Josh – Active Appraiser

Can I solicit a listing during my appraisal?

I was recently part of a discussion where an appraiser asked the group:

I am an appraiser as well as a real estate sales agent. After I complete inspecting a property for an appraisal assignment and before leaving the property, can I then solicit the owner about the prospect of being his listing agent or buying agent if he needs one in the future? I have no current interest in the house being appraised. Would this action violate USPAP?

Remember that determining compliance or non-compliance with USPAP would ultimately be determined by your state regulator. Certain states may have position statements, guidelines, or specific instructions on how to handle yourself in these types of dual-license situations. That being said, let me discuss with you several important passages from USPAP which relate to an appraiser soliciting his or her sales services to a homeowner during the appraisal visit.

To start, the Conduct section of the Ethics Rule states that an appraiser “must not misrepresent his or her role when providing valuation services that are outside of appraisal practice”. Part of understanding whether we are “misrepresenting” our role is to consider our interactions from the point of view of the parties involved, in this case the homeowner. In your case, you are clearly performing services as an appraiser, since the homeowner was told an appraiser would visit the property, an appraiser’s office called to set the appointment for the appraisal visit, an appraiser arrived to measure and photograph the house as an appraiser, and so on. If, while you are perceived to be an appraiser, you solicit business related to sales services and later list the house for sale, might the homeowner think you are listing her house as an appraiser? After all, you solicited the homeowner when acting as an appraiser and the homeowner knows you by your appraisal work.

Soliciting for a listing while performing the appraisal as an appraiser can mislead a homeowner in terms of his or her understanding of what service you are providing now and what service you might provide in the future. The Management section of the Ethics Rule states “An appraiser must not advertise for or solicit assignments in a manner that is false, misleading, or exaggerated.”

Keep in mind, too, that the Conduct section of the Ethics Rule states “an appraiser must perform assignments with impartiality, objectivity, and independence, and without accommodation of personal interests.” Offering sales services as you described may cast doubt on whether you are truly acting impartially and without accommodating your personal interests.

Further, and perhaps most to the point, your act of soliciting or promoting your services as a listing or sales agent creates a prospective interest in the property or parties. To illustrate, ask yourself: Why are you advertising your sales services to her? Invariably, your intent is to obtain the listing and/or sell a house to her in the future – a prospective interest.

If you have an interest, USPAP then requires two disclosures for appraisal and appraisal review assignments. The Conduct section of the Ethics Rule requires: “If known prior to accepting an assignment, and/or if discovered at any time during the assignment, an appraiser must disclose to the client, and in each subsequent report certification: any current or prospective interest in the subject property or parties involved”. The initial disclosure to your client might take the form of a phone call or email, and the disclosure in the report certification should follow the example of Standards Rule 2-3. (Note that if you are performing appraisal practice that does not result in an appraisal report or appraisal review report, the initial disclosure to your client is still required.)

But disclosure aside, while USPAP allows the appraiser to have an interest in the property and parties, many intended uses prohibit the appraiser from performing the assignment if he or she has any interest. For example, the I.R.S., the GSEs, and federal financial institution regulators have regulations speaking to the appraiser’s interest related to the property or parties. So, while USPAP allows it, you would likely need to decline or withdraw from the assignment if you have a current or prospective interest.

In the scenario in question: by soliciting sales services, you are creating a prospective interest which must be disclosed and likely precludes you from performing the assignment.

To restate the oft-cited “hat” metaphor: bring only and wear only your “appraiser hat” for your appraisal assignments.

Joshua Walitt, SRA, AI-RRS, MNAA, CDEI is a certified residential real estate appraiser, reviewer, and educator. As the Compliance Manager for Property Interlink, he oversees procedures, training, licensing, audit, operations, and review functions. His ongoing goal is to increase accuracy and efficiency through sound reasoning and communication skills, appropriate methodology and technology, and proper oversight.

He writes for industry publications, speaks at national industry events and client conferences, and designs and presents education courses. Prior to joining Property Interlink, he provided fee appraisal and consultation services. He has also been recognized as an expert witness in local and federal court.

Walitt holds the SRA & AI-RRS designations with the Appraisal Institute, is a Board Member of the National Association of Appraisers (MNAA), holds a Certified Distance Education Instructor (CDEI) certificate, is an AQB Certified USPAP Instructor, and currently serves on the Colorado Board of Real Estate Appraisers.

Appraiser Participation: Voicing Change…

In March of this year, I spoke at the Valuation Expo in Orlando. The general topic of my presentation centered on professionalism within the appraisal industry and how individuals can take steps to stand out and rise above the difficulties we see. As a fee appraiser for many years and having recently moved into a compliance manager and review position, I have seen both sides of the struggle to achieve professionalism and excellence in day-to-day appraisal work.

As I closed my talk at the Expo, I shared with the conference the good news that, after years of prohibiting trainees from signing appraisal reports, the Colorado Division of Real Estate had issued guidance on finally allowing trainees to sign as the “appraiser”; the Division’s guidance aligned very well with Fannie Mae’s recent reminder that the GSE has allowed trainees to sign reports for years. My point in the talk was not to boast (although I was overjoyed!) that Colorado trainees and supervisors now had more flexibility in managing their appraisal firms from a training perspective. Rather, my point in sharing the good news was that years of actions by me and other individuals, groups, and companies had finally brought about important CHANGE in our state, which was a main premise of my talk.

As I’ve written before, the Power Of One (one person taking action) is a formidable force – especially when coupled with many other individuals taking action towards the same end. During the question period after my talk, the following day at the conference, and in the months since, appraisers have asked me “What can I do to make necessary changes in my state?” So, let me reiterate several of the main points I presented in March:

Every state is different. Some states’ policies may stem from the law itself, in which case the solution would likely require legislative changes. In other states, the problem may be related to the rules that the real estate division or board have adopted; changes to rules can take time, but are often simpler than changing laws. As I told one participant from the podium, “There is no 10-step process that works in every state to bring change.” Remember, whatever steps are needed to alter your state’s rules or laws will not take days or weeks, but likely months and years.

Reach out to organizations. State coalitions, the National Association of Appraisers, the Appraisal Institute, and other appraiser organizations may have local chapters and contacts who can shed more light on the issue and help to direct your efforts for maximum effectiveness. In my case, the NAA contacted appraisers, management companies, and lenders who wrote letters and emails explaining the need for trainees to participate more fully in the appraisal industry in Colorado; when I approached the State, I was able to share these documents to show it was not simply one appraiser who was concerned about the issue, but rather the larger industry. I owe a big Thank You to the NAA!

Attend state Board meetings. Don’t expect someone else to tell the Appraiser Board or the real estate division that there is a problem. Call, email, and visit the state yourself. In my case, I called and emailed the Board and Division numerous times over a period of over a year, before being encouraged to attend a Board meeting at which time productive discussion took place, including future steps for the state. At one point in the process, I found out about a Board meeting at the last minute, so joined by phone – but only after pulling off the interstate and parking in a hotel parking lot (I was driving to an appraisal appointment at the time). Bottom line, commit at least some time to getting personally involved, and get to know the employees and Board members in your state.

Join a professional organization. Ask fellow appraisers about their experiences with specific appraiser organizations. Costs of membership vary from one organization to another, so research the cost. Contact the local, regional, and national leaders of the organization or coalition. Determine what the organization has done to affect the appraisal industry positively. Truly, supporting appraiser groups ensures that appraisers’ interests are being bolstered behind the scenes on a continuing basis, even as you go about your daily work.

Ask questions and network. As you attend conferences and other events – whether locally, regionally, or nationally – get to know people. Seek out your state regulators and Board members, long-time experienced appraisers, representatives from agencies and the GSEs, current and former Board members, individuals who participate in appraisal organizations, and other knowledgeable participants in related industries such as bankers, real estate agents, and lenders. Who better to hear the rationale behind current policies than many of the people on the front lines? Communication with others – and encouraging the continued distribution of accurate information – helps to strengthen you and your peers’ knowledge base.

I was certainly not the only person responsible for “victory” in allowing trainees to sign reports in Colorado. However, it was through the steps above that I ensured my years-long activities were united with many other individuals’ and organizations’ efforts to bring about the change our state needed. As I shared at the Valuation Expo: “If you want a voice, you need to make sure you’re saying something. So… what are you saying?”

Joshua Walitt, SRA, MNAA is the Compliance Manager for Property Interlink, an appraisal firm and management company. He oversees procedures, training, licensing, audit, appraiser independence, and review functions. He is currently a Director on the Board for the National Association of Appraisers (www.naappraisers.org). Prior to joining Property Interlink, he provided fee appraisal and consultation services to lenders, attorneys, management companies, and private parties. In 2013, he was the appraiser member of Colorado’s AMC Rulemaking Taskforce. Walitt designed the Market Machine in 2015, a market analysis and regression modeling tool used by appraisers throughout the U.S.. He also provides valuation consulting for international applications. He writes for industry publications, designs and presents education courses, served as a valuation hearing officer, and speaks at regional, national, and client conferences. Contact: linkedin.com/in/joshuawalitt

Common Appraisal Errors – Part 1

Having a report that complies with USPAP, state, and client conditions is not simply a client expectation, but an essential component to every appraiser’s practice: appraisers, after all, are the individuals to which the standards directly apply. Consequently, appraisers are directly in the cross-hairs for state sanctions if deficiencies are discovered.

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This article was published on Working RE magazine. See the full article here… http://www.workingre.com/common-appraisal-errors-part-1/

Process, application, and communication of regression modeling in valuing real estate

Regression software has become more and more a part of developing real estate property value opinions. As a result, it is paramount to understand the differences in tools available, and the elements of the regression process that are necessary for the valuer to understand and to disclose in a report.

While guidance is available related to the general use of AVMs and statistical tools, currently there is limited detailed guidance that speaks exclusively to the specifics of regression modeling. There is little instruction on evaluating the credibility and reliability issues that surround: the variety of features in regression tools, the process of developing a regression model, and the communication of the conclusions to the user. Below are important factors for the valuation professional to consider when evaluating the choices of software, and when generating, applying, and communicating regression results.

General knowledge of the regression software’s “inner workings”.

The valuer should understand and disclose the overall processes used by the tool and the type of regression employed. In addition, the valuer should understand any built-in equations, parameters, algorithms, and “givens”, which are automated and out of the control of the human valuer. How do those automated operations affect the process and results? For example, if the software automatically subtracts an estimated land value, automatically removes certain types of transactions, or automatically applies increases or decreases to prices based on market changes since the transaction date, how exactly is the software making those determinations and what is the impact on the final analysis?

Plain-language explanations.

It is likely that the user of a valuation report (and quite likely the valuer him or herself) is not a statistician or mathematician. Terms like R-squared, p-values, coefficients, ranges, intercepts, and other words related to regression should be explained so the user can understand the content of the report. This is not to say that specialized terms should never be used, but rather that they should at least be defined in a clear manner.

Data: source and delineation.

What data is brought into the regression software, and what is the source of that data? Consider and disclose the geographic area, transaction dates, physical and transactional characteristics, the size of the pool of sales, and other delineators. The valuer should understand and disclose what data is initially imported to the software, as well as how (or, if) additional filters are applied to that data. For example, if all residential sales from City A are imported to the software, and is then filtered to analyze only manufactured houses within a certain neighborhood, those constraints on the data should be understood and disclosed, with the implication that the resulting data set is relevant to the subject. Additionally, if data is supplied by a third-party, are the make-up and origin(s) of that data understood, and is the data thorough and adequate for a reliable analysis?

Excluding data.

Beyond the general filtering of data, the valuer should understand and disclose the rationale for the exclusion of other sales. Reasoning could include the sales being outliers, having unreliable or incorrect information, or other reasons. For example, were some properties remarkably large, small, old, new, high-quality, low-quality, or did they have data that was legitimately suspect or otherwise flawed which could not be corrected? Did manually excluding the data result in a regression model that was improved and more relevant to the subject than it would have been?

Pool size.

The valuer should understand and disclose the size of the pool of sales being analyzed. For example, is the pool so small that conclusions are not reliable or the pool so large that conclusions are not relevant to the subject, to the point the reliability and/or credibility of the model are affected? Does the pool size influence how many independent variables should be (or were) used?

Variables used.

Independent variables in a real estate regression model are the physical and/or transactional characteristics of the properties that are determined to affect (or not affect, in some cases) the sales price (the dependent variable). As such, the independent variables are of utmost importance to the analysis. The valuer should understand and disclose the method and rationale behind the choice of the specific variables used. If the selection of the variables was partially or fully in the control of the software, or was otherwise limited by the software, the valuer should have a general understanding of the software’s parameters that are used for such determinations, with disclosure in the report. Has the software so limited the selection of variables or forced the exclusion or inclusion of certain variables, to the point that the outcome of the regression model is affected?

Absent variables.

The valuer should consider if any independent variables are likely absent from the model, such as due to limitations in the data source or built-in parameters of the software. Absent variables might be evidenced by a low R-squared figure or other known factors, and might include characteristics that are not accounted for, such as condition, quality, location factors, or other characteristics. The valuer should consider and disclose how these circumstances may shape the reliability of the model and the valuer’s application of the model’s output. The valuer’s understanding of variables that are absent from the regression model can influence the valuer’s use and application of the output.

Testing the model.

The valuer should test the conclusions drawn from the regression model. Tests might include visual scatter graphs, to illustrate the degree of accuracy of the regression output for the pool of sales analyzed. Tests also might include applying the adjustment-rate conclusions to actual market sales (such as sales specifically comparable to the subject), to illustrate the comparison of the model’s predictions to the sales’ actual sales prices. Comparing regression output to other market data, such as comparing regression figures to paired sales figures, can be a useful process to test and reconcile reliable and credible conclusions.

Application, and other approaches to value.

The valuer should understand and disclose the extent and purpose for which the regression model is being used. For example, is it being used to simply indicate which characteristics are the important driving features in a particular market segment? Or does the model’s use also include estimating the likely value(s) for a type of or a specific property? If being used to estimate a value, the valuer should understand and disclose whether the model was used in isolation for its own end (such as to calculate a prediction of a subject property’s value) and/or in tandem with other approaches to value (such as to estimate adjustment rates in a market approach).

Note: This document is a summary of considerations related to using regression in real estate valuation; it is not comprehensive, nor is it a set of standards established, required, or endorsed by any organization or agency.

TRID v Customary and Reasonable Fees

This past week, I had the opportunity to discuss TRID with appraisers, lenders, and AMCs when I attended and spoke at the Appraisal Summit and Expo (http://www.appraisalsummit.net). Clearly, there are misunderstandings of this lender disclosure rule.

A few basics about the TRID rule (TILA RESPA Integrated Disclosure):

The lender must disclose the appraisal fee to the borrower, and cannot collect more than the disclosed amount from the borrower at closing. This is a “Zero Tolerance” disclosure item.
After the amount is quoted to the borrower, if the lender learns of a previously-unknown complexity related to the appraisal, that event may qualify as a “Changed Circumstance”, which may give the lender the option to re-disclose the higher fee amount to the borrower.
If the lender already knew of the complexity (or reasonably should have known), then the lender cannot re-disclose (nor collect) a higher fee to the borrower. (Additionally, the lender always has the option to simply not re-disclose the higher fee to the borrower, but then cannot collect the higher fee at closing.)

Did you notice…? None of the above actions involve the appraiser!

TRID is a rule that governs activity and disclosure between the lender and the borrower – not the appraiser. In contrast, Customary and Reasonable Compensation (C & R) rules govern activity and payment between the lender and the appraiser.

The lender cannot pick and choose: it must comply with both sets of rules – TRID with the borrower, and C & R with the appraiser. Let’s look at an example…

The lender takes in an application for a single-family property with no known complexities. The lender engages an appraiser who agrees to perform the specific assignment for $X, and the lender discloses that fee to the borrower.

After the inspection, though, the appraiser notifies the lender that, since the property actually has an accessory unit, he/she will require a fee of $Y (higher) due to that complexity. What are the lender’s options in handling this situation?

The lender may agree to pay the higher $Y fee to the appraiser, so that the fee reflects the complexity in compliance with C & R. In terms of complying with TRID, the lender has a few options, depending on the specific situation and the lender’s interpretation of “changed circumstance”:

the lender may choose to re-disclose the higher $Y fee to the borrower so that it can collect that fee from the borrower at closing, if the lender believes the scenario meets the definition of “changed circumstance”; or,
the lender may choose to not re-disclose the higher fee to the borrower, and simply absorb the difference itself when it pays the appraiser.

Regardless of the lender’s handling of “changed circumstance” or TRID disclosures, the lender is still subject to the C & R appraisal fee rules.

Appraisers are reporting that some lenders have stated the following in newsletters, blast emails, or other announcements:

The lender will not ever increase the appraiser’s fee even upon discovering complexities; and or
The lender will pay only a set fee to an appraiser (such as based on county or state) regardless of the complexity of the property or assignment.

The above-two lender policies are just that: lender decisions. Nowhere does TRID suggest that lenders should ignore complexities in an appraisal assignment when determining a C & R fee to pay an appraiser. In fact, the above policies may prove to be problematic for lenders, due to AIR violations (appraiser independence rules) resulting from non-compliance with C & R rules.

After all, how could a lender produce a believable argument that the C & R appraisal fee for a property – now known to be complex – would be the same amount as when the property was originally believed to be non-complex?

Here are a few tips for appraisers:

Conduct basic research about a subject property and quote the appropriate fee.
When requesting fee increases, always cite the reasoning.
“TRID” is not a compliant excuse for paying a non-C & R fee to an appraiser. TRID regulates disclosure between the lender and the borrower, and does not release the lender from its regulatory responsibility to pay C & R fees, including when a property is complex.

As with most government rules, lenders may end up having procedures that look slightly different from one lender to another. However, TRID-related lender policies should never distract from, be confused with, or “trump” compliance with the payment of customary and reasonable fees to appraisers when faced with complex properties or assignments. Complying with one rule at the expense of another, is never an acceptable approach to compliance.