Transcript Staying Out of Trouble Ted Whitmer, MAI CRE CCIM Attorney Orientation • Introductions • Nature of the Seminar – Is a mix of… – – – – Standards &

Staying Out of Trouble
Ted Whitmer, MAI CRE CCIM
Attorney
Orientation
• Introductions
• Nature of the Seminar – Is a mix of…
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Standards & Ethics
Appraisal Theory
Common Agency Problems (e.g. TALCB, OREA)
Common Legal Problems
• Rules
– No smoking
– No taping
– No cell phones
• I will answer questions when they come up
Staying Out of Trouble
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The Cost of an Agreed Order
(Consent Order)
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4.
5.
6.
Cost of class ($150/day)
Time lost in appraising ($350/day)
Expenses to take class ($100/day)
Administrative Penalty (???)
Mentorship ($150/hour)
Lost business (One client lost all business. Potential
$100,000)
7. Higher Insurance costs ($2,500/year x 5 = $12,500)
8. Higher Deductible ($10,000 if lawsuit)
9. Ramps up Discipline for the Second Offense (Many states
this gets you closer to a revocation. Cost = A lot)
Staying Out of Trouble
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The “Fab Five”
Common Residential Mistakes
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Neighborhood box is inaccurate
Zoning is not correct
No analysis of Highest & Best Use
Land value unsupported
Cost approach not done properly
Staying Out of Trouble
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Common Reasons for Lawsuits
• Wrong Size of Subject
• Floodplain
• Comparable Selection
• Loss from foreclosure
Staying Out of Trouble
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If “Market Value”…
• Definition
• Source
• If cash or terms comparable, or non-market (if
non-market summarize and explain their
contributions to or negative influence on
value.)
• Exposure time
• Highest & best use
“Canned Statements”
• Standard 2 reporting…
– Summarize the scope of work used to develop the
appraisal (STD 2-2(a)(vii)
• Sufficient information includes disclosure…
• Significant professional experience summarize the
extent
– Words & phrases in Standard 2
• Explain (exclusion of approaches)
• Summarize (analysis of subject history)
• Sufficient information to show the appraiser complied
with STANDARD 1
• Summarize the support and rationale (HBU)
Staying Out of Trouble
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“Canned Statements”
• “Canned statements” in a report are ones that
contained in most reports of an appraiser.
– They essentially are from a drop-down menu and
inserted in every report or are copied from a
previous report
– If statements are repeated, then there really is NO
ANALYSIS
– Common in: HBU, Reconciliation, Land value
discussion, cost, etc.
Staying Out of Trouble
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“Canned Statements”
• Suggestions
– Include at least some of the following in your
analysis
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Subject description
Subject location
Specific zoning and/or deed restrictions
If Reconciliation, specific strengths and weaknesses of
approaches
• If the Cost approach gives nothing to the final value, say
so
Staying Out of Trouble
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• Law
What can you legally appraise?
It Depends Upon the State
– Trainee: May appraise only under the “active, personal & diligent
supervision” of a Certified Appraiser
– Licensed Residential Appraiser (can, however, associate with a General
Appraiser)
• You cannot appraise complex
• You cannot appraise above $1,000,000
• You cannot appraise what the Certified Residential cannot appraise…
– Certified Residential Appraiser (can, however, associate with a General
Appraiser)
• You cannot appraise vacant land that is not residential
• You cannot appraise other than one-to-four family
• You cannot appraise a house on 50 acres unless it is single-family (& there is a risk
if you conclude to that)
• You cannot appraise commercial properties even though they are below the diminimus
– Certified General Appraiser – Must be competent
Staying Out of Trouble
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What can you legally appraise?
• Competency Rule
– Only what you are competent to appraise
– Otherwise, associate with an appraiser who is
competent
• Clients
– FHA: If you are not on the panel, don’t do the
appraisal
– If you are not on a management company list, bank
list, etc. don’t do the appraisal if you are not suppose
to
Staying Out of Trouble
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Support What You Do…
• Paired Sales?
– Real Estate is unique
– You will have to adjust until there is one difference
– It is not statistically valid even if you can find a pair,
you have a sample size of one
– May not be valid in another price level or area even
if you get an adjustment from a matched pair
• How can we support?
– Surveys
Staying Out of Trouble
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Leaving the Subdivision to get Comps…
• Determine if you have to leave your subdivision,
if so, spend time to discuss why
• Include the sales in the subdivision, at least in
your workfile, and write notes on the MLS sheet
why you didn’t use each sale
• Run the prices, wide open, in your subject
subdivision versus where the comparable is
located. See if this suggests a location adjustment
(or other adjustment such as quality, etc.)
• Research tax values of lots in each subdivision to
see if a location adjustment is warranted.
Staying Out of Trouble
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Going Outside the Subdivision
• If you go outside of the subject Subdivision (not just the
Neighborhood)…
– Do not expand the “Neighborhood” just to have comps in it.
– Location Adjustment?
• Tax value of sites of the subject versus the comparable subdivisions
• Average (or median) home values of the subdivisions of the comparables versus the
subject subdivision
• Average listing prices in the subdivisions of the comparables versus the subject
subdivision
• Reputation of the comparable versus subject subdivisions (but be careful not to
have biased or unsupported comments)
• Original price ranges in subdivisions of the comparables & subject. E.g. “Homes
from the $150,000s to $250,000s.
Staying Out of Trouble
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Neighborhood Considerations
• Always research and report the % of homes that are
post-foreclosure or REO.
– Will affect all prices because they increase supply
– May sell at discounts, report if they do
• Discuss if Neighborhoods are Non-conforming
• Discuss detrimental conditions in the neighborhood
• Discuss where your subject value fits in the range of
neighborhood value
Staying Out of Trouble
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Commercial…
• Look at rental levels in the area of a comparable versus
the subject.
• Look at land values in the area of the comparable
versus the subject.
• Look at traffic an traffic counts in the comparable area
versus the subject.
• Find out investor and broker opinions between areas.
• Look at activity in each area
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Growth
Decline
New construction
Vacancies
Staying Out of Trouble
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Identify External Problems…
• Walk to all sides and corners of a property and
take photos of what you see.
• Describe the properties adjacent and near the
subject.
• Use Google Earth and include an aerial.
• Discuss any detrimental conditions
Staying Out of Trouble
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Measure of an external problem
• Usually the loss is in the land value. If there is loss in
the improvements then the HBU may not be for the
improved use.
• If a house backs up to a power line, busy road, pipeline
& the highest and best use is still single family
residential, the loss is in the land
• Measure the problem with land sales near and away
from the external problem
• Measure the problem with sales of improved
properties near and away from the problem
• Look at tax value differences between properties near
and away from the problem
Staying Out of Trouble
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Price + Cost + 20%
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Sale price of subject = $100,000
Cost of renovation = $25,000
“Profit” = $20,000
Total appraised value = $145,000
Often these appraisals have little backup for the renovation and
the sales are chosen out of the neighborhood (or subdivision)
because “there are no renovated properties in the immediate
neighborhood (or subdivision).”
Staying Out of Trouble
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MLS Photos
• Using MLS photos when you agree to, or even certify,
that you inspect comparables can be viewed as proof
you did not inspect the comparables and in fact lied on
your certification. (Misleading conduct)
• Don’t use photos if user license forbid it (CoStar)
• If you use MLS photos…
– Tell why you used the MLS photo
• The property changed since sold & the MLS photo more accurately
reflects the property when sold
• People were in the photo
• You could not get a picture of the building
– Put a copy of the photo you took in the file
Staying Out of Trouble
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Appraisers “Connect the Dots” in
Mortgage Fraud
• Intentionally or unintentionally, appraisals
connect the dots when there is in fact fraud!
House
Buyer
Seller
Broker
Other
Appraisal
Financial
Institution
$$$$$
Lender
Actual Fraud (No appraiser intent):
1.False financial documents by others
2.False HUD statements
3.False “builder sales”
4.Fictitious “renovation”
5.Strange property, few or no comps
6.Incompetent appraiser
Staying Out of Trouble
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“Proof” of Appraiser Fraud
• Hard facts (“smoking gun”)
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Payment of bribe or excessive fee
Promise of continued business
Fact of continued business
Email or letter that will make the values
Someone to testify that the appraiser says he will get the
value or “push the value”, etc.
• Circumstantial evidence
– All factual errors or omissions inflate the value
– ½ chance that error makes the value higher or lower
– If 10 errors & all make the value higher the odds are 1/210
= 1/ 1,024
Staying Out of Trouble
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Development & Reporting
Development
• USPAP – Standard 1
• Proper Methods &
Techniques (not a part of
USPAP)
• Client Requirements (not
necessarily a part of USPAP)
Staying Out of Trouble
Reporting
• USPAP – Standard 2
• Client Requirements (not
necessarily a part of USPAP)
I see past Standards
Board members fail to
understand the difference
between the development
& the report.
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Market Conditions Adjustment
Do from the date of Sale to date of Appraisal…
Sales with extended contract
periods cannot be used for
Exposure time estimates.
Staying Out of Trouble
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Miscellaneous
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Signing the certification
Inspecting
Plagiarism
Working for individuals
TRAINING
HUD, Chase lists
False document
Conclusion
• Ted Whitmer
• [email protected]
• 979.690.9465