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Reconciliation of Value (c) 2007 Leigh Pollet
Author, Leigh Pollet, NYS CERTIFIED RESIDENTIAL REAL ESTATE APPRAISER
Real estate appraisals are (finally-once again) undergoing greater scrutiny thanks to the current mortgage-crisis-mode-market. One aspect of that scrutiny centers on the question of how appraisers arrive at and justify their final value estimate
Ever larger numbers of appraisers appear to becoming more lax in their preparation of reports and in adhering to the appraisal process. However, with the newť Limiting Conditions in effect, the LC has passed liability for an appraisal on to a larger end-user group. If appraisers are not yet finding that they need to justify their valuation position to an increasing number of clients, they soon will be.
In the name of expediency and closing ever greater volume, appraisers and lenders justified less then quality and supportable work, and less then appropriate and defensible reconciled value, by noting that rising real estate values covered all sins – including less then appropriately addressed value estimates. That scenario is changing rapidly.
Reconciliation by definition is the final resolution, the bringing together of the valuation methodology, to arrive at a supportable, final conclusion. What has been promulgated through the years, and is the only methodology to withstand the rigors of court cases, is based on a directed value estimate leaning on a specific adjusted value of the most competitive sale, individually, to the subject.
In other words, the reconciliation of value of the Sales Comparison Approach (the Market Approach) should gravitate to the adjusted value of a specific sale comparable (adjusted) which offers the most appropriate (adjusted) characteristics of value (individually) to the subject, of the sales offered for consideration in the report, and appropriately supported by the other adjusted values.
In this manner, the appraiser has (theoretically) reviewed and compared the best available competing sales to the subject, selected the most appropriate of those sales, and then individually compared them to the subject. That is a trend that appraisers have been gravitating away from.
Appraisers (are supposed to) apply adjustments for pertinent differences, to sales comparables, individually, comparing each factor to a competing factor of the subject property. This is supposed to appropriately account for those pertinent differences, especially those that impact market derived value, between each sale, individually, and the subject. To arrive at a supportable final value estimate, we must have accurate data applied appropriately for these factors. That data is then supposed to be reconciled individually for each sale, resulting in an adjusted value for the sale that reflects an alternative substitute for the subject if the subject were replaced by that sale.
This is repeated for all of the sales comparables applied in the valuation, resulting in their adjusted values. These adjusted values are supposed to reflect and convey a value estimate which is supposed to be as accurate and market driven as possible.
These competing sales are supposed to offer an alternative to the subject if the subject were not available for sale (Theory of Substitution) and the comparables were offered as an alternate choice to a typicalť open market, arms-length purchaser.
Ideally, each appraisal would garner market drivenť adjustments from a paired sales analysis to justify each adjustment applied. Realistically, this happens far too infrequently. For the average appraiser to conduct a paired sales analysis for each 1004 completed would result in astronomical fees, excruciatingly lengthy turn-around times and probably not too different (and well within accepted tolerances) an end result from their “experience-gathered-and-applied” market adjustments. But those market-experienceť adjustments are still not quantifiable factors.
More and more reports with value estimates are being grabbed from anywhere within the range of adjusted values – and sometimes from without. There is no attempt at a true direction, no attempt at justification of the value estimate, just a number placed on the form.
For example: three adjusted values are: $150,000; $155,000 and $165,000. The sale with the least adjustments, with bracketed primary characteristic focus points or extremely competitive points or a near matched pair happens to be the bracketed value at 155,000. Sounds like a good direction for the appraiser to head for a value estimate, right? So why would an adjusted value be, say $157,000? Many appraisers answer, because that is what they feel it is worth.
Theoretically,
let's take this appraisal to court with just the above data to consider. Add a second appraisal that justifies its value estimate, using the exact same data but offering a value at any one of the adjusted values, but for this argument, going to the $155,000 (adjusted) sales price.
Appraiser 1 is at the $157,000 value. Appraiser 2 is at $155,000. #2 can justify his value decision by pointing to the sale with a defined adjusted value from the three sales. Sale 2 offers the most competitive value indicators, individually to the subject and this is recognized by the adjusted value as compared to the subject. In a more detailed valuation, this would be recognized by a paired sales analysis. Therefore, the appraiser reconciled to that particular and most competitive sale with its adjusted value as identified by that adjusted value as compared to the subject. Whereas appraiser one offered a “reconciled” value estimate based upon what he feels it is worth from the value range – with no defining support for that value.
That is not the definition of reconciliation of value just a blind opinion with no essential supporting documentation. Why
wouldn't an appraiser want to present the best possible and most supported value direction on a 1004 (if he/she would in a narrative?
Generally speaking, a court would almost always toss out the first appraisal as an unsupported opinion of value, while accepting the second as a (better) supportable opinion of value.
Appraisers need to treat a 1004 or any form report as a condensed version of a narrative, and offer the best and most supportive data and reconciled approach to a value opinion; a reconciled value that is able to defend itself. That defense is a resolved value based upon the most competitive sale, adjusted to the subject and then the reconciled value selected to that particular sales’ adjusted value (supported by the other (two) sales). Not an (unsupported) value grabbed from anywhere in the adjusted value range.
Mr. Pollet has been an appraisal professional since 1980. He currently serves as a chief regional appraiser for one of the nations largest lenders; prior to this position, he was the CEO and founder of a firm bearing his name for over 11 years until selling the company. Before that, he served at several major financial institutions as a corporate officer and chief appraiser.
This article is owned by Mr. Leigh Pollet (c) 2007. This article may be reproduced as long as it is reproduced in its entirety and the author and copyright are clearly displayed.
Discussion on marketability and sale
prices
in a Market impacted by a natural
disaster:
2012
Leigh
Pollet, New York State Certified Appraiser,
polletassoc@live.com
Accepted Real Estate Valuation
Expert, President, Pollet Assoc., ltd.
and with assistance from : Bill C.
Merrell, Ph.D.
N.Y. State Certified General
Appraiser/Educator
Director/Founder: Merrell Institute
drmerrell@optonline.net
This article was written by Mr.
Pollet with assistance from Dr. Bill Merrell and its
use is governed by all applicable copyright laws.
Its use is permitted as long as the authors are
recognized by any persons/organizations quoting from
this article.Both Dr. Merrell and Mr. Pollet are
appraisal experts; both have been accepted by and
have practiced in front of federal regulators, as
well as state and local governmental authorities
and in numerous and various types of litigation.
They have a combined 65+ years of valuation
experience. Mr. Pollet has published extensively on
real estate valuation issues and his
articles/research have been used and quoted in
litigation as well as scholarly pursuits.
There is
an immediate demand, especially from lenders, for
appraisers to make snap decisions regarding market
value and marketability, of properties in disaster
areas such as the current situation with Hurricane
Sandy on the east coast.
The first
thought from most appraisers is that property values
in the impacted areas have declined as a result of
the disaster. It is "assumed" and "expected" by
lenders that the appraiser(s) will so note that
dimunition of value in disaster reports.
However,
'gut feeling' and assumptions are not necessarily
supported by empirical data.
As of this
writing, the recent hurricane has impacted closing
activity so that in certain areas, there has been no
recorded sales activity since October 28-29. This is
actually to be expected, especially for homes in the
disaster impacted areas, as people are more
interested in rebuilding their lives, having power
restored, heat, etc. than buying/selling homes.
Since
there is nothing recent to compare with, the
appraiser(s) have conducted research into prior
disasters and their impact on housing prices and
housing marketability.
Florida
has seen extensive hurricane activity over the
years, and there are several published data bases
relating to the aftermath of these disasters on
housing. Repeated disasters face a different set of
circumstances than the current situation we face in
the New York metro area, which is viewed as a
once-in-a-lifetime disaster. A more competitive
situation to view would be that of Hurricane Katrina
in New Orleans. While the appraiser(s) did conduct
research into various Florida hurricanes, this
article concentrates on presenting data extracted
from Hurricane Katrina.
As noted,
Katrina, as an essentially "one time" disaster,
appears to compare to Sandy. While the level of
destruction of property was far worse with Katrina
on the New Orleans area than Sandy had on the New
York area, similarities abound, making it a useful
comparison for market value trends and marketability
factors, especially since the economic impact of
Sandy now appears to actually be worse than the
economic impact of Katrina.
Immediately out to +/- three months post Katrina, as
would be expected, marketability of properties and
sale prices dropped. Additionally, housing
stock/inventory skyrocketed - and was joined by
vacancies (of both habitable and uninhabitable
properties).
While
vacancies might be expected in the aftermath of a
disaster, a jump in houses for sale was slightly
unusual. A disaster on the magnitude of a Sandy or
Katrina is a sudden and severe trauma to typical
marketplace activity. There can be no preparation
for it. There is widespread destruction of property.
Available housing stock is set upside down with a
critical shortage of habitable housing, both of
current inventory and potential inventory. Pricing
structure is non-existent; with some habitable stock
available-for-sale, people with means or insurance,
may be tempted to pay beyond the prior market median
to retain habitable shelter, while others may simply
walk away from the market.
What was
observed in Katrina, and is just beginning to be
seen in the wake of Sandy, is that habitable housing
stock becomes extremely valuable. This suddenly
mitigates migration out of the market impacted, to a
market not impacted by the disaster. Peoples first
reaction to a disaster is to flee, as was seen in
Katrina, and many - especially, again, in the New
Orleans market, chose not to return.
With
Katrina, vast amounts of housing stock were totally
destroyed. Similarly, with an event such as
Hurricane Andrew in Florida in the 1990's, there
were vast losses of housing stock. Compared to
Sandy, those events destroyed far greater amounts of
housing, and initially, promoted mass movements out
of the impacted markets by homeowners.
Sandy,
while causing extensively documented widespread
destruction, actually caused far less total
destruction of housing stock. Let me elaborate: In
Katrina and Andrew, vast areas of housing were
totally destroyed. With Sandy, housing stock was
extensively damaged, but many of the houses still
stand - albeit requiring extensive repair work.
However, requiring extensive repairs versus having
literally nothing left standing, is a significant
difference.
In
addition to the total damage to portions of the
housing stock in the New York area, which has been -
so far - documented as relatively small amounts of
housing (of course, relative is a matter of
perspective - for those who lost their homes, a loss
is a loss). Certain areas sustained significant
total losses of dwellings, but even in such markets,
significant housing still exists and survived.
Compared to photos of Florida, for example, after
Andrew, whole developments were wiped out entirely.
Thankfully, the New York area dis not confront such
damage.
Additionally, though, there is still a large portion
of housing that was damaged beyond repair. New York
City has announced that it will condemn and tear
down in the vicinity of 200 houses. In the balance
of the New York metro area and in New Jersey, even
if that number quadrupled, it would not approach the
thousands of homes rendered uninhabitable in either
Katrina or Andrew. In certain other areas, such as
in Queens County, New York or Long Beach, in Nassau
County, New York, in addition to damage directly
from the hurricane (wind, water surge etc.) the
hurricane induced other damage, such as fires. In
Long Beach, as many as 10 homes were subjected to
fire damage at the height of the storm (the waters
were so high that firefighters literally could not
get to the fires). However, again from a total
perspective, this is a relatively small number of
homes totally lost when compared with the majority
of houses still standing - many, if not most,
repairable.
Appraisers
approach placing a value on a dwelling with one of
the major theories of valuation. Most prominent is
that of Substitution. Substitution is what an
informed potential buyer of one property, when
unable to buy that property, would pay for a similar
one in a competing market.
In a
disaster situation, in the first several months,
there may be no comparability with which to judge
such actions. The appraiser cannot use pricing
models prior to the event and there is typically
little activity immediately afterwards. What is seen
is thus:
Those that
can afford to repair and rebuild, with or without
insurance, and desire to remain in place, do. Those
people who do not wish to stay, regardless of the
habitability of their dwelling, will leave. Those
leaving will put their houses "on the open market" -
and are faced with several options.
Before we
discuss those options, it is important to research
and understand the market impacted. With Katrina,
many of the inhabitants decided to not return. This
was a significant portion of the (former)
population. With Andrew, many of the inhabitants did
return. What we are seeing, at present (four weeks
post-Sandy) is that a vast majority of the New York
area hit by the disaster is faced with residents who
are NOT leaving.
With
Katrina, not only were lower income populations
faced with an exodus of residents, but a significant
portion of those people identified as significant to
rebuilding the market and economy - mid-level and
upper professionals, also decided not to return
(many left for suburbs further out in distance from
the area impacted). This has - and still is -
impacting the overall economic activity of New
Orleans.
With the
New York area, the vast majority of homeowners are
staying. They are repairing where the damage is
repairable, and those with total losses, in general
(the "hard data is not yet in, so much is
word-of-mouth) are seeking to rebuild.
The
potential, then, is for an economic rebound in the
near future.
Back to
options facing homeowners:
The first
option, is the homes insurance company taking the
property and either leveling it or repairing it and
attempting to sell it at some future date.
The second
option is (will be) the influx of investors who will
be seeking to buy distressed properties, with the
intent of repairing/rebuilding and, in the short
term, renting, with the longer term intent of
selling (at a profit).
The third
option, as noted, is and will be from those current
homeowners seeking to stay within the same market:
This group is divided into two sub-groups.
First, is
the group that can rebuild/repair and remain in
place.
The second
group is the (apparently relatively smaller group)
group whose dwellings were so badly damaged, totally
lost or damaged to the point of being governmentally
condemned. This group will face the options of
either leaving the area, or rebuilding.
Again,
from what we are starting to see, the majority of
homeowners with uninhabitable dwellings, are opting
to stay and rebuild. This portends very well for the
near and long term economic support for the markets
impacted.
Of
immediate use to our study, is the impact Sandy has
had on the open market. Anecdotal evidence is that
habitable units in, for example, Long Beach New
York, have become extremely desirable in the three
weeks post-Sandy. For example, a rental apartment
building I am familiar with, had numerous vacancies
prior to Sandy (+/- 5% of +/- 276 units). Post
Sandy, one of the two buildings rented out entirely
by the end of the second week post-storm and the
other, by the end of the third week- post-storm, had
only three vacancies of the nine prior to the
hurricane. People were opting to stay within the
market, rather than leave.
While
rental buildings are not ideal to compare to single
- two family detached residential units, as of the
present time, this data is the only readily
available known data to apply to the market.
It is
important to note that many people could not find
housing on a temporary basis within the impacted
market. This was either an economic decision (and/or
they were not covered by insurance), or the housing
available was not for short term habitation (but
long term, for example, with one year leases). Many
of these people are temporarily staying outside of
the market - but, and this is important to note,
these people are returning to bring and keep their
children in local schools or for local employment,
proximity to family, etc. What is equally important
to note is that these people are committed to
staying within the impacted markets.
Further
this data demonstrates the desirability of habitable
units in a sticken market, where migration out of
the market is not contemplated by a majority of the
residents.
The
desirability of housing, however, is modified by the
lack of potential buyers coming in from out of the
area seeking to move into what may have been a
desirable market prior to the storm.
For
example, again lets's look at the City of Long
Beach, New York.
Long Beach
is known for its Atlantic Ocean beaches and its
boardwalk, as well as the desirable lifestyle
associated with an upscale beachfront community with
ease of access to New York City employment centers.
Most residents- again, anecdotally, post Sandy have
no intention of leaving permanently. Estimates of
the "mandatory" evacuated community run to in excess
of 95% of the population. Three weeks post-Sandy,
huge numbers of apartment buildings (condos, coops
and rentals) are still uninhabitable - but nearly
all of them are undergoing repair to restore
habitability. Of the entire housing stock of the
City of Long Beach, within four - five weeks
post-storm (as of this writing), government supplied
tentative data shows that less than 5% of the entire
building (not just housing) stock has been rendered
habitable (or in in the process of damage-mitigation
to restore habitablility/use).
Damage
estimates of building stock in Long Beach run as
high as 95% of the entire building stock of the
city. The city has an estimated 16,000 residential
dwellings. Of that number, the city is initially
estimating that approximately 100 units will be
condemned, which appears to include all houses
rendered uninhabitable.
Prior to
Sandy, the city had an active real estate market.
Post Sandy, that market of people seeking to move
into Long Beach, at the present time, has
disappeared. However, people whose homes are or will
not be habitable, and are not migrating out of the
city, will put pressure on the housing stock in the
near future.
This can
be compared to post-Katrina New Orleans.
New
Orleans-Metaire-Kenner MSA data:
total
#/housing units as of 7/1/2005: 1. Jefferson Parish:
192,373
2.
Orleans Parish: 213137
3.
Plaquemines Parish: 11,290
4. St.
Bernard Parish: 27,292
5. St.
Tammany Parish: 88,791
total
units/housing: +/- 532,883.
Total %
housing stock destroyed
post-Katrina: Total % housing stock
with major or severe damage:
1.
2.43 17.84
2.
37.03 49.42
3.
35.38 45.92
4.
50.37 72.13
5.
1.89 19.86
(Overall,
it is estimated that upwards of 90% of New Orleans
flooded, mostly due to the failing of the levees
post the storm surge).
The
housing price index prior to Katrina shows a
relatively stable line for the previous five years.
However,
the third quarter of 2005 and into 2006 shows a near
tripling of the housing price index, with housing
prices seriously rising and continuing to rise into
the first quarter of 2008, along the lines of a 25%
rise in home prices during that period.
HUD
estimated that the cost of housing post Katrina,
rose upwards of 33% from post Katrina in late 2005
to 2009. HUD estimated that the New Orleans Metro
area totally lost +/- 13% of the housing
stock (rendered uninhabitable and unrepairable/unrebuildable).
Pre-Katrina, the New Orleans area had a plethora of
affordable rental units (66,300 such units). Post
Katrina, that number dropped to an estimated 19,300
units. Hence, with Supply and Demand, the cost of
those remaining units pressured an upwards spike in
rental housing costs in the range of a 27% upwards
surge in cost.
HUD also
offers added data: prior to Katrina, HUD estimated
587,000 residential units in the market. Post
Katrina, that number dropped to +/- 511,000 units
(the balance condemned, destroyed or demolished). In
the five years post-Katrina, HUD estimated that
there were +/- 24,700 new residential units built in
the market which still leaves the market in the
vicinity of 51,000 units of housing less than
pre-Katrina.
The
National Association of Realtors reported a "home
buying frenzy" in the year post-Katrina. Two years
post Katrina, that "frenzy" had subsided and leveled
off. With an estimated 8,000 homes for sale in the
entire New Orleans market pre-Katrina, that number
ballooned to +/- 14,000 immediately post-Katrina
into 2007, but slowly leveled off towards the end of
2007 to 11,000 units in inventory.
Home
average sale prices from 2003 - 2005 rose from
+/- $175,000 to +/- $210,000. However, post Katrina,
average home prices rose from +/- $210,000 to close
to $270,000 in the first half of 2006, up
approximately 27%. Various organizations attribute
this significant rise in prices to the paucity of
habitable housing.
The area
has since suffered ups and downs in the real estate
market. A great deal of those swings are due to
sub-areas due to the storm - migration of mid and
high level professionals moving out of the metro New
Orleans market, jobs lost due to the recession,
significantly higher home insurance costs etc.
Still, in the two years post Katrina, median priced
homes were selling at reasonable levels competitive
to pre-Katrina markets. Upper level priced and
luxury priced dwellings were selling much slower
with inventory up to +/- 23 months for luxury homes
(compared to 5 months for median priced dwellings).
This
brings us back to the current subject market (New
York area). The appraiser does not have a crystal
ball to tell the future. However, based upon data
from previous natural disasters such as Katrina, it
appears that, depending upon the extent of the
damage to, and loss of housing stock, prices can be
expected to at least remain stable and to rise in
the near term, as loss of housing stock pushes
habitable dwelling prices up (supply/demand).
A
significant mitigating factor will be what the
actual extent is of loss of housing stock. Median
priced housing and housing generating significant
rental income, however, in this market, was strong
and would be expected to remain so, in the wake of
Sandy.
While
post-Katrina data clearly shows an immediate
decrease in sale prices up to +/- 3 months post the
storm, there was a corresponding increase in housing
prices and a decrease in housing stock (in the
immediate 12 months months following the storm);
compared to the subjects market area, the loss of
housing stock in the subjects market does not appear
to be as significant as a percentage of housing as
compared to Katrina and New Orleans.
Therefore,
to summarize, it is expected that sale prices of
residential properties in the areas most impacted by
the hurricane may drop initially in the immediate
several months post-Hurricane Sandy. However, it is
also anticipated that sale prices of residential
real property will rebound shortly thereafter, and
possibly even appreciate in the four plus months
after the initial disaster.
Addressing the
1004MC L.S. Pollet, MA, CFA,
2011
The 1004MC form, now mandated
to be attached to all 1-4 family mortgage related
appraisals, has become an interesting exercise in
creativity. The forms original purpose was to assist
lenders with determining the potential for disposing
of a property if the property was taken back in
foreclosure, has taken on the proportions of
“anything goes”. A form rooted in exposing greater
transparency for the appraisal and mortgage process,
has become cloaked in more smoke and mirrors than a
stage magician.
The 1004MC has as its heredity
the economic crisis that still enfolds the country.
With lending institutions struggling to protect
their assets (regardless of the parentage of the
crisis) they (and certain regulators) turned back to
appraisers to provide a measure of support for their
valuations. Rather than merely accepting the check
boxes on page one of the URAR for housing trends,
lenders and the major quasi-government agencies,
especially HUD/FHA and, following HUD’s lead, FNMA
and FHLMC - decided that appraisers needed to
actually document the direction appraisers were
stating that the market was taking.
Much was written on the 1004MC
prior to its mandated use. Appraisers worried – with
reason – that the form, especially if completed
properly, would add extensive amounts of time to
their work load. And appraisers also worried – with
reason – that they would not be paid for their
extensive additional work. Despite these legitimate
concerns, the added workload of the 1004MC was
forced on appraisers.
Regardless of the additional
work load, an appraiser is bound to appropriately
represent, support and complete the appraisal. And
in some cases, appraisers report that
appropriately completing a 1004MC can add over
an hour of work to the appraisal process. Since the
1004MC becomes an important piece of the lending
process, it is important to appropriately
address this form.
After conducting extensive
interviews while researching this article, one thing
has become increasingly clear. Essentially,
appraisers, underwriters, lenders, management
companies and everyone dealing with the 1004MC does
not understand it. And few, if any, appraisers are
completing the form to anyone’s satisfaction.
The MC form is designed to
supplement the 1004’s Neighborhood Section, and to
especially support the appraisers “conclusions”
regarding housing trends. As noted above, prior to
its introduction, appraisers merely checked a box on
the 1004 noting what they perceived as the direction
the market was taking. There was no support for
this, just three checked boxes for Property Values,
Demand/Supply and Marketing Time.
Some appraisers, either on
their own, or in conjunction with lenders, began to
offer a short narrative description , as part of the
form or in an addendum, describing the direction
they took, with support from data. Others just
checked the boxes. With this haphazard approach, the
roots of the MC form took hold.
Few people question the need
for the appraiser to document the trend of values
he/she utilizes. The questioning arises around the
manner and format, ie; the MC form, that is usually
the sole defense for the appraiser’s conclusions.
The MC form is designed to be
completed in its entirety. However, as Jim Taylor,
the retired former Chief Appraiser for the FHA’s New
York office noted, since the form was implemented,
it has been largely ignored by the “quasi-government
organizations”, ie: HUD, FNMA and FHLMC. There has
been no study of the results offered by the form and
no empirical data collected. In a sense, the MC form
has been orphaned; instead of being used and studied
for the information it ostensibly provides, by
lenders and the government agencies, it is just
another form to be filled out. In Jim’s words, “It
could take another mortgage crisis to get the MC
form evaluated, understood and changed…” to
appropriately represent the data it is supposed to
represent.
As most appraisers know, it is
nearly impossible to completely fill in the form.
Lenders and their underwriters are slowly finding
that out as well. Some lenders – not all – mandate
that the appraiser completely fill in the form. The
refuse to accept any “N/A’s” in the boxes, even if
adequately explained
by the appraiser in the summary
sections. This has the obvious result of data being
input that is,… let’s call “creative”.
The problem exists with
databases: If data exists at all, there are limited
databases that offer listing information
specifically bound by the first two column time
frames: “Prior 7-12 months” and Prior 4-6 Months”.
Most MLS systems only offer current listing
information. “Current/active” listings listed 7-12
and 4-6 months ago may not even exist in most
markets – which is why some software programs are
blocking out those two columns. When taking into
account areas such as rural or inner city markets or
areas without “MLS” or with their own (private)
listing services, this data becomes nearly
impossible to arrive at.
Nearly, but not necessarily
totally, impossible. Appraisers who have conducted
extensive work in a particular market can go back
through their files to uncover data-lists. I have
actually taken prior MLS “runs” from my files dating
back to the prior 12 months, from a market where I
am currently conducting an appraisal, and analyzed
that listing data, in order to arrive at a
defensible information fill for the first two
columns. It took well over an hour to find, compile
and present the data.
And essentially proved little,
since in some of the areas I work, MLS does not
cover all listings (and sales). The lender got a
completed 1004MC, but with, at best, only somewhat
supported data.
Fannie Mae recognizes this
shortcoming. Under Guidelines for Using Form 1004MC,
it is noted that “In some markets it may not be
possible to retrieve the total number of comparable
active listings from earlier periods.” Yet the
paragraph ends with this sentence: “Regardless of
whether all requested information is available, the
appraiser must provide support for his or her
conclusions regarding market trends and conditions.”
That concluding sentence offers perhaps one of the
most important directions to an appraiser for use of
the MC form, yet it is backed by virtually no
substantive direction from Fannie Mae. And, as
noted, some underwriters and lenders do not know or
understand this, and still request the entire form
be completed.
There is a real need for what
the MC form represents – or is supposed to
represent. Lenders need to have a better
understanding of the specific marketplace and it’s
trends, for the collateral they are offering a loan
on. Are REO’s undermining the “market-rate”
properties and their list/sale prices? Are REO’s a
factor in the market? Is the market still declining,
stable, or, even in some cases, rebounding and
showing some appreciation? What is the absorption
rate for the market (inventory v. sales activity and
the time it takes for the inventory to sell)?
All of these factors can play
an important role in the lenders decision making
process, from making – or not making – the loan, to
understanding that specific markets particular
risks, and maybe making the loan, but at a different
interest rate.
Which brings up a side-bar.
While appraisers struggle to offer lenders
appropriate data, most underwriters (still) have no
idea of how to decipher the information they are
looking at on this form. From conversations with
underwriters, I’ve been told that for the most part,
they are told to make sure the form is completed,
or, as per their lender’s guidelines, filled in and
explained for any “N/A’s”.
All of this has resulted in
greatly expanded responsibility for the appraiser.
In the past, the appraiser, as part of a typical
scope of work, was “supposed to” research and
prepare a defensible position for market trends. Now
the appraiser has been forced to take on an altered
role, from not just offering a supported, defensible
opinion of market value (including their opinion of
market direction) but to also providing the lender
with added, defensible data about the marketplace.
For the most part, the scope of work has been
expanded from maintaining supporting data in files,
to presenting it in an additional format. And the
underwriter has been forced to accept a form and
format that they may not clearly understand. Or may
be misleading.
Under USPAP, and good appraisal
practice, an appraiser may not mislead a client.
That said, when data simply does not exist, and the
appraiser “finds” data to complete the report as
mandated by the lender, is this not misleading?
Completing the form takes on
additional complications when attempting to actually
understand the intention of the form. As discussed
above, the form is supposed to provide lenders with
a more in-depth understanding of trends in the
subject’s marketplace.
For a simple, one family
dwelling, in a market with a plethora of arms-length
transactions, this should be a relatively
easy undertaking.
But it may not be. If the
subject is a single level “ranch” style dwelling, is
the universe of “comparable” properties limited to
single level dwellings? FNMA’s Announcement 08-30
notes: “When completing this section, the appraiser
must include the comparable data that reflects
the total pool of comparable properties from
which a buyer may select a property in order to
analyze the sales activity and the local housing
supply.” (emphasis is mine, not FNMA’s).
The interpretation of this
particular section is so varied and becoming so
twisted that I believe it is leading to a loss of
nearly any substantive use for the MC.
Dennis J. Black, IFAC, of
Florida and a member of the ASB, noted that the
complications with interpretations of this area led
him to shy away from mortgage appraisals. “There is
no easy answer… to understanding what is required
here.” he noted. “What is needed is a narrative
discussion of the results the appraiser is applying
in the form.”
Dr. William White, NYS
Certified General and a certified appraisal
instructor noted that “… If used properly, the form
could offer validity to the appraiser’s direction…
for representing the specific markets activity to
the lender. And for the lender to make a better
informed lending decision.”
The key words are IF USED
PROPERLY.
Lets go back to the ranch
example above. What exactly is the universe of the
“total pool of comparable properties” for this
subject? Is it only single level ranch dwellings? Is
it the entire “universe” of single family properties
in the subjects immediate sphere of influence? Is it
the entire universe of residential dwellings in the
subjects marketplace?
There are two veins of thought
on this. Dr. Bill Merrell, NYSC General, the
Director of the Appraisal Education Network School
and a qualified expert appraisal witness, offers
that the entire universe of single family dwellings
should be considered and offered to the lender. “The
form and the form’s intent are that it addresses
competitive properties to the subject. In the
case of a single family dwelling, that encompasses
the entire single family inventory in the subjects
market. There should not be a distinction between
types of single family dwellings in representing the
marketplace and its activity, to the lender for the
lender to make an informed decision. The place for
the appraiser to make distinctions is in the Sales
Comparison Approach grid.”
There is a great deal of
validity to this point. When the appraiser considers
the Principle of Substitution, if a single level
dwelling is not available for inclusion in the Sales
Comparison Approach, the appraiser must seek the
most similar competitive property with which to
compare the subject – as a “typical” potential
purchaser might do. Hence, if the appraiser is using
different styles in the Market Approach, shouldn’t
the appraiser also consider alternative single
family dwellings as part of the “comparable
properties” that the MC calls for?
Andy Mantovani, NYS Certified
General Appraiser and a certified instructor opined
a slightly different take by offering a “real life”
direction. “Lenders are telling us their parameters
so that we can duplicate or work within those
parameters. At the same time, when an appraiser is
offering data in the MC, that data should be able to
be replicated by the lender.”
“Using sales similar and
competitive to the subject’s specific qualities can
work if there is enough data. If the property is
unique, and there is not enough data to develop and
support trends, then the appraiser should expand
his/her search radius…” to include a wider pool of
data.
If the appraiser only offers
the lender data on single level dwellings in the
subjects market, is the appraiser offering the
lender a true insight into how the subject could be
marketed if taken back by the lender? Or is the
lender better served if the entire pool of single
family dwellings is considered?
We need to take this one step
further. Many reviewer appraisers and underwriters
are reporting that the MC form is becoming even more
skewed. An other example is offered: A single unit
condo in an urban area in a converted former
townhouse was under appraisement. The unit was in
the multi-million dollar range, and there was a
dearth of directly competing simplex, 2,000+/- s/f
GLA million dollar + sales; there were a number of
such units throughout the subject’s immediate sphere
of influence, but few had sold within the prior 12
months sales and there were few listings of directly
“near-matched-pair” properties.
The appraiser in completing the
MC form, limited his/her pool of “competing” units
to the 10+/- total sales over the course of the
year, solely of similar simplex, 2,000 s/f million
dollar+ units, ignoring sales of slightly smaller
units and units selling in the next lower price
bracket. Sales of these alternative units totaled
approximately 30 over the course of the prior 12
months.
Similarly, there were only
three current listings (and unknown how many
“current” listings during each of the prior time
periods, since this was not an MLS market) of
similar simplex, 2,000 sf million dollar plus units,
but over 20 listings for alternative, potentially
competitive units.
The appraiser made a case for
this narrowed focus by offering that a potential
purchaser would only seek similar units in the same
price bracket and would not consider alternative,
smaller and lower price point units. In not seeking
an alternative unit, the potential buyer would move
to a different market.
Is this disingenuous? People
with high net worth (who could afford such a
multi-million dollar unit) might only consider such
similar units, and not consider smaller units of
lesser price points, as the appraiser noted. But
there are many examples of people considering and
buying, for example, two such smaller units and
combining the two to meet their needs. In the
current economy – and even in previous superior
economic times, this also is not necessarily
supported. Potential buyers typically seek the
marketplace first, and then seek a dwelling within
that market.
The appraiser was also faced
with another set of challenges. The subject was in a
pre-war converted townhouse, was a walk-up unit and
in a building with less than a half-dozen units.
With the paucity of sales of such units, despite
their popularity (they appeared to be selling in
less time than other condo units), again, the
appraiser was faced with a limited market. There was
however, as noted, a significantly larger market for
near-competing condo simplex units of newer,
post-war and new construction elevator buildings.
If there were no sales of
pre-war walk-up units, the appraiser would venture
to an adjacent, competing market for competing
sales. If a paucity of such sales still existed,
then the appraiser would be forced to consider sales
of non-walk-up units, despite certain suggestions or
guidelines dissuading such comparisons. Appropriate
adjustments would have to be applied in the Market
Approach. But there is no “Market Approach” with
which to make adjustments in the MC form.
And that brings us back to the
central question: What constitutes, as FNMA noted,
the “…total pool of comparable properties from which
a buyer may select…” that the appraiser is supposed
to analyze?
I propose that the functioning
of the marketplace itself should dictate the
direction the appraiser take, without manipulating
the data to “make it fit” the appraisers perception
(or worse, a deliberate misstatement of the
marketplace by the appraiser) to support their
contention of market direction. After dissecting
the information above, we come back to the fact that
the market is in and of itself, an indicator. If
there is a flood of inventory, then absorption rates
will suffer. If the government provides a tax
credit, it (did) might stimulate purchases. If the
economy is in recession, most likely prices are
going to depreciate along with everything else.
Hence, if the appraiser treats
the market to determine data for the MC form, as
he/she should with the Sales Comparison Approach,
then as noted, the market will dictate the forms
direction. And that will generally mean that the
entire pool of “competing” properties must be
considered.
For residential single family
dwellings, I submit that the entire pool of single
family homes in a specific, defined market are all
similarly impacted by market/economic conditions. To
single out solely the one level ranch style
dwellings as “the competitive pool” for a single
level ranch style subject property is misleading. To
single out only multi-million dollar condos in a
marketplace where a paucity of such units exists and
ignore the balance of condo units (such as simple
million dollar units!) is misleading the lender as
to the actual forces shaping the market.
I have been following the
prescriptions of Dennis Black, by presenting two
sets of the data for the MC form, where I find it to
be appropriate, along with a narrative description.
I will usually offer the MC form with the data I
consider to be most appropriate for the lenders
overall interests, and then, in an addendum, offer
the alternate set of data points for the underwriter
to consider. This is by far, time consuming and
sometimes duplicative, in terms of net findings. Yet
it offers the lender the most supported
documentation that they should be using with which
to make an informed lending decision.
If one thing is actually clear
and transparent, it is that the 1004MC requires
revision and greater input from HUD, FNMA and FHLMC.
Further, greater oversight by those agencies of use
of the form, as well as a compilation of the data
reported, both for documenting market trends as well
as for regulatory and appraiser oversight purposes
is also necessary.
Hence, the appraiser, to avoid
misleading the lender, should present the most
complete data to the lender on the MC form that
offers a supported position for “the market” that in
the most direct form, “reflects the total pool” of
properties that the appraiser would fall back on in
the Sales Comparison Approach under the Principle of
Substitution, if the subject or an alternate, was
not available.
And of course, appraisers
should be paid a commensurate fee for their added
work and burden.
------------------------------
·
Leigh Pollet is the Principal of
Pollet Associates, a real estate appraisal and
consulting firm originally founded in 1980. Leigh
re-opened PA in 2009 and currently serves the legal
community as well as financial and lending
institutions. He is a former corporate officer and
Chief Appraiser for several major financial
institutions on a national level. Leigh has an
earned Masters degree in Land Use Planning and
Policy Analysis, and is a state certified
residential appraiser (and has passed his state
certified general classes). Leigh is currently
accepted as an “expert witness” in a number of legal
and governmental situations. He has also taught real
estate appraisal classes and has numerous r/e
appraisal articles published both in ink and on-line
(including one article with over 15,000 “hits” and
reportedly cited in numerous court/legal
situations). He can be reached at:
polletassoc@live.com.