And We're Off! (Part 2 of the Breaking the Appraiser series)
And We’re Off! (Part 2 of The Breaking the Appraiser Series)
There is a Strategy
In the inaugural edition of the Breaking the Appraiser series, a call went out to all real estate owners and syndicators. It was made clear that you MUST be engaged in the appraisal process from the very beginning to avoid problematic results at the finish line. In other words, have a strategy! You do with all of the other components comprising your deal, right?
Like it or not, the appraisal and the process that surrounds it are part of your business model. Consequently, they deserve careful thought and strategic thinking. As an MAI appraiser, turned syndicator/owner, it is my goal to educate you on both. Together, we will form a tactical plan that will give you the best odds of keeping your deal together and mitigating a potentially significant risk to your business model.
What is an Appraisal?
Let’s start with officially classifying some of the terms associated with the valuation process. While I believe most in our chosen trade(s) are already familiar with the word or term “Appraisal”, it can’t hurt to provide some clarity:
According to the most recent edition of Merriam-Webster’s On-Line Dictionary:
Appraise - to set a value on; to estimate the amount of; to evaluate the worth, significance, or status of; to give an expert judgment of the value or merit of.
Appraisal - an act or instance of appraising something or someone; a valuation of property by the estimate of an authorized person.
Appraising - making or expressing a critical judgment or evaluation.
Within the realm of real estate valuation, the Uniform Standards of Professional Appraisal Practice: 2020-21 (USPAP) offers the following applicable definitions:
Appraisal (Noun) – the act or process of developing an opinion of value.
Appraiser – one who is expected to perform valuation services competently and in a manner that is independent, impartial, and objective.
Appraisal Assignment – a valuation service that is provided by an appraiser as a consequence of an agreement with a client.
Report – any communication, written or oral, of an appraisal or appraisal review that is transmitted to the client or a party authorized by the client upon completion of an assignment.
There are many types of appraisers. These include trained professionals who develop and report opinions of value for: gems & jewelry; business valuation; machinery & equipment; real estate; etc. Our focus is the real estate appraiser and real property appraisal report in written form (oral reports are typically not acceptable for use in mortgage loan underwriting).
While I have not been officially ordained a “high priest of valuation definitions” by The Appraisal Foundation, I will take a stab at clarifying “what-is-what” by combining a few of the above-provided definitions:
A real estate appraisal is the development of an opinion of value by a qualified appraiser. This developed opinion of value is usually the result of an assignment and the results are delivered in a report. The report can be in written or oral form.
A quick side note with respect to the report. There are currently two ways to convey the results of a written appraisal assignment: an Appraisal Report and a Restricted Appraisal Report.
In the confines of the appraisal profession, there is a long (and some would say sordid) history associated with these options. The industry has struggled at times with the issues of how to label the assignment results being communicated and determining the sufficient level of work necessary to arrive at said results. The list of differentials, the history of changes, and the vacillation by the powers that be when making decisions on the topic, are not only long, they make for rather dry narrative. They are also well beyond the scope of this publication’s intended goal. As such, I’ll save the details for my book. Which gives me an idea. I think I’ll approach the book with the title/marketing approach of - “Boring, Unread, but Unfortunately Necessary – The Appraisal and The Appraiser”. Has a nice ring to it, doesn’t it? There is also a strong connection to the actual product and producer (hey, I’m an appraiser, so I get to call appraisers boring – remember, I’ve met these people!).
Anyways, it is sufficient to know that for this discussion you will in all likelihood be dealing with an Appraisal Report, not a Restricted Appraisal Report, and it will be in a written format.
What’s the Process?
You’ve found the right deal and lined up the equity. Next, you successfully made your pitch to a lender - hopefully with a well-prepared loan application package! The ensuing result, you sign a term sheet (loan). The appraisal process has commenced.
Near the top of your lender's to-do list will be commissioning the appraisal. This is typically done directly by the lender, or via the lender's engagement of a third-party entity known as an appraisal management company, or "AMC".
AMC's are not the topic today, but there will be an entire chapter written about them in "Boring, Unread, but Unfortunately Necessary…". As tedious the subject may be, it does need to be revealed how these unnecessary interlopers have negatively affected appraisers and the industry as a whole. Personally, I refused to do business through an AMC and am proud to have held this stance over a long career. Author's Note: This position is in no way intended to demark the good people earning a living by working at an AMC. I reserve my vitriol for the overall model, or concept, itself.
I digress. Regardless of who is doing the ordering, your first chance to participate in the process has presented itself. As the paying customer for the appraisal (but not the direct client of the appraiser - more on this nuance next week), having input in the selection of who will be developing an opinion of value for your property is certainly within your purview and deserves more than just a thought. But how do you know which appraiser is the right one? How do you help the lender select the appropriate appraisal firm? We start by taking a brief look at your choices and touch on a trend that has affected the industry as a whole.
Who’s Appraising What?
Like many other industries, there has been significant consolidation in the appraisal profession over the past 20-25 years. Back in the 1990’s and prior, there was considerable fragmentation in the sector. This started to change as the decade and the century closed out. Consolidation became the buzzword. This trend has only picked up steam since.
National real estate service firms like CBRE and Cushman & Wakefield, who had traditionally been brokerage driven, were looking to expand their in-house service lines. The general idea in acquiring valuation, and other property-related service lines, was to create a “one-stop shop” for their clients. By adding other service lines (primarily through acquisitions), they could keep clients “in-house” by offering both a variety of real estate services and a broad geographic footprint.
The result today is about 4-5 “powerhouse” firms with broad and deep valuation & advisory capacity in addition to a myriad of other real estate related services. I believe as of the date of this publication, CBRE remains the proverbial “800-pound gorilla” on the block with nearly 2,000 valuation professionals in over 300 offices worldwide.
While these goliaths have certainly made their presence known by gobbling up huge chunks of market share, and permanently altering the appraisal profession’s model along the way, I am happy to report there are still local and regional appraisal firms surviving. I wish I could say thriving, but I am afraid this likely isn’t an appropriate characterization for a majority of these brave firms. I will address why I believe this to be true later in the series, but for now, it is enough to know that they remain a viable option.
While the following will vary depending on the observer, I define a regional appraisal firm as one that covers a large Metropolitan Area, a State, several States, or all three. They do so with the presence of multiple physical office locations. These firms typically have more than 20 but less than 100 professionals on-staff. In contrast, a local appraisal firm is typically limited to covering a smaller geographic area like a metropolitan area or several “grouped” counties. These companies usually will have less than 20 professionals and will operate out of a single office location.
It is probably prudent to back up at this point and provide another layer of distinction. There are generally two types of real estate appraisers – commercial and residential. I point this out because as a general rule of thumb, my comments and discussions are provided from a commercial appraiser and appraisal product perspective. This is where I spent the bulk of my 25+ years of operating in the industry.
Regardless of where the author is coming from, the concepts and practices discussed and-or recommended in the Breaking the Appraiser series are applicable to both the residential and commercial segments. This will typically hold true throughout the publication unless specifically addressed and distinguished by the author. Here is one of those times.
In terms of the broader industry structure, I believe residential appraisers are primarily practicing out of local firms rather than from regional or national platforms. I believe this dynamic is directly a result of the product being appraised (single-family homes) and the appraisal fees associated with this property type. This observation may not be entirely accurate and my apologies to the regional/national residential appraisal firms out there!
The Transition
This seems like a good place to pause and reflect. So far, we’ve identified the need for strategic thinking when approaching a very specific component of your overall business model – the appraisal. We also tried to add some clarity to the discussion by providing a number of definitions associated with the appraisal process. Finally, we provide a 30,000 Ft. perspective on the types of appraisal firms operating in the sector and we briefly touched on the types of appraisers we will run across.
With a better understanding of who and what we are dealing with, we can now dive into the factors affecting and shaping the selection of the appropriate appraisal firm/appraiser. We will also discuss how to communicate your choice to the lender.
Please tune in next week to the Breaking the Appraiser series to find out which appraiser is right for your deal and how to help your lender make the appropriate selection. Better yet, check in with me (email, text, or call), for more specific articles and advice on how to “Break the Appraiser”.
In Service,
Craig A. Schumacher, MAI
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