CAN COMMERCIAL APPRAISERS STAY RELEVANT?
In May 2018 the feds have increased the De minimis threshold on commercial real estate loans from $250,000 to $500,000. This means federally related loans being made below $500,000 are not requiring a licensed appraisal. Likewise, the last quarter of 2018 brought another proposed De minimis change this time for residential properties. This proposed residential change is raising the de minimis from $250,000 to $400,000. As expected, appraisal organizations are outraged, Appraisers accuse federal regulators of recreating housing crisis conditions. Appraisal Institute president, Mr. James Murrett, MAI SRA said that increasing the appraisal threshold will “threaten the vital role” that appraisers have in real estate deals.

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Here's the likely reason why the feds are easing appraisers out of the underwriting process. Licensed appraisers are required by USPAP (Uniform Standard of Professional Appraisal Practice) to appraise a property based on the collective market participant's value opinion within the context of the definition of market value. For example, this means if a specific property is in escrow for $375,000, has 5 backup offers for $375,000, other similar properties in the district are selling for $375,000, and verification of this sale coincides with the elements of the definition of market value, well its pretty obvious the collective market participants think the market value of this property is $375,000.  

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Many appraisers, in all good conscience, will appraise this property with a "conservative" market value opinion below the $375,000 escrowed sale price if they feel this market is over heating. Their argument is because they "feel" it's just plain wrong to appraise the property at $375,000 that could possibly lead to disaster somewhere down the line like what occurred in the 2007 "great recession". What this type of appraisal opinion has led to is a conflict in the appraisal community between these "conservative" appraisers and anyone who, in their opinion, "rubber stamps" this $375,000 value example. 

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This conflict between appraisers was intensified when many of these "conservative" appraisers were dropped from many lenders "approved appraiser" list because they were "blowing" the closings of these loans. When the "great recession" occurred, these blacklisted appraisers felt vindicated for their previous value opinion "feelings".  

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Here is the "catch 22" for appraisers. Do we adhere to USPAP standards and reflect the value opinions of the collective market participants or do we "follow our conscience and feelings" and "dictate" a misleading appraisal value opinion in the face of market evidence to the contrary? 

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In hindsight, appraisers that adhered to USPAP standards by neither over valuing or "conservatively" undervaluing the property as of the date of appraisal appeared to have nevertheless over valued properties once the market collapsed. Although they were not blacklisted from the lending community before the collapse, they were now vulnerable to wrath of blacklisted "conservative" appraisers; lawsuits by clients trying to claw back lost profits from the appraisers E &amp; O insurance; and aggressive state appraisal licensing boards that, due to public outcry, felt a need to "protect the public good" by severely punishing appraisers that elected to reflect their market value opinions based on the collective market participants forecasts and opinions.

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Its very difficult for an appraiser to defend previously appraised values, that have now collapsed, from other blacklisted appraisers that are now acting as "expert witnesses" in these "Monday Morning Quarterbacking" types of complaints.    

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As a result, attempts to resolve this conflict has given rise to AMC's (Appraisal Management Companies) which are middlemen between lenders and appraisers. This policy grew out of the "conservative" appraisers complaint that lenders were pressuring appraisers to "hit" the right market value in order to close the loan. Most of the time, this market value opinion the lenders wanted "hit" was indeed the correct market value as reflected by the collective market participant opinions. The AMC attempt at "leveling the playing field" has actually exasperated the problem in the following ways:

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* Has increased the appraisal costs to the borrower because AMC's have to add their fee on top of the appraiser's fee. 
* The AMC's fee has actually lowered the appraisers "customary and reasonable fees"
* Has increased a draconian appraisal review process by AMC's and other review appraisers that inhibit the field appraiser from accurately reflecting the collective market participants pricing of a specific real estate property. This has led to excessive regulation and insufficient compensation complaints by appraisers. 
* Has decreased the timely delivery of appraisals &amp; customer service
* Has created greater liability risks to appraisers even if they are following the rules and standards
* Has increasing barriers to direct communication with lenders resulting in appraisal report acceptance and/or perceived report quality issues
* Has delegated appraisal assignments to lesser-qualified appraisers
* Has created a reluctance by appraisers to interact with clients out of fear of violating appraiser/client firewall
* Has increased the wealth divide by punishing buyers and sellers that rely on financing when competing with cash buyers. This paves the way for cash buyers to snap up properties ahead of those buyers that have financing contingencies. These contingencies rightfully so have increased seller's risk of successfully closing the sale due to the buyer being denied the loan due to an unanticipated "conservative" appraisal opinion. 
* Has discouraged the next generation of appraisers from entering the profession or existing appraisers from hiring them. 
* Has lead to a shortage of qualified appraisers especially in rural locations. 

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This middlemen AMC solution has not protected the public in reducing the risks of inaccurate and/or "conservative" valuations. Nor has it reduced the risks of another collapse in property values in the near future. In fact, leading macro economists are predicting major valuation bubble formations are occurring in this country and all over the world for both residential and commercial properties. 

 

The exasperation of this conflict has also opened the door to the proliferation of "proprietary algorithms" big data, machine learning, and artificial intelligence types of valuation processes. These "black box" valuation solutions are being created and promoted by founders with little of no valuation experience. The reason they are called "black boxes" is because the valuation processes are not transparent in divulging their appraisal methodologies in arriving at the opinion of value. If you cannot transparently follow the appraisal process without asking the reader to take a "giant leaps of faith" to the conclusion of value, you are opening the door to massive incompetence and fraud. 

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If there’s "proprietary algorithm" transparency, valuation experts will be able to better tell whether or not these processes are just junk science and/or do not adhere to  generally accepted appraisal standards and methodologies. 

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Now you see why the feds are simply excluding appraisers from the process of buying and selling properties. By no fault of their own, appraisers have increasingly become part of problem and not part of the solution.   

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The value industry's leadership and membership have to immediately make up their minds how best to proactively solve this conflict or, if they continue to stay on the defense, see their profession and services become increasing irrelevant. 

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This solution first has to be in the best interest of the public and the world community, and second must have a place for all current participants to fairly participate at acceptable compensation for their services. Lastly, this solution must give all appraisers including "conservative" appraisers a way of quantifying and communicating their "feelings" of hidden risks without contradicting the collective market participants obvious market value conclusions as indicated in the previous $375,000 example.  

   

We think we have solved this problem for both residential and commercial properties and will be announcing this practical solution in the first quarter of 2019. We are a group of dedicated valuation experts with decades of experience in performing complex valuations and reporting. This solution will not exclude any of the current participants and will encourage the next generation of valuation experts in entering the profession. 

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This solution will be used by designated and non-designated licensed appraisers; "conservative" appraisers, and appraisers that give greater weight to the collective markets determination of market value;   AMC's; lenders and other users of appraisal products; real estate brokers that provide valuation services; investors; developers; providers of risk analysis; and even the general public can use this solution in making better buying and selling decisions. 

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This solution will actually speed up the underwriting process by reducing costs, reduce ineffective appraisal  regulations, and reducing the time it takes to prepare and transparently report the appraisal opinion.  

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This solution does not throw out the "baby with the bath water".  Instead, it builds on the current appraisal process and generally accepted appraisal methodologies that are transparent and verifiable by the appraiser and recipients of the appraisal products. This solution for residential and commercial properties not only accurately and transparently derives a property's accurate current market value without bias, but also uncovers hidden risks previously undetected by the appraisal process. 

  

This solution does not exclude data scientists and other specialists in artificial intelligence, machine learning and blockchain technologies. These specialties can use their skills and talents in building upon the transparent foundation of the appraisal process that took decades to perfect. Their participation will add further risk reduction in helping to arrive at accurate and unbiased current market value opinions as well as reducing the risks of future market collapses due to previously undetectable bubble formations when the appraisal was performed. 

  

We welcome everyone's participation and opinions regarding this solution. Help stabilize economies,  encourages growth and promotes the well-being among citizens. By registering [HERE](https://mailchi.mp/82103b1d5464/solutions) you will be the first to receive details of this innovative solution to a problem that has plagued our country and the world community for decades.  

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[{"id": "eatsqae", "text": "This was a wall of text and likely to:dr. However, there are some reasonable issues raised here. Yes, I am an independent fee appraiser. Yes, the new loan threshold increases are highly concerning. But the concern I have is the macro effect of taking an independent third party out of real estate transactions can have on our economy. Keep in mind, in a typical RE transaction the loan officers, the brokers, and the buyers/sellers are all highly motivated for a deal to close. At times, regardless of price or soundness. The Appraisal serves the purpose that for a flat fee giving professional, unbiased analysis on if a price is supported by market data. And to be clear, Appraisals on properties where the value is less than contract price is way more work to Prove the conclusion. Raising the bar on when Appraisals are needed may speed up loan closings, or lower costs slightly, but it also absolutely will increase risk profiles of deals. Appraisers are supposed to maintain the public trust that prices are credible. That seems melodramatic up until the point when banks find the properties are worth less than the loans. Then it just seems like we can\u2019t learn from history. When you remove Appraisals, where is the test of reasonableness on a deal in what is inherently an inefficient market. Frankly, this seems like it will lead to lower LTV\u2019s as banks try to eliminate the Appraisal but keep costs low. I also think that any sound financial institution that intends to hold the loan within their portfolio will require/order an appraisal anyway. Not sure if original post is selling something but for CRE professionals I can say (as an advocate for Appraisals) I think is is not a good new federal policy. And it will hurt most risky banks and those that buy mortgages. ", "replies": [{"id": "eauz9kw", "text": "Your right about more work involved supporting opinions of value below the contract price. Our proposal addresses this and allows the appraisal to fully and transparently support his/her opinion of value with getting ostracized by your clients or reviewers. Sign up on the post to receive our proposals, at the first of the year, to this problem.  ", "replies": [], "depth": 2}], "depth": 1}, {"id": "eatwgyu", "text": "These are very good issues you raise, and the National Credit Union Association is seeking to raise their appraisal threshold to $1M. In fact, I recently met with my Congressman to discuss these issues specifically. The short answer is that if the current trend continues there will be a period where there isn\u2019t a lot of work for appraisers. However, as we have seen repeatedly, lack of regulation leads to a market crash. Be it the S &amp; L crisis of the 80\u2019s or the MBS driven crash ten years ago. Appraiser\u2019s play a vital role in our economy and if these thresholds keep increasing we will have another market crash, it\u2019s only a matter of time. Hopefully when that happens there will be someone in charge who can undo some of the damage to our profession and to the economy as a whole. \n\nThe good news is, if there is a crash, banks will need their portfolios of non-performing loans appraised. Yay?\n\n", "replies": [{"id": "eauyur1", "text": "I agree with you. However, this country cannot afford another crash. Please sign up on the post so we can send you our proposal on how this problem can be solved. We will be announcing at the first of the year. Thanks for your comments. ", "replies": [], "depth": 2}], "depth": 1}, {"id": "eau6oy7", "text": "As a person who buys commercial real estate, why would I care what some third party says about value?", "replies": [{"id": "eau9pzq", "text": "You shouldn't unless you want to borrow money from a institution backed by the good faith of the American public (the fdic sticker you see in 99% of banks). Appraisals are primarily required for federally related transaction, because the loans are federally insured by the fdic and backed by the American people. After the savings and loan crash of 89 and the following regulations to protect the American people from bad or uninformed real estate actors, laws were enacted to create professionals who were experts in real estate valuations to protect the public from having to bail out a bunch of bad real estate deals.", "replies": [], "depth": 2}, {"id": "eauym9v", "text": "You're right, you shouldn't care. The issue is if you borrow money on the properties you purchase and these loans eventually are insured by the feds we need some kind of analysis and support of the property's current market value. Also, we need to know if there are any hidden risks associated with the sustainability of this value during the current business cycle. Your comment is very valid. Please sign up on the post to receive how we are proposing to solve this problem to everyones benefit. We'll be announcing this proposal the first of the year. ", "replies": [{"id": "eav4if1", "text": "My point being, the lease agreement is what makes it a good deal or not for the investor.\n\nThe value of the property only becomes relevant for the lender, they need to have the appraisal.", "replies": [{"id": "i2urfjl", "text": "This is an old post, but FIRREA does not permit loans solely based on the lease in place, if the value of the property's leased fee interest varies from the fee simple interest assuming stabilization.  Quite often leases in place are significantly above market, with the value of the above market rent considered an intangible value. This is actually stated in virtually every REIT offering, so I'm amazed you don't know this.   A FIRREA regulated institution can only lend on real estate value, not intangible value. \n\nMost appraisers (and clearly most investors) do not understand this.  \n\nThe S&amp;L crisis was driven in no small part by banks lending on prospective market values of proposed construction.  When black monday hit, all the banks were stuck with was the land.\n\nIn 2007, every drug store chain had low risk investment grade credit rating.  People were buying these properties assuming they were bonds.  Many closed.  \n\nNow we have whole office buildings or even districts with vacancy rates (and default rates) unimaginable before COVID.  \n\nAn investor that cannot understand real estate outside of simply a lease, or the risk exposure of the landlord if the tenant defaults, cannot survive an economic a downcycle.  I'd imagine you're probably out of business.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "eav3abn", "text": "You are always free to buy without leverage, you then dont have to rely on an appraisal. If you need a loan, then you have to play by the lender's rules and they would want an appraisal. But, like I said you can always buy without leverage!", "replies": [{"id": "eav4p2z", "text": "I would think the lender could substitute a loan-to-value requirement for an appraisal.\n\nThe value from my point of view isn't in the property necessarily but in the lease agreement.", "replies": [{"id": "eav6hof", "text": "We already have max LTV requirements already in all of our term sheets. Say our term sheet says max 65% LTV, we need some sorta measure of what the \"V\" is so that we can get comfortable with the loan. 65% leverage is not terrible, the severity of loss in case of default is very manageable at that leverage point and we already have an idea on the value when we do our initial analysis, but the appraisal in my mind gives us a peace of mind and serves as an additional precautionary measure that the value is what we already think it is. ", "replies": [{"id": "eav7c5n", "text": "Our lender seems to focus almost entirely on the lease terms.  \n\nMaybe it is because we already have significant assets and it is assumed that we know what we are doing.  ", "replies": [{"id": "eavg45d", "text": "Is your lender a bank/depository institution? ", "replies": [{"id": "eaw04c2", "text": "Credit union", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "eavedro", "text": "So let me point something out. A good Appraisal is way way more valuable than just having a bank double check a LTV.  Oftentimes buyers and sellers are too close to a deal. Refer back to motivation. Does a seller disclose a zoning issue? Does a buyer carefully vet each lease, often when it may be not clearly and professionally written. I am in an MSA of about 500,000.  The number of deals, or refinance that has an issue is not small. Of course I can relate war stories, we all can, but the most important part is that you are having a professional but dispassionate review. Every one else in the transaction is motivated by the closing. That skews perception. I am not saying we are the only ones I can figure things out. But doesn\u2019t include sense to have someone who spends 6 to 10 hours a day five days a week 50 weeks a year analyzing property look at deals to see if the pricing is supported considering all possible factors including physical features, lease features, and zoning features? This really will cut down the number of appraisals ordered translating into less need for appraisers in the economy, translating to overall less oversight at the expense of $1500-$2000 for an appraisal. It really seems shortsighted", "replies": [], "depth": 2}], "depth": 1}, {"id": "eav3hps", "text": "Federal rules may not \"require\" an appraisal for transaction below 500K, but that does not mean all lenders particularly banks/depository institutions are not going to require an appraisal. We absolutely will and the best part is we wont even pay for it, so why wouldn't we? The borrowers pay for all third party fees anyway. ", "replies": [], "depth": 1}, {"id": "eb1cuko", "text": "Mods this guy has posted the same info 3 days in a row. Pick the one that works and delete the rest. ", "replies": [], "depth": 1}]