Proposed Changes In The Law

[David C. Johnson]

Much thanks for weighing in, Frank.

Regards,

David C. Johnson

 

[George Hatch]

I don't remember the last time a thread stayed up on the forum this long. And the similar thread on Wayne's Political Action Board went up prior to this one.

In reference to the question about investigators not needing to follow SR-3, we should probably bear in mind that a state investigator's job description entails more than just appraisal review. As part of every investigation, the investigator would have to establish the elements of the 'crime'. For instance, was the appraiser licensed/certified at the time of the appraisal? Did the assignment fall under the appraiser's license category? Was the appraiser engaged to perform an assignment? Did the appraiser perform the assignment? If it's a contract dispute, as at least some complaints are, did the appraiser fulfill the terms of the assignment? In addition to these appraisal related complaints, there are also other types of enforcement activities the state boards get involved in. Was there unprofessional conduct not directly related to a specific appraisal report? Examples of this include criminal convictions, cheating on exams, bouncing checks, non-payment of subcontractors, failure to comply with other conditions of licensing such as address notification, delinquent child support, and the list goes on.

Many of these types of questions actually would fall outside the bounds of what a review appraiser would be concerned with when reviewing a specific appraisal report. As such, these types of investigations would not, and in at least some cases, could not be conducted within the scope of work necessary under SR-3. I would bet that at least 30% of the enforcement activities performed by a state appraisal board investigator have nothing to do with the review of an appraisal. I'm sure a state board could save a lot of money by having two classifications of investigators, one without any appraisal experience or expertise, and the other with appraisal experience and expertise. This latter category should, of course, consist strictly of certified appraisers. This way, those states accustomed to staffing their appraisal boards under political patronage could fill the former category with their friends, relatives and associates; reserving the latter category for career professionals. For those states with more limited resources and activity, it may be that the either or both categories could include part-time employees or even subcontractors.


I believe a state enforcement program could be set up whereby none of the investigators were licensed/certified appraisers. An investigation could, and possibly should, start with an investigator examining the complaint to see if the complaint involves any allegations of technical deficiencies having to do with the development or reporting of a real property appraisal. If so, the investigator could start by establishing the other elements that would be necessary to discipline the appraiser; like the contract, the proper license status, etc., Once these elements have been established, the technical portion of the investigation could be turned over to a competent reviewer, either a staff reviewer/investigator employee or to a contract reviewer reasonably believed to have the necessary competence. This portion of the investigation should be required to conform to SR-3, and really, should be held to some additional standards as well. The reviewer should be held to strict accountability under SR-3 to perform their review in a professional manner, under penalty of discipline and with no exceptions. The work files should be sufficient to back up the findings of the review, either postive or negative, so that any appeals by either side can be readily resolved without additional expense.

As a bonus, the non-appraiser/investigator could pursue their investigations and tesify as advocates for the state, leaving the certified appraiser/reviewer to testify strictly based on their unbiased review.

This type of setup could well turn out to be more cost effective in the long run. It's something to consider.


George Hatch

 

[Tom Hildebrandt]

George

An excellent post.

I agree that many investigative functions do not call for a standard three review. The problem arises when the investigator who is an appraiser actually is given a copy of the report or an assignment to review a workfile or to speak to the appraiser. In this case the line between reviewing and investigation is impossibly blurred.

Best regards

Tom Hildebrandt GAA

 

[Austin]

I agree that if there is evidence that some one is doing something obvious like: appraising without a license, making up comparable sales, cheating on exams or giving false information to acquire an appraisal license, etc., then that is a job for an investigator and the appraisal board.
However, I still contend that to protect the integrity of the appraisal process, any questions of methodology or appraisal procedure should be presented to a standing grand jury of experienced appraisers (appointed by their peers and not politicians) and pass their muster before the appraisal board can act on it. The reason I say this is to protect the appraiser from this situation: “Either add another $20,000 to my appraisal or I will turn you into the appraisal board.”
Under our existing system, especially in states like North Carolina with their “Witch Hunt Mentality”, the client has nothing to lose. Once the client makes his complaint he has shot his wad. Then for the next two years the appraiser is at the mercy of a state bureaucracy with unlimited time, legal staff, clerical staff, a lust for blood, and funds to do their evil deeds. Take this situation and couple it with the mentality expressed on this and other threads on this subject, namely: “Due to a lack of funds and time constraints, we are doing away with due process, constitutional rights, and legal procedure under the law.” Please don't anybody hand me that crap line: "Well the appraiser can get a lawyer and take it to court and get his due process if the results turn out wrong." BS!!! Lawyers and courts are for the rich, government agencies, and big corporations with unlimited funds and political clout.
Under law and rationality, can some one explain to me how an appraiser can be brought before an appraisal board for questionable appraisal methods and procedures when it has not been established that his/her price estimate is not un-reasonable? If the answer is reasonably correct, how can the methods and procedures that produced the answer be wrong? Using existing methods, how do you know what is the correct answer? This would be bad enough if the accepted appraisal methods were accepted as gospel, but as many others and I have stated numerous times before, there are serious questions about existing methods and procedures. The nature of the appraisal process does not lend itself to this type of subjective scrutiny. As we use to say in the Army: "If we had adult supervision we could all go home and live in peace."

 

[Tom Hildebrandt]

Austin

I agree in principle, but as we have discussed several times, there are some things, in addition to those you listed, which can be proved to be in error without proving the value is out of kilter. You are correct that the severity of the purported error is hard to measure unless you prove that the value was wrong.

I think those that can be proved fall more into the category of competency. Possible examples: Not knowing when to apply an income approach or just making clear errors in development of this approach, such as incorrectly calculating the cap or yield rates. Failure to develop a highest and best use analysis for an opinion of market value. Failure to research an appropriate property history where an expanded history is required by the client (or other factors) in a condemnation case. Failure to provide a certification. Failure to comply with specific supplemental standards provided by the client.

Here is one that is easy. the appraiser who just ignores USPAP in providing appraisal services to a client is unethical. Example, the appraiser who is handed an appraisal report by an attorney in a matter of litigation and asked to comment on the work product, and who comments on that work product without developing a workfile and signing a certification as required by Standard Three, is a clear violation of USPAP regardless of whether his comments were germane or even absolutely 100% correct.

But I do agree with your basic premise, that in the vast majority of cases, the decision regarding whether an error is substantive has to be viewed in the context of the value finding.

Regards

Tom Hildebrandt GAA

 

[George Hatch]

Whoa there,

Value is not the only significant aspect in an appraisal, nor is it the only issue that we address. If it were, then we could express all of our opinions verbally, include our license numbers and skip the report. In fact, there are some circumstances where the opinion of value itself is not even the most important issue in an appraisal. I just got a copy of 'Valuation' from the Appraisal Institute in the mail yesterday. One of the articles is on E&O claims, authored by Liability Insurance Administrators (LIA). Some of the most common claims made against appraisers include failure to disclose significant aspects of the subject property. Things like the actual zoning, septic vs. sewer, physical deficiencies, differences in square footage, among others. Things that would be readily apparent with a modicum of due diligence.

I have had more than a few cases where my appraisal report disclosed something about the property or the market segment that nobody was apparently aware of, outside of the value conclusion, that subsequently impacted the underwriting of the loan. I am sure this is common experience with us all. In fact, one of the 'value added' amenities a professional appraisal report offers is this type of discovery and disclosure commonly found while pursuing due diligence in an appraisal. It's something that will forever separate our services from that of an AVM or 'distance appraisals' performed from afar.

I would go so far as to suggest that appraisers are more likely to be disciplined for these non-value issues than for questionable values. As it is now, a lender can roll into a court, point out any factual errors and suggest to the court "Your honor, if we had known this property was actually zoned R1-5000 and not R2 as appears in the appraisal report, we would have never made this loan." The appraiser has little recourse because they did indeed make an error in fact and have given the lender 'plausible deniability'. If an appraiser thinks that lowballing a property will cover their mistakes and protect them from a claim, they need to re-think that philosophy.


George Hatch

 

[Austin]

Tom & George: I still say you are missing my point. I have used this example before but it makes my point so I will use it again. About 1990, I took the AI class on “Case Studies In Real Estate Valuation.” There were about 50 experienced appraisers in the class from all over the country most from large MAI appraisal firms. We divided up in three groups with each group taking one of the three approaches to value. Each group did their approach as a group and then we all got back together and presented our findings. Again, these were highly experienced well-schooled appraisers from large firms. I have never seen as many varieties of doing the three approaches to value as I witnessed at that class. The price estimates ranged from $500,000 to $1,000,000. I saw some procedures and methods from angles I have never read or heard of before. I learned there is more than one way to skin a cat.
Now, here is the point: Should I have turned in the other 49 students on ethics charges because I didn’t like their interpretation of how to perform a valuation approach? If everybody took that approach the appraisal business would be like a can of worms. All of these students were performing the approaches to value based on their person experience in their unique market areas. You should attend a USPAP or state law classes at our AI chapter. Hell, these MAI’s can’t agree on which way is up. Basically what happens is everybody gives their slant on things, we try to get the gist of the subject and apply it in our specific practice. I have no fear of a one on one grilling from one of my peers, in fact, I rather enjoy it as you can see, but don’t sent some entry level appraiser that got themselves appointed to a state appraisal board because they gave a big campaign contribution and that wants to make a statement about how much they know after me threatening to take away my license to practice because I didn’t make an adjustment for a fire place the way they do it. Especially when in their mind the adjustment comes from patch pairs which is a totally discredited method. We are assumed innocent until proven guilty. It seems that some people have this concept reversed in their minds.

 

[David C. Johnson]

<span style='color:darkblue'>Austin:

Admittedly a little off the subject here, but consider giving some constructive thought (or not) to the following sometime. I may bring it back up in a few months after I do the same (but probably not):

Consider the possibility of devising a testing system to debute in a decade or so (a multi-moduled interactive computer program) one could take on his/her computer -- a computer game, if you will. You download the standardized complete Case Study module (actual facts and circumstances of a verified, actual, arms-length, market transaction) with all the data EXCEPT THE SALE PRICE (plus another 2000% of superfluous, semi-related or totally diversionary trash data). You are instructed (if you intend "to win") to come to the game with few preconceived ideas of property values, cap rates, etc., etc., because this property is to be located in a "foreign market" (to your market -- say like on the West Coast if the player/appraiser is from the East Coast -- or, in some versions, it could be an alien market for Alpha Century real estate).

Everything you need will be provided for you in data files you can decide to open (along with a multitude of files that, at best, you do not need, but more likely could blow it for you it you were not aware enough to dismiss them immediately). These selectable files include investor interviews scripts, transaction participant scripts (for verification purposes of the comparable sales you download). A programed-in assumption is that you will be given -- errr...you will be reading correct answers -- there will be no lying to you. Of course, on the sophisticated versions, you may be provided with hints that the "interviewee" may be fibbing or BSing beyond his/her knowledge or expertise, and you will be left to your own devises to use all, part, or none, of what is said/contained in that file. These can be timed tests/games or ongoing (e.g., could take a week for the appraiser to get around to producing/submitting their chosen valuation estimate "for grading").

In the end, you use acceptable methods (or unacceptable methods) to arrive at the actual sale price (i.e., the market value) that actually occurred (well, maybe not on the Mars versions, yet). To judge the subject sale's actual "representativeness" in the market to prevailing market prices to see if it was actually a good sale (i.e., actually market value), a statistical model would have to be designed to verify that the Subject Sale was not an aberration -- but this "detail" could perhaps be worked out. You would have to devise such a statistical checking model (as part of this product you would be bringing to market) -- to facilitate the successful marketing of the "Cyberborg AppraiseRater."

This could be done for Medieval properties too, and the currency exchange rate might have to be figured out at other times. Is commerce in salt licks, beaver skins, dollars, rubles, or sea shells (or virgin women -- for the Muslim extremists appraiser in mind)? Economic conditions might become an issue if you were assigned to value a particular mausoleum, where the best comparable sales might be 20 or 100 years apart, but you would have the economic data provided to do it all with -- all provided on that particular program module selection (if you knew to open for the right economic data file and knew how to use it).

Ultimately, you have a Rating System of appraisers -- nationwide. A measure. A scale. Not completely conclusive by any means, but an indicator:

"Sir, we might can use you on this appraisal assignment, what is your Cyborg Appraiser Simulator Systems 4000 (CASS-4000) Rating? Is that a recent testing? How many modules back-to-back and what experience level? Our underwriters indicate we will need at least a grade 74-B for an assignment like this. You have a 86-D1 rating fresh from a recent gaming/testing!? Wow! Hmmm ... you may be a bit over qualified for this job, but we will want to talk with you about an even better paying assignment -- a couple of high rises we are looking at in Odusville... What kind of turnaround time can we expect and do you take your fee in dollars, shells or virgins?"

dcj</span>

<span style='color:brown'>________________Additional thoughts______

Austin,

You write in your next to the last post:

"...However, I still contend that to protect the integrity of the appraisal process, any questions of methodology or appraisal procedure should be presented to a standing grand jury of experienced appraisers (appointed by their peers and not politicians) and pass their muster before the appraisal board can act on it. The reason I say this is to protect the appraiser from this situation: “Either add another $20,000 to my appraisal or I will turn you into the appraisal board..."

"Under our existing system, especially in states like North Carolina with their “Witch Hunt Mentality”, the client has nothing to lose. Once the client makes his complaint he has shot his wad."

Excellent. Your quotes are unusually Interesting-Idea-Packed. The "grand jury" concept is something that is sorely lacking in the disciplinary process at some, most or all such boards, to some degree or another (for one, to wit: www.boardwatch.org/htmfiles/probablecause.htm ). You have appropriately linked it to an increasingly popular Extortion Strategy for "Appraiser Valuation Control" on the part of clients (or any other "Friend of the Court ... err, "Friend of the Board" as any interested party may file such a claim against an appraiser). And you have commented how pitifully painless it is to carry through with the extortion if necessary (against any and all remaining stupid appraisers).

The combination guarantees the corruption of appraising (as if we did not have enough problems already). In NC, we are not necessarily seeing a rise in the number disciplinary cases due to the NCAB's policy of protecting a client's/customer's right to the valuation of their choice. But this is probably not a good sign. With the word being out about the policy for some time, this implies appraisers are "properly acquiescing" -- some, automatically so probably, without ever even having to be so instructed in the first place. Your grand jury idea might be a partial solution. Another partial solution is mandatory recordkeeping of the voting record of individual board members during hearing deliberations. The deviants could be better identified and would be forced to take some responsibility for cowardly, dastardly actions instead of the "hit and hide" terrorist's tactic currently widely available.
_______________________

And then from your most recent post directly above:

"There were about 50 experienced appraisers in the class from all over the country most from large MAI appraisal firms...Again, these were highly experienced well-schooled appraisers from large firms...The price estimates ranged from $500,000 to $1,000,000."

Interesting number you cited -- 50 (as in states). Could just be another case of "too many cooks spoil the broth" in combination with the "watered down responsibility" concept discussed here. Every group member can safely say: "Sure our group's value may have been way, way off, but it Sure Wasn't My Fault -- no one would listen to me."

My somewhat tongue-in-cheek post (hope you liked it) expresses my desire for more individual accountability and credit in appraising for a job well done (or poorly done). I cannot see remaining in appraising for life due to my experience with annointed Jackasses-in-the-Box being able to judge & jury an appraiser as wrong while breaking the very same set of rules in order to do so. Incredible. So, I spend what time I can studying the sciences (molecular biology), where, at least in the end, the clowns don't always get the last laugh. -- dcj</span>

 

[George Hatch]

Your experience demonstrates exactly why I never tried to do a group exercise with appraisers. We are too accustomed to working alone; we don't work well with others. It's like trying to herd cats 8) . The more veteran appraisers involved, the more 'technical' the solutions are going to be. Everyone is going to try to outdo the others with arcane techniques and theories. Especially if they can show off their math and a regression analysis (LOL). I don't think a case study problem with carefully built but limited data is a good indicator of day-to-day appraisal practice. There's never any context.

I still maintain that if the data is reasonable for a subject property that most appraisers would come up with similar results if left to their own devices, your 'engineered' case study experience notwithstanding. Granted, adjustment techniques are going to vary somewhat depending on the type of property and comparability of the data involved, but the basics are still going to be there.

Besides, the big problems in appraisals don't even come into play in the adjustments of the data. They usually come in prior to that with the identification/description of the subject property to be appraised, and/or the selection and description of the comparables. I have seen appraisals where the final value turned out to be correct (must have guessed) but the manner in which the appraiser got there was flat out wrong. I'm sure you have, too. Kinda like they were backing into a gut feeling. And by that, I mean their definition of the problem or selection of comparable data was either totally incompetent or just misleading, not so much that the adjustments of the data were wrong.

So I guess you could say that it is possible to come up with the right value using the wrong methods and techniques (misleading), but it isn't possible to come up with the wrong value using the right methods and techniques. Assuming there are no truly hidden aspects about the property or the appraisal problem itself. I'll bet you could even engineer one of your regression analyses using the wrong methods and yet come out with a correct value. I've definitely seen Yield Capitalization analyses that used very faulty assumptions yet managed to come in with the right value. It's like using two wrongs cancelling each other out to make a right.

The answer itself does not demonstrate competence or professional practice. The process does.

It's true enough that the body of knowledge for appraisers has yet to be codified. There is no universal method for coming up with specific adjustments for physical characteristics; there is no universal method for calculating accrued depreciation, and so on..... However, there are methods and techniques that are reasonably consistent and demonstrable in daily appraisal practice and in the standard appraisal texts. Appraisers shouldn't be making adjustments for fireplaces without some way to back them up. Those adjustments are subject to review and should be demonstrable somewhere, or else not made. Our work is generally defined by our peers and subject to the 'rule of thumb' test (if this were my money, would I buy it at this price?). Ergo, the reasonable man theory.

This is exactly why a reviewer or a state investigator should avoid chasing value under the guise that the value is the thing, and focus on the process itself. You cannot fault someone for a difference in opinion, only the manner in which they got there.


George Hatch

 

[Tom Hildebrandt]

Austin

I understand yopur point, Austin. And I agree with you in principle. Your position is that an appraisal, whose primary function is to provide a value, should ultimately be measured by the value conclusion. You also note, and I agree, that there are many "correct" ways to solve a specific appraisal problems.

Your primary premise would be an absolute except for two major issues. The first is that in developing the opinion, the professional appraiser must follow the appraisal process as outlined by USPAP, ie, he must have a supportable basis using appropriate methods and technniques. In the extreme, this philosophy could mean you may get the wrong number, but still be USPAP compliant. The second issue is specifically what George is presenting in his most recent post, that the client may require the report (as opposed to the appraisal) to present elements of facts, that if incorrectly reported, may make the report misleading for the clients intended use even if the value is correctly developed.

So, if one is not a professional appraiser, they can provide opinions all day long and if they get the value right, that is ok regardless of how they get there. That is what many brokers do.

The professional appraiser must comply with the appraisal process as presented by USPAP for their work to be credible. They also must meet the reporting requirements, as defined by the client and USPAP, so that the report itself will not be misleading.

We actually agree, as does the ASB, on the significance of the intended use of the appraisal and the related report and that regulatory agencies have a problem with this concept. The 2002 F&Q #79 addresses the issue in the summary on page 49 saying "It is essential that an appraisal be judged within the context of its identified purpose, intended use and intended users, as stated in the appraisal report. In nearly all cases, enforcement authorities are not intended users of appraisals, so enforcement agencies should use extra care in understanding the circumstances under which an appraial has been developed and reported."

Regards

Tom Hildebrandt GAA