Allowing appraisers to provide the service they were built for
Written by Jonathan J. Miller, CRE CRP
As a real estate appraiser for the past 25 years, I’ve always viewed my role as a provider of a neutral valuation benchmark for clients to become empowered to make more informed decisions. Of course this is a fantasy-based, in-a-perfect-world depiction rather than an actual practice. In mortgage lending, residential real estate appraisers are not able to provide an independent market value without some sort of reprisal if the results do not match the client’s needs.
Since the credit crunch began with the Lehman Brothers bankruptcy that roiled the world economy in September 2008, our profession has actually strayed farther from being any sort of neutral valuation benchmark.
Recent financial reforms, HVCC, USPAP and other policies and regulations, while perhaps initiated with the best intentions, have done nothing to enable the appraiser to provide the services for which the profession was created.
Moral flexibility required
Over the past decade the global credit boom ultimately forced most experienced appraisers to choose between feeding their families or changing their business models and even their careers. The refrain “always hit the number” would get you more work. After the credit crunch, the refrain was modified to “occasionally hit the number” and you get more work. The sheer critical mass of the moral flexibility of many in our profession during the go-go credit era nurtured a whole new class of appraiser: the form filler that dominates the profession to this day. They work well with the gum-chewing 19-year-old appraisal processors who call every day on the status of an assignment, having no idea what an appraiser actually does and only cares when the report will be delivered.
Rage against the machine
In 2005 I noticed I was beginning to lose my long-cherished national retail banking clients because, in hindsight, I wasn’t morally flexible enough to consistently provide “the number” for them. My client mix had long been 75 percent national retail banks and 25 percent everything else. I began to realize that national retail banks really didn’t want my neutral market value opinion. Instead, banks wanted me to become a “transaction advocate” or a “deal enabler” because volume was all that mattered and the boom mantra declared that housing prices always go up. Everyone had gone mad with greed in the eventual systemic global credit crisis.
Despite the hard lessons of the past few years, most experienced bank appraisers operate in fear of reprisal from their banking and appraisal management company clients. Nothing has been learned, largely because executives in place during the boom have remained in charge. The lack of reliance on the process that should provide a neutral valuation benchmark to enable a financial institution to manage its mortgage exposure has not materially changed. Bank lobbying efforts and financial reform continue to debase and commoditize the appraiser within the mortgage process.
Why? Because the sales function in a bank continues to overpower the underwriting function in a financial institution when the U.S. government provides a backstop. That’s the ultimate risk management for a bank. While underwriting remains at its tightest level in decades, it’s not because high-quality appraisals are being performed. The constrained mortgage environment results from more attention being paid to the credit side of lending rather than the collateral side of the lending.
Before the credit crunch, a respected appraisal colleague told me that in a purchase transaction, all parties were smarter than the bank appraiser because they already knew the market value: It was always the sales price. The listing agent, buyer’s agent, seller’s attorney, buyer’s attorney, seller, buyer, title company, mortgage broker, and banker were smarter than the appraiser. They already knew that if a buyer was willing to pay the price offered, then the property must be worth the selling price. The appraiser was only there to fill out the forms and simply confirm what was so obvious to all other parties 100 percent of the time. Just fill out the form. Of course, in theory, only the appraiser was neutral to the transaction.
Following the credit crunch, the valuation bias is now in the opposite direction. In fact many of the morally flexible appraisers that were biased toward higher valuations for mortgage brokers during the boom, are the same appraisers biased toward lower valuations for appraisal management companies the in post-boom world. These appraisers are rewarded for performing high-volume work at low fees and conservative values. And these values aren’t just low by a few percentage points. We have observed values from a nationally well-known appraisal management company as much as 50 percent below current market value for a property with multiple bidders, largely because the appraisers they use have no local market knowledge.
It’s insane yet logical for national retail banks to view the market generically if they are trying to protect themselves to live another day. Banks don’t want to lend unless dragged kicking and screaming. “Form fillers” fit into this system because lenders view the profession as yet another way to filter out any variances or the slightest blemish on a transaction, whether actual or perceived. Banks are truly issuing AAA mortgage loans, if not AAAA mortgage loans, because they remain afraid of their own shadow. Considering the massive legacy issues of bad lending decisions during the boom, the wave of foreclosures and a weak national economy, who can blame them?
With this marginalization of our profession I could see that I would be out of business within three years unless I capitulated or expanded my long-held views of being a neutral valuation expert and seek out clients who actually wanted a neutral valuation expert. I chose the latter and I lived to tell the story and revived my business at the same time.
I decided to reverse my emphasis so I eventually fired all my national retail bank clients (or they fired me). Now only 25 percent of my clients are banks and these are primarily private banking or wealth management groups. These clients actually care about appraisal quality because they generally hold their loans in portfolio due to the higher price point of the collateral and disappearance of the jumbo secondary mortgage market since the credit crunch began.
The era of experienced appraisers making a living from mortgage work is over
The mortgage lending industry has destroyed the collective experience in the appraisal industry and this knowledge has been lost forever.
It is time for experienced appraisers to look for greener pastures because most retail mortgage work doesn’t require much valuation experience – in fact experience is specifically shunned by the requirements that are adhered to in the AMC-dominated world:
• 24- to 48-hour turn times that don’t permit adequate market research or understanding
• local market knowledge is not a primary criteria
• fee splits remain in place that force corners to be cut to levels that require willful negligence or fraud
Simply review a dozen appraisals performed for national appraisal management companies and it becomes apparent that quality is paid lip service and passes muster only to the uninformed.
Despite newly minted financial reform phrases such as “common and customary fees,” experienced appraisers continue to pay for bank compliance with the Home Valuation Code of Conduct. Despite the sunset of HVCC, it was long ago embedded into institutional policy.
Unleashing the power of neutrality
Since the beginning of my career, I’ve always held out hope that most of my clients actually wanted me to provide “the number” that represented market value. Some clearly did.
I’ve found the concept of neutral valuation to be intoxicating and powerful in my business. As a result of shifting our practice toward clients that actually want to know “the number,” we have remained at our most profitable level in our 25-year history.
Fire your retail banking clients and stop burning calories for clients that don’t want your expertise and will only pay for a form filler. If you don’t they are going to fire you eventually and your practice will die a slow death.
It is better to serve and expand on clients that actually want to know what “the number” really is. You’ll be surprised at how your quality of life improves and how much more business you are able to get.
Think of a non-neutral appraisal as a lie
Someone who tells a lot of lies is inconsistent in their interaction with others. From a practical matter, it is hard to keep track of what story was told to whom. When you lie to someone just once and they discover it they will never trust you again.
As an industry we pay a lot of lip service to the notion of being neutral. We have USPAP, Code of Conduct, HVCC and other rules and regulations to keep us in line. If they were effective, then why is our industry reputation so poor and getting worse? All these efforts provide no day-to-day guidance or practical penalties on behavior because users of our services in the mortgage lending process are not economically incentivized to encourage better quality. It is not in their best interest, as crazy as that sounds.
How is it in virtually every litigation and divorce case where appraisals are done for each side I have observed, one has a low value and one has a high value, both always consistent with their client’s needs? I see appraisers that use the same “comp” in two different reports with different physical characteristics presented. I see appraisers presenting different market conditions described within the same location. I see appraisers attack each other on bank review appraisal assignments for things they actually do themselves.
What message does that send to users of our services?
Being “neutral” means that you believe in your value and could care less about your client’s problems unless you made an error. It means that all interactions with your client are transparent. All information that leads up to your conclusion is disclosed. If the information is not consistent with your result, explain why. If you are providing services to several parties, all communication and presentations, as well as perceptions of communication, are completely transparent. It’s that simple.
Some reading this must be thinking, “I’ll never get any work if I act this way.” Wrong. If you live and breathe neutrality 100 percent of the time, your clients and others will notice.
Neutrality in daily practice
After firing my retail bank clients a few years ago, we expanded our more lucrative legal-related work, specifically litigation support. As a result, we perform a lot of “neutral” appraisals in divorce matters. We are hired by both parties and represent both of them. Courts regularly appoint us as the neutral appraiser for cases in front of them.
Both parties have to trust that you will not omit them from any conversations. I insist that neither or both parties are present during the site inspection. Even the perception of the appraiser favoring one party over another is not tolerated. All correspondence via email is copied to all parties and any party that sends me direct emails is forwarded to the other party. My assistant takes direct calls if one party makes an inappropriate call to sway us and directs the party to conference in the other party to the call. The engagement letter is addressed to both parties.
The appraiser has to detach themselves from the situation and focus on the appraisal itself. Of course we’re human and this is always a challenge. For example, in divorce matters where there are small children at the property during the inspection, after the inspection I always call my wife and tell her I love her and my children and how fortunate we are. I get that out of my system and I proceed with the assignment as neutral as I can be.
I was in a situation recently where both parties hired their own appraisal experts for arbitration and both ended up citing my public market analysis in their reports, with one party embellishing my results. I was brought in as the neutral expert to clarify what my own market analysis actually represented.
A neutral reputation is contagious. I have had many attorneys come to me after my firm was engaged to say the other party settled because they knew we would be providing a neutral valuation and there was no point in playing games.
There have been many instances where a potential client will call to engage us because another appraiser involved in the matter came up with a valuation conclusion that was clearly biased to an extreme result. I beg off on those assignments and suggest they find someone else. It has been my experience that a value straight down the middle would be averaged with a biased high or biased low result, creating an unfair position for my potential client. Both parties often end up coming back to me for a third, neutral report after the original appraisers, predictably, are significantly apart in their valuation estimates.
The glass is simultaneously half empty and half full
Maintaining your neutrality as a valuation expert is tough and requires constant review and feedback. Although I view most mortgage-related work through national retail banks and appraisal management companies as incompatible with the concept of neutrality, yet there are many other opportunities out there. Consider weaning yourself off of it and you may be surprised at how much better you view your career and profession.
Neutrality is a powerful code to live by as a valuation expert.
And that’s no lie.
Jonathan Miller, President/CEO and co-founder of residential real estate appraisal firm Miller Samuel and co-founder and Managing Principal of commercial real estate appraisal firm Miller Cicero has been a real estate appraiser and consultant for 25 years. He is the author of a series of real estate market reports with an annualized distribution in both print and Internet downloads of more than 1 million copies. These reports are widely used by local, regional, national and international media, as well as national and local lending institutions and government agencies. Jonathan provides real estate commentary, speaking often in the media on national and local housing market issues. He is a frequent speaker at real estate and appraisal functions and sits on a number of advisory panels.