Follow-up to Valuation Expo 2014 Presentation

valuation expo

A big “Thanks” to Joan Trice and the Allterra Group for holding another great Valuation Expo. This year was the 15-year anniversary and the Expo did not disappoint!

 

I had the opportunity to speak at the recent Valuation Expo held in Las Vegas. My talk was called “Everyday Compliance Items and Your Appraisal Business” and focused on issues related to federal, state, and client rules, regulations, and expectations. The main thrust was to examine how we can handle all of these so-called “laundry list” of items efficiently and effectively in our day-to-day work.

 

At one point, I discussed unacceptable “stips” (aka, revision requests) from clients, and shared that I had once been told by a client to “remove time/date adjustments – we do not allow them”. It elicited a groan from the group (we all know a client can’t tell us that!) and I went on to tell them that I persisted and the adjustment remained in my report, by referring the client back to the support, analysis, logic, etc. already in the report and by explaining the multiple sources that supported my including adjustments. Afterward, I did have an appraiser attendee ask me, “Couldn’t the client ask you to remove it if it wasn’t appropriate?” He brought up an important point: of course we shouldn’t include time/date (aka market condition) adjustments if they are not supported, but in this case, I had ample data – which was detailed and analyzed in the report.

 

It was for time reasons that I didn’t get into all the details during my talk at the Expo, but I did want to share the specifics behind the request, because I suspect I am not the only appraiser who has been asked to make similar changes to reports. Below is the article I wrote a few months ago in the April 2014 edition of Appraisal Today regarding this incident, and how I was able to insist that my report remain as delivered (with the already-included support) and to still retain my client.

Take a look and let me know your thoughts.

Appraisal Issues: Handling Unacceptable Instructions from Your Client

Appraisal Issues: Handling Unacceptable Instructions from Your Client

This article was originally printed in the April 2014 edition of Appraisal Today, “Handling “instructions” to not make time (market conditions) adjustments without losing your client”

 

by Joshua Walitt

 

 

A few months ago, I posted to my blog several sample “instructions” I received from lenders, one of them telling me to remove a time adjustment I had applied to a comp that had sold 6 or 7 months prior to the effective date. (The other sales comps I used had all sold in the prior one or two months and I made no adjustments based on the market studies.)

My blog emphasized remaining professional, polite, and courteous in handling any appraisal issues with clients, as well as solidly knowing the rules, with the goal to save any business relationships worth saving.

 

Some could argue that a client that “instructs” an appraiser isn’t worth keeping, and I’d tend to agree. But when the client has a long-term and good track record, the fact that one problematic episode arises isn’t, in my opinion, reason to throw the baby out with the bath water and fire the client. As it worked out, I was able to communicate effectively with my client and save the relationship (I’ve received more assignments since the episode). A few appraisers questioned how I could possibly remain strong in insisting that my time/date adjustment (aka, market adjustment) remain in the report, yet still retain the business relationship. (Oh, and I like to think I educated the client at the same time!) This is one type of example I will be using in June when I speak at the Valuation Expo in Las Vegas. My talk will cover compliance-related issues and practical applications to our day-to-day appraisal businesses.

Residential Appraisal

With only minor editing, I’ve included the email exchanges below. While there are many issues related to the discussion, some of the major items I noticed throughout the conversation are included below.

 

Can a no-time-adjustment policy be an acceptable assignment condition?
No. Adjusting for market conditions is a necessary (and fundamental) part of analyzing sales, in order to bring sales “current” to the effective date. An assignment condition that bars an appraiser from properly applying such adjustments would be unacceptable, and raises USPAP and Appraiser Independence issues for the appraiser and client.

 

Is it a problem that this assignment condition was added after the assignment engagement (in fact, after
delivery)?
Whether it was presented as part of the original engagement or as an additional condition after acceptance or delivery makes little difference.
At engagement, such a condition would have to be considered an unacceptable assignment condition. In the latter scenario, after engagement or delivery, this type of “instructing” the appraiser in the development or reporting of the appraisal would not be in line with Appraiser Independence regulations.

 

Does the client evaluate the market, in order to determine when a time adjustment is warranted; or, does
the appraiser do that?
Obviously, it must be the appraiser – the market analyst expert – who evaluates the market. Regulations require that the lender engage a state-certified or state-licensed appraiser to develop and report the appraisal. They need to leave the appraising up to the appraiser.

 

Is forecasting important when deciding whether to apply time adjustments?
Forecasting may come up in some assignments, but in market value assignments for lenders, typically adjustments to comparable sales are not related to forecasting into the future (beyond the effective date), but to bringing the sales “current”. If a client is concerned that the increase or decrease in a market may not continue into the future, that concern is not directly related to the market adjustments made to the sales.
[Editor’s note: sometimes a “quick sale” value is requested on REO appraisals, such as a 90 day sale when the typical exposure time is much larger. This is, or is very similar to, future value.]

How much market study summary (such as graphs, charts, narrative) is necessary to support a
time adjustment?
In my experience, the necessary amount of summary analysis supporting market adjustments may vary, based on the market, the specific data, the variables studied, the availability of specific data, and even the client (the client can compliantly ask for further clarification). Most frequently, the Neighborhood section of standard appraisal forms (even supplemented with the 1004MC form for lending appraisals) does not offer enough space or request enough data for an adequate summary.

For example, simply reviewing the change in median sales prices over 3 periods of time, such as on the 1004MC form, may not provide enough data to determine whether values have increased or decreased, or how much they have changed. There is not enough information provided to a lender to understand how market adjustments were arrived at.

 

Does it really matter if the appraiser simply takes away the market adjustments?
If the appraiser believed, from market data, that a market condition adjustment was warranted, then removing it because a client instructs him to do so is a problem. And it’s not just a problem for the appraiser, in terms of USPAP and state enforcement.

The lender is required to obtain a USPAP-compliant report and the entire process must meet Appraiser Independence requirements; “instructing” an appraiser and utilizing a non-compliant appraisal does not place the lender in a good position.

————————————–
The email conversation, between the underwriter and myself, follows:

Request from Underwriter
Hello Josh,

Due to feedback from investors we cannot accept positive time adjustments on any comps, so please remove the time adjustment on comp 3. In the past we could accept positive time adjustments, but our investors feel differently now. So going forward please do not use positive time adjustments. This will be reassessed as we go along and the market continues to show an increase in values.

Thank you for your help

Underwriter

———————————-
Reply from Josh
Underwriter,

For me to ignore all of the studies and data that I’ve summarized in the report and not reflect the change in the market for this older transaction would not be consistent with USPAP or sound valuation practice. I can honestly say your organization is the only client, lender, or AMC that has ever instructed me to remove an adjustment. FNMA, VA, FHA, etc. all expect market analysis, and FNMA Selling Guide specifically notes time adjustments can be positive or negative. This was conventional – what set of industry guidelines is this file subject to?

Your hard and fast rule could be called an unacceptable assignment condition because it does not allow the appraiser to follow USPAP. Lack of time adjustments is one example of the problems that led to appraisers being blacklisted and losing State licenses after the bubble a few years ago.

Please hear my comments as they are intended, which is a non-confrontational discussion in order to figure out how we can work through this. I hope these comments do not jeopardize our business with one another.

Best regards,

Joshua Walitt
——————————————
Reply from Underwriter

Josh,

I understand your concerns and what you have to understand is that we have to satisfy our investors and you are the only appraiser that I have seen at this time use positive time adjustments. [Editor’s comment: How many times have you heard this? Am I the only one who does what should be done in an appraisal? I doubt it.]

I have had conversations with the investors and yes you are right there are times when it would be appropriate to use time adjustments but because of the short amount of time that we have seen an upward trend, we want to be very cautious because we don’t want to be the only ones out there doing this. We received a lot of flack from the investor on the last appraisal that we sent in that had positive time adjustments and ended up having to have a second appraisal done to support the value and that appraiser did not use time adjustments and was able to come up with a similar value. So for right now until we see more of this happening industry wide and being accepted, then we would like to avoid them if possible. I do not want to ask you to do anything that would be against USPAP but as I said I have not received any other appraisals that have used positive time adjustments so it is hard for me to make a judgment on whether you are right or wrong.

I have had conversations with a couple of other appraisers and investors about positive time adjustments and they felt that there had not been a long enough period of upward growth to determine if positive time adjustments are appropriate. Also for comps less than 6 months old I do not feel there is enough data to support the use of positive time adjustments. On older comps positive time adjustments might be appropriate, but again there has not been enough time to determine if the upward growth will continue or turn around and head back down.

You do good work and I trust your judgment and because you want to discuss something would not jeopardize your standing with us. But in this instance I don’t feel that a time adjustment is warranted and in the future you would be asked to remove positive time adjustments for comps less than 6 months old.

This is not a hard and fast rule but a judgment call by our company for this period of time, and as we know things change and I could be asking you in the future why you did not use a positive time adjustment on an older comp. I appreciate your comments and I am always willing to discuss any issues.

Underwriter
————————
Reply from Josh

Underwriter,

Thanks for the response.

The Division of Real Estate has said that if a market has increased (assuming that the summary of those market analyses is in the report and the analyses make sense), then they will expect to see time adjustments. A lender policy is not an acceptable reason for an appraiser leaving off a time adjustment, and the Division considers this type of situation a misleading report, which in the appraisal and compliance world, is a huge deal in terms of violations of USPAP. The Division is the entity that enforces USPAP and issues our licenses. They will “fail” a report that ignores the time adjustment when the market has increased or decreased leading up to the effective date. As they see it, it is black and white.

Other appraisers, your investors, you, etc. acknowledge – according to your email – that the market has increased (at least for some time) leading up to the effective date in this particular assignment. (Of course, it varies by assignment, due to market area, what particular segment,  type of property.) You note you don’t want to be the “only ones out there” having time adjustments appear in your files’ reports. I work for a variety of lenders, and looking back through my reports, I see other reports in which I used time adjustments and summarized my research and conclusions (with attachments and narrative) just as I have in several reports I’ve turned into your organization. I haven’t heard “boo” back from them (I rarely get revision requests anyway) and I’ve continued to get work from them which is one indicator to me that the quality (including time adjustments) in my reports is not an issue. Wanting to see “more of this happening industry wide and being accepted” you write below. As I noted above, it is being accepted by other clients, some small some national. However, looking to the larger industry doesn’t seem to be a reliable way to verify if adjustments are necessary or appropriate. I have absolutely no idea if time adjustments are appropriate for segments of the markets in Denver, Philadelphia, LA, or small towns in Florida. What we look at is our local market, and USPAP – according to the Division of Real Estate and reading USPAP – expects us to react certain ways in our reports if the market has changed since a comp sale’s transaction.

You note that you haven’t had any other appraiser use positive time adjustments. Talking with other appraisers, I know others are (and some are not) depending on the market and the specific segment, but obviously I haven’t looked at reports you specifically receive so can’t really comment on them. With this, I understand you are in a tough spot not knowing if I am “right or wrong”. But in light of your comments that clearly acknowledge the market in some cases (not every segment) has increased leading up to the current time, I am confidently telling you – in terms of compliance with USPAP and enforcement/ interpretation through the Division – that I am right. The bottom line is, if a market has increased, comps with older transactions must be adjusted, unless there is good reason not to. (Again, policy of a lender is not considered a valid reason.)

You mention in several places below in your email something to the affect that the increase hasn’t been going on “long enough”. Market studies and analyses in appraisals are not meant to indicate forecasting or predictions or anything like that (in general, for lending appraisals).
So, I do not understand the significance of the worry of whether “upward growth will continue or turn around and head back down” as you state. I am concerned with (as are HUD, VA, FNMA, Division, AF, AI, etc.) what has happened between the comp transaction and the effective date. While the “health” of a market can be a concern, a time adjustment is not in response to how long an increase has been occurring or if an increase will continue into the future. A time adjustment IS used to reflect the change in the market from the comp’s transaction to the effective date. For example, let’s say a comp sold 6 months ago with studies showing values increasing during that time (6 months ago up to the effective date); a positive time adjustment may be needed to reflect the upward movement of the market since that specific sale. Another example, I make a positive time adjustment following analysis and provide support in my report, and a month later the market tanks; there is nothing that makes the report invalid because any time adjustments used in the report were reflecting the change leading up to the effective date (to bring the comp “current” to the effective date). There is never a guarantee that a market will not “head back down”, and time adjustments made to comp sales have nothing to do with that. The Division does not allow appraisers to avoid time adjustments (or any adjustments for that matter) based on a lender policy/condition. If they see this type of omission, the appraiser will face a fine, required additional education, required review by another appraiser, or worse for a misleading report. As the Division sees it, there are sequences of adjustments that must be adhered to (which is basic appraising 101), one of them being market/time adjustments, so if it is left out, that is not good. One of the top “missing” adjustments found in reviews of reports leading up to the recent “bubble” were time adjustments and/or little-to-no actual market analysis. I need my license to work.

Knowingly meeting a lender’s condition that is against USPAP is risking my license and not smart. No other lender has asked me to remove adjustments, and no other lender has disallowed time adjustments. I want to find a way we can work through this, while still delivering a compliant report.

Is there a way that you/investors allow time adjustments to remain in a report, through additional pieces of data that I can supply to you?

Josh

———————–
Reply from Underwriter

Josh,
I am willing to give this a try so we will call it good.

Underwriter.

—————————

Final comments

Appraisers have a responsibility to evaluate any requests from clients (lender or otherwise). Whether the issue relates to market (or any) adjustments, the condition of the property, locational influences, the final opinion of value, or a laundry list of other items, appraisers decide. In the end, the appraiser’s judgment and expertise must prevail, in providing the unbiased, credible, and reliable appraisal report he or she is required to deliver.

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

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.

5 Guidelines to Hire the Right Real Estate Appraiser as an Expert Witness

Many legal cases revolve around real estate. These cases can stem from disputes over jointly-owned real estate, tax issues, estates, probate, wills, and trusts just to name a few. Frequently, property valuations play a key role in these cases. Maybe it is a divorce or will, and one party is disputing the value of a property pertaining to a division of assets; or a dispute regarding a buyout in jointly-owned real estate. There are many possible scenarios, but in all cases an attorney will need a real estate appraiser as an expert witness. But not all appraisers are appropriate as experts or qualified to testify in court. So what qualities should an attorney look for when you hire the right real estate appraiser to provide expert testimony?

 

The Importance of Expert Witnesses

In Colorado, legal disputes over real estate can be resolved through trial. The plaintiff and the defendant present their arguments. Depending on the type of trial, these arguments are heard by either a jury or a judge as an objective party. Now with all the possible cases that can come before a judge and jury it would be impossible for them to be knowledgeable in all subjects being tried. In such a case one or both sides will call in an expert witness to clarify the evidence for the judge and jury. An expert witness is a person considered to have credible knowledge in a specific field and provides his specialized viewpoint to determine whether the evidence shared in court is accurate.

real estate appraisal

 

 

Guidelines for Selecting a Right Real Estate Appraiser as an Expert Witness

So what should attorneys look for in an expert? I recommend following these guidelines to ensure that you select the best real estate appraiser for the case.

 

1. Experience

When it comes to legal cases, there is no better criterion than experience. Real estate disputes can be complicated issues to handle, so you want to select an appraiser who has spent a number of years working in the real estate industry. The appraiser should have conducted thousands of appraisals for various types of properties in. The appraiser should also be considered an expert in his field by other local members of his profession and the industry at large. It is also desirable if the appraiser has experience in providing expert testimony in similar cases.

2. Knowledge of the area in question

To be an expert witness in a trial concerning property valuation, a real estate appraiser must be knowledgeable about their profession and about the geographic area in question. Josh Walitt 12-2013 eSay you were trying a case in Montrose County Superior Court in western Colorado. You wouldn’t hire an appraiser from New York to be your expert witness. They might be an extremely qualified appraiser, but without an intimate knowledge of the area in question they would be all but useless to you in providing expert testimony. You’ll need an appraiser with experience servicing the city or county of the disputed property in your case.

3. Honesty and objectivity

An expert is there to aid the court in identifying whether a piece of evidence has material bearing on the case and is permissible in court. To do this, the expert witness must be straightforward and unbiased at all times. The expert witness must be well-prepared and well-researched, providing honest information about the case. The appraiser must have the capability to answer unanticipated questions from either side in the case.

 

4. Professionalism

Attorneys want an expert who is highly dependable. The real estate appraiser’s professional reputation must be beyond reproach otherwise the credibly of their testimony might be called into question and possibly discredited.

 

5. Good communication skills

Attorneys need an expert that talks confidently and can provide clarity to complex principles before either a judge or a jury. They need an expert who comes off as knowledgeable but not a know-it-all. This is especially important in jury trials where verdicts can be swayed by the likeability of a witness.
While this list is not exhaustive, an attorney should have great success in their trial by using these five guidelines when you hire the right real estate appraiser as an expert witness.

 

 

The above statements are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. The opinions expressed at or through this article are the opinions of the individual author and may not reflect the opinions of the firm or any individual attorney.