP. Certified ePRO Instructor. To contact me, email me at: melanie@TheMelanieGroup.com or visit my website: www.TheMelanieGroup.com
