Author: Josh

Joshua Walitt is a Certified Residential Appraiser. He writes blogs and articles for online and print magazines, and presents talks and seminars to lenders, AMCs, homeowner groups, regulators, and clients, at national conferences and online webinars. He served on Colorado’s ‘AMC Rulemaking Task Force’ in 2013. Walitt designs and teaches online and classroom courses. In addition, he designed the Market Machine, a regression software used by appraisers.

Reasons Real Estate Agents Order Appraisals

I talk with real estate agents almost every day. Sometimes I’m asking them questions about a property that sold which I’m considering using as a comp or I’m teaching a class on appraisals to lenders and realtors. Other times they’re calling me asking about various appraisal procedures or if I can do an appraisal for them. The answer is Yes – appraisers can do appraisals for real estate agents.

 

Pricing a Listing
Let’s say a real estate agent is trying to get a listing from a homeowner that wants to sell. Since they’ll be working on behalf of that homeowner they want to get top dollar for that sale. But they also need to make sure that they don’t over price the home making it undesirable to any potential buyers relative to competitive listings already on the market. In some cases a market analysis done by an agent may be producing significant valuation swings between possible listing prices. In this situation a real estate agent may bring in a certified real estate appraiser to properly value the property, ensuring a reliable list price for a well-timed sale.

 

Difficult Homeowner
Some homeowners don’t want to hear from an agent that there estimate of the home’s current value is overinflated. In these cases to properly list the home at a price that will sell, a real estate agent may call a certified appraiser to develop a second opinion of the market value of the property in hopes of guiding the homeowner to a more realistic asking price. This hard third party evidence may be needed to convince the homeowner that if they want to engage serious buyers they must price their home accordingly.

 

Complex Area or Property
Occasionally a real estate agent will come across a property that is difficult to price. The home may be located in a mixed use area. It could be an older home that the surrounding zoning has changed significantly over the years. This could present challenges in finding nearby properties of comparable use. Or it could be a high end neighborhood which can be problematic because such developments have a tendency to have few resales – and consequently few recent comparables.

 

It isn’t always about the area – sometimes it is the home itself; a home may be significantly over- or under-improved for the neighborhood. One example would be a homeowner who builds a custom “dream house” that is substantially bigger with numerous high-end amenities – far greater than what is typically found in its neighborhood. The problem is there may be no comparables in the immediate area. Here a real estate agent may call an appraiser to establish a value for the home.

 

Legal: Tax Issues, Trust, and Divorce
Sometimes lawyers, trustees and executors are calling realtors to help sell or value properties, but they may initially call a realtor for a referral to an appraiser. Oftentimes, an appraisal – not a BPO or a CMA – is required for legal proceedings. A tax attorney may need to value (or advise a sale) of a property in order to use the proceeds from the sale to payoff state or federal tax liens. A trustee or an executor of a will may need to liquidate the real property of a trust or an estate.
Divorce attorneys contact real estate agents to sell marital homes as part of the divorce settlement. In many of these cases, the agents may be asked to recommend a certified real estate appraiser to establish a market value to satisfy the demands of the legal proceedings.

 

In all of these types of situations, I am relied upon to develop an accurate value opinion in a timely manner to help facilitate the client’s next step.

See my video here.

 

Related articles:

House Market Value: Valuing a House Based on Price Per Square Foot

AMC Appraisal Fees and Disclosure- Joshua Walitt

The proposed AMC Rules from the Agencies are out in draft form.  Coalitions, industry organizations, and groups of appraisers are examining these and other Rules.  There is discussion amongst appraiser groups and other industry participants like never before.  It’s a great time to make your voice heard and to hear what others have to say!

 

AMC_ Appraisal Fees and Disclosure- Joshua Walitt

When I helped put together a petition to the CFPB a few weeks ago (related to correcting the Customary and Reasonable Fee Rules which allows circumventing the intent of Dodd-Frank), I never imagined the amount of responses I would receive. With so much change going on in the industry, I encourage every appraiser to be involved:

 

  • What is your Appraiser Coalition doing?

  • How can you be involved in the local chapters of AI and other appraisal organizations?

  • Have you read your State’s Appraiser and AMC rules?

  • Have you read the Appraiser Independence rules established by CFPB, HUD, the Agencies, and other entities?

  • Who do you contact if you have questions regarding State laws and rules?

  • Have you contacted the CFPB regarding enforcement of Appraiser Independence or Customary and Reasonable Fees?

  • Have you completed any and all available fee surveys related to establishing your area’s typical (aka Customary and Reasonable) fees?

  • When was the last time you met with other appraisers in your area?

  • Have you signed and shared the Petition to the CFPB?

  • Are you part of online discussion groups that are positive and share useful information?

Obviously, we all need time to do our work, but issues related to our independence and our fees are part of the foundation of that work itself, so we need to make time to be engaged in the industry discussion. My talk at Valuation Expo this June will touch on related fee issues, with the overall topic being compliance-related issues and their practical applications to our everyday work.

 

One argument against the Rule-based solution is the assumption that consumers, in the end, really don’t care how much an appraiser is paid. (So is this really a consumer issue? the argument goes.) While consumers may not care about an appraiser’s paycheck per se, let’s not fool ourselves: consumers do care 1) how much they are paying, and 2) what they are paying for. I would argue that consumers DO care how much the appraiser is receiving – since it may differ from what they are charged on the settlement sheet (which may reflect a higher fee than is necessary).

 

If a loan settlement document shows the consumer is being charged $600 for the Appraisal Fee, I think that consumer would find it surprising – and confusing – to learn the appraiser was actually paid $300 (this is an illustration). Even real estate agents and loan officers tell me they are confused over this issue: Why does the appraisal report say the fee is $300, but the borrower is being charged $600?

 

The CFPB allows lenders to separate the two fees on the settlement document. But in situations where the lender chooses to comingle the fees on the settlement document, the consumer may not realize they are being required to pay an AMC fee – which is an optional service.

 

To help alleviate this confusion, many states now require appraisers to post their fees in the reports. HUD also gives this authority to the appraiser for FHA appraisals. (Some AMCs expect the appraiser to post the breakdown of fees within the body of the report.) I have posted my fee in appraisal reports for years.

 

But be sure to include a disclosure explaining why the Appraisal Fee on settlement documents may differ from the fee you’ve typed in your report, so there is a clear explanation of any “additional” or “different” fees. Take a look at a sample here.

 

In the end, Appraiser Independence and Fee issues are complex and there is no easy one-route solution. We must proceed with caution.

 

My two points today:

  1. CFPB Rules related to C & R Fees do not allow for any real enforcement of Dodd-Frank, and need correction.

  2. Post the Appraiser Fee in the body of the appraisal report with a clear and understandable explanation to avoid consumers misundertanding settlement documents.

Take a look at the Petition, and please sign and share it. But don’t stop there: Know your industry, Get involved, Take action.

 

 

Josh Walitt

 

Originally published at appraisalbuzz.com .

 

Appraisals for Trusts, Estates and Probate

Though much of my business comes from lenders and banks, I do a fair amount of valuation work for attorneys, CPA’s, trustees, executors, and estate planners. This often involves appraisals of real property related to setting up and administering Trusts, Estate planning, and settlement at the time of death or property tax assessments during the course of Probate.

 

 

Trusts and Working with Trustees

 

A trustee is usually an individual who acts as the administrator for property or assets for the benefit of a third party. A trustee can be chosen for various purposes and are entrusted to act in the best interest of the trust’s beneficiaries.

 

When a trust is set up, assets are put into a trust and sometimes those assets are real property (primary residence, rental properties, vacation homes, etc.). Before these assets are placed into the trust it is required that a value be established for the properties in order to establish the overall value of the trust. This situation is just one example in which a trustee would order an appraisal for all real property being placed into the trust. It is often a crucial step because various types of trusts have differing rules concerning disbursements from the trust based on the overall value of the trust. Without establishing value for the assets in the trust, the trustee could not calculate appropriate disbursements to the beneficiaries.

 

Because of the nature of trusts, appraisals may not be needed at the time of the original grantor’s death, but it may be prudent to get a valuation for the property at that time in order to establish current value to limit potential future capital gains if the beneficiaries are allowed (through the structure of the trust) to sell the property in the future. It is a complex situation and should be discussed in depth with a tax attorney, CPA, or both.

 

 

Estate Planning and Settlement

 

An estate planner is often an attorney who helps manage the asset base with an eye to the future in terms of minimizing tax liability and ensuring a distribution of assets to heirs at the time of death. Estate planning can be an ongoing process as additional assets are added to the estate or existing asses’ values fluctuate. If these assets are real property, the estate planner will often order a real estate appraisal to establish the value of the property, since it will be included in the overall value of the estate.

 

Additionally, at the time of death the executor of the estate may need to order a new real estate appraisal to establish current market value for all real property, for both tax and distribution purposes. Estate taxes can be a concern, so a CPA or tax professional should be consulted. It is likely that the executor will order an appraisal on all real property at the time of death, in order to establish the estate’s value and the subsequent distribution of funds.

 

 

Probate

 

Probate

Unfortunately, not everyone plans for their death and quite often property falls into probate even if a legal will has been executed. Probate can be defined as “…the general administering of a deceased person’s will or the estate of a deceased person without a will. The court appoints either an executor named in the will (or an administrator if there is no will) to administer the process of collecting the assets of the deceased person, paying any liabilities remaining on the person’s estate and finally distributing the assets of the estate to beneficiaries named in the will or determined as such by the executor.” (Investopedia)

The assigned executor will likely order an appraisal to establish the value of any real property assets. The valuation is going to be key in settling any current or past due property taxes and ensuring that the overall estate in under certain tax thresholds. State’s rules vary inheritance taxes.

 

Procedures related to trusts, estates and probate can be complex and stressful for all of the parties involved. Establishing the value of real property is often a necessary step by engaging a qualified real estate appraiser.

Q & A with Josh Walitt on Residential Appraisals Colorado

Q&AQuestion #1:

My bank said they ordered an appraisal for my loan, but no one ever came inside the house. Does this sound right to you?

 

For certain types of loans, such as home equity loans, banks follow specific federal guidelines (called Interagency Guidelines) which allow for the bank to use an exterior-only appraisal from a licensed or certified appraiser in some cases. These types of exterior appraisals are typically used in low-risk lending situations, and can also used by banks for pre-foreclosure, loss-mitigation, and similar situations. Since the property is only observed from the street, the homeowner may not even know that the appraiser’s visit took place.

 

With exterior-only appraisals (sometimes referred to as “drive-bys”), assumptions are made about the interior, sides (if not visible from the street), and rear of the property, as well as the site in general, based on the limited viewing of the property, along with public records, any records in the local real estate MLS system, aerial imagery, or file information the appraiser has on the property, as long as the sources are determined to be reliable. For example, the appraiser may see that the visible parts of the property are in average condition displaying little-to-no needed repairs, so he could assume that the entire property is of similar condition. Or, based on the county records, the appraiser could assume the subject has a covered back patio, a fireplace, and a detached utility building, none of which is visible from the street. Keep in mind, these exterior-only appraisals are not typically ordered for first-mortgage loans, such as when you buy a house.

 

 For first mortgages, a full appraisal is usually conducted, which includes the appraiser viewing the inside and outside of the property. In these situations, the inventory of the property is observed by the appraiser (rather than making assumptions, as in exterior reports). However, it is important to remember that the appraiser is not a home inspector, so he will still make certain assumptions. For example, the appraiser may assume the utilities are functional, the structure is sound, there are no health hazards, and so on, as long as there is no evidence to the contrary.

 

 There are some situations where the bank can loan without the use of an appraisal. If there is ever any question, remember this: a borrower can ask to review copies of all valuation reports that the lender used.

 

Question #2:

I got my own appraisal a few months ago because I was thinking of listing my house for sale. Now I want to refinance, but my banker won’t take that appraisal.

 

There are several factors at work here.

 

First, banks are required to order their own appraisals, ensuring certain Appraiser Independence regulations are met. For a privately ordered appraisal, such as for a legal matter, a trust, an estate following a death, or a pre-listing appraisal, these regulatory safeguards are most likely not met. Banks and lenders have internal departments and staff that carry out and monitor the appraisal-ordering procedures, although some choose to use third parties.

 

Second, an appraisal has specified Intended Use and Intended Users. To follow federal rule, appraisers must identify the Use and Users of an appraisal report. Examples include: to determine a property’s market value to aid in listing it for sale by the homeowner and real estate agent, to determine market value for divorce purposes by Mr. Smith and his attorney, and so on. The Use and User for lending appraisals may often be to evaluate the property for mortgage purposes by the lender.

 

Why is this so important? The Use can impact what the appraiser is trying to solve: is it liquidation value, market value, a range of values, before- and after- remodel values, a future anticipated sale price? And the Intended User can be a very important factor in the level of detail and information that the appraiser provides in his report. For example, writing for a lender, the appraiser would not hesitate to use terms such as “bracketing”, “highest-and-best use”, “super-adequacy”, “regression analysis”, and so on; these terms could confuse many homeowners, agents, or attorneys, unless there was further explanation in the report. Consider that the appraisal written for you, a homeowner, may not have contained details about the availability of public utilities, a cost to fix flaking paint, a photo and description of the crawlspace, and so on; for some lending purposes, though, these items may be expected by the lender. In some cases, there are specific requirements for legal, tax, and estate appraisals that wouldn’t even be mentioned in other appraisal reports written for other clients.

 

There are a variety of reasons you might order a private appraisal, so be sure to discuss with the appraiser exactly what it will be used for.

 

This article was first published from The Daily Sentinel- GJ Real Estate Weekly.