Proposed Changes In The Law

[Doug Walters]

Stephen,
your state's Supplemental Standards, items 6 and 8 would give me cause for concern too. Appraisers will soon be caught in another political tug of war between federal and state regulatory bodies (who can teach USPAP classes). Some already have been where the state has not been in compliance with AQB requirements.
Doug

 

[Austin]

Steve: This order of adjustments you listed from the texts: “The elements of comparison are: 1) property rights conveyed, 2) financing terms, 3) conditions of sale, 4) market conditions (time), 5) location, and 6) physical characteristics" is totally illogical. Until you have adjusted for physical differences, how do you know that any other adjustments are justified? For example, if an appraiser can make adjustments for physical differences and account for 95% of the variance between the actual and adjusted sale prices, then who can say other independent variables affect price? I use a completely different sequence of adjustments and verify the results of my system vs. the standard system at the same time by showing the variance between the predicted and actual sales prices of both methods. My system always has less variance because the existing system of making size adjustments is flawed among other things. The object of the appraisal process is to find the equation that explains the correlation of the value influencing variables and sale price. If anybody wanted to take this to court, I can supply some convincing mathematically proof that the accepted appraisal method is flawed. If the present appraisal method listed above stands up in court, then the laws of math will have to be altered which ain’t likely.

 

[airphoto]

Austin,

I recognize that you are probably the most statistically savvy poster on this forum. Here I pose a special request:

Would you be willing to provide some of your statistical worksheets in excel or database format and make them available (raw form, *.dbf or *.xls files) so that we could study just exactly how you go about your analysis?

 

[Austin]

Airphoto: I would love to do just that. There is a problem with doing what you requested for technical reasons. You have to do stepwise regressions meaning you follow a definite sequence of adjustments while at the same time viewing a graphical analysis of what is taking place after each step. You view the graph after every adjustment to watch the trend line develop to see what is going on. After you make all of the physical adjustments and have a relatively linear trend line, then you make a size adjustment. The reason the present method of making a size adjustment is wrong is that you can’t make it until all other physical adjustments have been made which means you are adjusting for nothing but physical size because everything else has been accounted for. You do it by iterations and you do it until the trend line becomes flat. This is a many stage process. The only way to really demonstrate this is to sit down at a computer and walk through the steps.
A good analogy is if I invented animation filmmaking and you had never seen it before and you ask me to send you a letter and demonstrate the process. Well, you can’t demonstrate animation in a letter, you can only do it on film and I can’t make a movie and e-mail it. I sent some Excel files and graphs and some people couldn’t open them. I wrote an article with graphs that Jane Trice published on her Appraisal Message, I can't call the name of it at the moment, and she had to put the graphs and tables of data on a separate link but it didn’t work very well. That is the reason a book can’t be written on the subject. Have you ever seen a book on how to learn to play the fiddle in five minutes? To further complicate the problem, every problem is different. The best way to demonstrate the process is with land sales. Again, it takes a lot of graphs and animated tables that we can’t send or post. I have to go cook steaks so can't elaberate now.

 

[airphoto]

Thanks, Austin ..

 

[Pamela Crowley (Florida)]

Hey Austin,

Your explanation does make me feel good at least. I determined back when I was first starting to appraise that the GLA adjustment needed to be done last. It's the only way it made sense to me.

Again, I would dearly love to watch you work that model of yours! Would you consider putting on a class? If we could get enough willing forumites to come?

 

[Stephen J. Vertin MAI]

Austin:

You say "This order of adjustments you listed from the texts: ‘The elements of comparison are: 1) property rights conveyed, 2) financing terms, 3) conditions of sale, 4) market conditions (time), 5) location, and 6) physical characteristics' is totally illogical."

The order is directly from the Appraisal of Real Estate, 9th Edition, as you know. As my post points out AI abandoned this order of adjustment logic in later editions. Possibly because it was an unworkable model in all situations as you have indicated. This is exactly my point. If AI can not tell you how to do it, why would Illinois appraisers want a bunch of appointed bureaucrats, who have little academic training, relative to the experts currently writing AI's text dictating how? These guys are suppose to be enforcing USPAP not writing and dictating appraisal theory. Furthermore, I do not know how to express this better than I have over the last 5 or 6 years on this form, comparable selection does not make an appraisal. It is how you adjust the data!!!!!!!!!!!. Data in its raw form means nothing. Who ever is telling appraisers raw data is the key needs a physiatrist. It is the interpretation of the data that makes an appraisal. The only reason Illinois is coming at it from this direction is because they do not challenge values. Why? Because it is expensive, time consuming, hard work and requires appraisal skills. The value challenge issue would be a great subject for another post, because it is almost impossible to talk logically and reasonably about appraisals without talking about value. Dear lord it is what the whole report is about. Because, they do not challenge values, they have to make up a bunch of other perverted rules and regulations, in order to obtain convictions. The problem is these rule changes make even the best appraisals subject to prosecution.

I am sorry to go on like this but it has been said over 20 times on this form by at least 5 or 6 very knowledgeable appraisers, but, somehow, it keeps flying past many. Selecting the"prefect" comparables does not necessarily make an accurate appraisal. It is how you adjust the comparables. What is more accurate? 1) An appraisal with the prefect comparables, but unsupported adjustments or 2) An appraisal with less than prefect comparables, but well supported adjustments. As everyone who has done more than 25 appraisals knows, it is the latter. Now lets take this one step further, given the States new, wanted, law change, which one can be prosecuted?

These new changes Illinois is trying to enact are poorly thought out and have little theoretical bases. They are being enacted to prosecute appraisers faster and cheaper and without a paper trail. That is the bottom line. We do not let our police on the streets work out side the law. Why in the world should we let these State Boards work out side our law, which of course is USPAP?

Steve Vertin

 

[David C. Johnson]

<span style='color:darkblue'>Steve,

From reading the proposed legislation, I have little doubt that I also opine for several other veteran Subterfuge/Stupidity Busters in the great state of North Carolina with the following:

The State of Illinois very clearly has a serious problem with the current makeup of its appraisal board. This is unhealthy for the State as well as the Profession. First, I'd like to make a distinction here that may seem real trivial, but I am convinced it's not. You write the following where I have bolded some words for emphasis:

"Not only does Illinois want to change standards, they want
to be able to dictate comparables. This comes directly from
State's philosophy not to challenge values but attack comp-
arables. This is always a win/win game for the State."

I understand very well what you are saying; I know for sure you are right. That being said, I take exception only to your choice of "phraseology." This is not a nitpicky concern because the recognition of, and stressing of, this distinction, is key to both the diagnosis and to the cure (in my opinion).

I would suggest that Illinois DOES NOT wish to change standards

I would suggest that this DOES NOT come directly from the State's philosophy

I would suggest that this IS NEVER a win/win game for the State

The State of Illinois is suffering from, and is being victimized by, one or more grossly inappropriate board member appointment decisions, and likely by their subsequent selection of some board staff.

____________________

I have written some text in a post meant to illustrate to others what I would certainly miss if I were not so aware of errant board tactics. Once I clean it up (i.e., censur to at least a PG rating) and shorten it, I will likely post it.

Thanks for your work, Steve!

Regards,

David C. Johnson, Raleigh</span>

 

[Austin]

Steve: A few points about comparable sales: What good are comparable sales if there is no consensus of the theory behind the sales comparison adjustment procedure? If you ask ten experienced appraisers what the definition of market value states: “Most probable price” you will get ten different answers. As stated above, the sequence of adjustments is acknowledged as being incorrect or highly questionable at best. Even if the sequenced of adjustments were correct, there are forces involved that current methods cannot and do not even acknowledge. One is normal random variance in the market. This is without question the single most significant factor effecting price, and the existing method doesn’t even acknowledge it exist much less deal with it. This makes matched pairs a joke. Another is multi-collinearity of variables. Using the existing sales comparison-marketing grid, you can essentially report cost as value. For example, if you get a subject property fully loaded with extras, pick comps that have few extras, then adjust the comps to the subject, you are saying cost equals value because you are ignoring multi-collinearity.
Another thing the present method lacks is the ability to verify the results of the appraisal. With regression methods you can verify the results by measuring the variance between the actual and predicted prices. Actually you can do it with the existing method, but with limited sales it is meaningless. Then when you deal with oddball properties, there are no really good comps. Then too, when interest rates and equity yield rates are making 4% shifts in a six-month period, what is comparable anyway?
Most if not all appraisers use the same procedure I do. I gather all of the data, look at the sale history of the subject and all comps, look at current offerings, search the sale history of all similar properties in the vicinity of the subject, runn it all through my memory bank, reach a decision based on the gravity of the data of what the most probable price is, then pick a few comps to use to illustrate the results. Even on a simple residential appraisal, I would never pick three comp sales even if they adjoined the subject in a cookie cutter subdivision and base an opinion on just that data along. I didn’t land in a space ship yesterday, but I have learned a few things over the last 25 years about local property values, and if it doesn’t pass the smell test or fit the pattern, I bail out. Most of the time, by the time I leave the tax assessors office, and before I ever look at the property, I have a pretty good idea what the answer is, as do most appraisers.
If I was on a state appraisal board and an appraiser was turned in for some infraction, the first thing I would do is to verify his final estimate of price. If his answer was reasonable based on the available data that would end the investigation. That in my mind is the key ingredient. If the answer is reasonable and my analysis supports the appraiser’s estimated price, then what is the crime? How can you use the wrong procedure, wrong comps, make gross errors, and come up with the correct answer? With less then 30 comparable sales, you can't even answer the question asked by the current definition of maket value anyway, so who is to say what the correct or incorrect answer is? As you say: "It is insane."

 

[bradellis]

Steven,

1. Your complaint about lender pressure being filed with the OBRE will be irrelevant if the lender is federally regulated, namely a federal bank vs. a state bank. The OBRE can only regulate the state banks and mortgage brokers/bankers under their state license. Even then, the law is very vague as to any remedies unless fraud can be proven- and that is usually a very steep hill to climb. So, I am NOT sure if your compliant about any inaction is or is not legitimate. Only you and the OBRE know who the lender is and what regulations apply.

You cannot ask a state to enforfce a law that does not exist.

2. You reiteration of the proposed law is useful. I have looked it over and can tell you that only item 6- over the selection of comparables- seems to be going past USPAP. AND, I AGREE that this PROBABLY should not stay in the bill. Start by calling Randy Neff, SRA, President of ICAP (and join if you are already not a member). ICAP does have influence in this and will weigh in. Randy is in Peoria. If you cannot reach him, call Mike Harris, IFA in Coal City. He is the VP, and he and I have already discussed this (you see I am a former President of ICAP and am still certified in IL- so it affects me as well).

I am actually surprised about all the venom over this. While I concur that this supplemental standard appears to be very restrictive, might it not also be beneficial to those ethical folks out there? Would you NOT like to see them hang those folks who are just out making numbers by choosing comps outside the market, mislabeling their locations, and by doing so, producing misleading reports? How about the ability to duck lender pressure by saying, "No, I cannot use that comp because it is out of the market area and it would cause me to break the law."?

But, you might get what you wish for. If you do, will we expect to see no posts complaining about the number makers?

3. I know most of the IL board members personally, along with the state director and some investigators. From my experience with them- and it is considerable- they are honest and ethical folks trying to do a difficult job with inadequate funds and time. Most are appraisers. Most, if not all, investigators are certified. I know two of them, and they are both VERY competent, AND will refuse to say an appraiser is wrorg unless they have the proof.

As to the exemption under STD3, this is not new. It existed under the former state director, Larry Bullock. There are reasons for it. I am not sure you will agree, but there ARE reasons. Why not call Mike Brown over at the OBRE office in Chicago and ask him?

Some posts have decried the lack of ASC oversight. The ASC is limited to making sure the state law conforms to FIRREA and it applies ONLY to FRTs- not to transactions outside title XI of FIRREA.

But one post suggested that these folks must have courage and not be cowards. The folks on the IL board are not cowards nor is the chief appraiser for the ASC, Dennis Greene.

I would be very careful here. IF IL fails to pass a law that conforms to FIRREA, the ASC will decertify every licensee until the law is fixed. I tried to get that done when I was ICAP President only to be told by Mr. Bullock that our 154 level that required NO experience would pass muster with the ASC because our ed requirements were so good. Guess he was wrong. Dennis Greene made it abundantly clear that IL is not in conformance; hence the change in the law. I warned Larry, but it fell on deaf ears.

So, go for the change in number 6 if you like, but remember that if you stop the whole law, you and all others will NOT be doing FRTs in IL.

Good luck.

Brad Ellis, IFA, RAA