Seattle Residential, Commercial and Agricultural Real Estate Appraisal Blog

By Michael N. Read, Certified General Appraiser (WA & OR)
& Barry Wilson, Certified Residential Appraiser (WA)

Changes and new provisions to the Washington State Condominium Law, which took effect June 12, 2008, may impact valuations and appraiser liability. These need to be understood by appraisers (and by owners, purchasers, and real estate agents) when becoming involved with a condominium, whether it is newly declared or has been in existence for many years.

For a quick overview of this topic, refer to an excellent article by Elizabeth Rhodes of the Seattle Times.

For a complete and detailed look at the law itself, please see the Condominium Act and scroll down to Section 64.34.380 through 64.34.390. The history of the new legislation is available at http://www.leg.wa.gov/legislature. You can view the Original Bill or the Bill as Passed in Legislature.

The goal of the new law, sponsored by Senators Rodney Tom, Jim Honeyford, and Bob McCaslin, is to enhance consumer protection in the purchase and ownership of a condominium.

In addition, new rules adopted by Fannie Mae and Freddie Mac, the two secondary mortgage market enterprises that purchase most residential loans, now require that lenders verify that the community association has a line item in its budget requiring annual reserve contributions equal to 10 percent of revenues. An article in the Community Associations Institute New England Chapter newsletter on July 25, 2008 discusses the responsibilities of and potential liabilities for condominium home owners associations.

RCW 64.34.380 ‘encourages’ every Washington Home Owners Association (HOA) to establish a Reserve Account to fund major maintenance, repair and replacement of common elements, including limited (long term up to 30 years) common elements. The Reserve Account is to be established in the name of the Association and the board of directors of the HOA is responsible for administering the Reserve Account. The Reserve Account is to be separate from the HOA’s normal operating and maintenance budget.

‘Unless doing so would impose an unreasonable hardship’, the HOA must prepare and update a Reserve Study in accordance with the HOA’s governing documents and RCW 64.34.224 (1), which requires each unit to have a proportional undivided interest in the common elements.

The Reserve Study must be based on a ‘visual site inspection’ conducted by a ‘reserve study professional’. The Reserve Study must be updated annually and at least every 3 years be based on a ‘visual site inspection’ conducted by a ‘reserve study professional’.

This requirement does not apply to condominiums consisting solely of units that are restricted in the declaration to non-residential use.

In its definition of a Reserve Study, RCW 64.34.382 uses terminology that appraisers will immediately recognize from the Cost Approach. A Reserve Study must include:

1. A reserve component list including quantities and estimates for useful life, remaining useful life, and current repair and replacement cost for each reserve component.
2. The date of the Reserve Study and a statement that the study meets the requirement of this section.
3. The level of Reserve Study performed.
   • Level I: Full Reserve Study, funding analysis and plan.
   • Level II: Update with visual site inspection.
   • Level III: Update with no visual site inspection.
4. The association’s reserve account balance.
5. The percentage of the fully funded balance that the reserve account contains.
6. The special assessments already implemented or planned.
7. Interest and inflation assumptions.
8. Current Reserve Account contribution rate.
9. Recommended Reserve Account contribution rate.
10. Projected Reserve Account balance for thirty years and a funding plan to pay for projected costs from those reserves without reliance on future unplanned special assessments; and
11. Whether the Reserve Study was prepared by a ‘reserve study professional’.

The Reserve Study must also include a disclosure that warns about the failure to include a particular component or provide contributions to the Reserve Account for that component may result in the unit owner having to pay on demand a special assessment for that component.

RCW 64.34.384 allows the HOA to withdraw funds from the Reserve Account for unforeseen and unbudgeted items providing they notify the unit owners and repay the amount within 24 months, unless the 24 months would impose an ‘unreasonable burden’ on the unit owners.

RCW 64.34.386 gives unit owners legal recourse to demand of the HOA a Reserve Study if none has been completed within the past three years. The unit owner’s duty to pay for common expenses cannot be excused because of the HOA’s failure to comply.

RCW 64.34.388 relates to the preparation and updating of a Reserve Study at the discretion of the Board of Directors.

RCW 64.34.390 may be of particular interest and concern to appraisers (and real estate agents) as it states that monetary damages or any other liability MAY NOT BE AWARDED against or imposed upon the association, the officers or board of directors of the association, or those persons who may have provided advice or assistance to the association or its officers or directors, for failure to: Establish a Reserve Account; have a current Reserve Study prepared or updated in accordance with the RCW 64.34.380 through 64.34.388, or make the reserve disclosures in accordance with RCW 64.34.382 and other referenced RCWs.

The legislation as written idemnifies all parties involved in the production, management and maintenance of a condominium but leaves the unit owners, purchasers, and their advocates (the very parties who the legislative author’s goal was to protect) with little legal recourse.

A Reserve Study Professional is defined as ‘an independent person suitably qualified by knowledge, skill, experience, training or education to prepare a Reserve Study in accordance with Sections 1 and 2 of this act.’

This definition is not very definitive and could easily result in poorly prepared and ineffective Reserve Studies where the preparer is protected from any liability!

Because of the dearth of professionals currently providing Reserve Studies, community managers, CPAs, contractors and other related professionals are rushing in to fill the void. Appraisers and home inspectors may look upon this as an opportunity to provide a new fee service. Be careful!

Mike Read, the primary author of this article, states:

“I have personally assisted in the preparation of these studies in Oregon under the tutelage of a licensed architect and even though I am a degreed engineer (Mechanical, UK) and a Certified General Appraiser licensed in Washington and Oregon, I do not feel qualified to complete a Reserve Study without additional training and experience. At present I am not aware of any education available in this field, but a background in Building Sciences would be relevant. There is an organization, the Community Association Institute (CAI), which has some certifications, but I do not know the details of their educational path.”

Nena Groskind, the author of the article in the CAI New England Chapter newsletter referenced above, recommends that the Reserve Study be performed by an engineering firm “with expertise in this area.”

There are two main parts to a Reserve Study. The first requires the completion of a ‘Property Condition Assessment’ which is a detailed site inspection of the property and all its common areas and systems. This report identifies the immediate repairs and replacements required plus short and long term replacements required of all common area components. The second part is the number crunching, which places the work items in an orderly time and dollar budget (RCW 64.34.380 recommends a 30-year projection for major maintenance and replacement), to be presented to the HOA and its owners. In her article, Ms. Groskind also noted that IRS regulations require separation between operating funds for maintenance and reserve accounts for replacement and strongly cautioned against commingling funds.

If an appraiser (or real estate agent) is involved in the transfer of a condominium (in Washington State) where there is an action brought by a unit owner or purchaser for nondisclosure of a pending assessment or large unfunded or undisclosed liability contained in a Reserve Study, they could be the only entity in the chain of responsibility that could be held liable. Likewise an appraisal that does not include in its value conclusion the amount and effect of such an assessment or unfunded liability could become the focus for recourse of action by an owner or purchaser.

In preparing a condominium appraisal report on the Fannie Mae form 1073, the appraiser must answer four questions in the “Project Analysis” section on page 2; two of those questions may now have more significance. The appraiser is expected to comment on the project budget for the current year and the adequacy of fees, reserves, etc. and to opine how the unit charge compares to competitive projects of similar quality and design.

Just stating that the budget was not analyzed because the documents were not provided and checking the “Average” box may not be an adequate defense.

Henceforth, when appraising a condominium, in addition to the other documents typically required (minutes of annual membership or monthly board meetings, resale certificate, etc.), it is incumbent upon the appraiser to obtain a copy of the current Reserve Study. If none is available, the appraiser should clearly state in the report that:

1. A copy of the Reserve Study described under the provisions of RCW 64.34.380 was not provided to the appraiser (and describe the efforts made to obtain same);
2. Inadequate reserves for replacement of critical components of the building could result in special assessments that would financially impact the borrower;
3. The opinion of value is based on the Extraordinary Assumption that the HOA has adequate reserves and/or plans to address such expenses; and
4. If this assumption proves to be in error, the value of the property could be affected.

The authors of this article are both experienced appraisers and are aware of appraisers being sued for failure to disclose critical financial information or information on property conditions that impact value. With the changes to both Washington law and the lending requirements of Fannie Mae, more responsibilities are being placed on the appraiser.

About the Authors:

Michael N. Read has been appraising residential and commercial property in Washington, Oregon and Mexico since 1986.

Barry C. Wilson has been appraising residential property in Washington since 1986.

Additional expertise concerning the items discussed above was provided by:
Carson M. Horton, RS of HOA Services Group, LLC in Beaverton, Oregon.
carson@hoaservicesgroup.com
www.hoaservicesgroup.com

• Seattle Real Estate Appraisal Information
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A residential real estate appraiser produces a variety of appraisal reports that are specific to the property type, the value definition applied, and the client’s needs. For residential financing purposes, conventional or FHA, the appraisal of typically written on a standard 1004 Form report, also known as a Uniform Residential Appraisal Report (URAR).

Fundamentally, there is no difference between an appraisal report written for a conventional loan and one that is written for an FHA insured loan. Both display an “opinion of value” that represents Market Value. Starting in 2006, the FHA appraisal became the same URAR appraisal report used for conventional loans with the exception of a statement regarding the Intended User that reads, “to support the underwriting requirements for an FHA insured mortgage”.

So why do we perceive a difference between an FHA and a conventional appraisal report?

To know that, you need some knowledge of FHA history. Prior to 2006, an FHA report required two HUD forms to be included in all appraisal reports.

The first was HUD Form 92564-VC, which was a “Notice to the Lender” form also referred to as the “Valuation Conditions” or “VC” form. This form, with 14 sections, broke down the property into sub-categories including: site, soil, topography, site improvements (well and sewage), pests, access, structure, foundation, roofing, mechanical systems, health and safety, lead-based paint and specific requirements for condominiums and manufactured homes. In this form, the appraiser would check off the presence or absence of the various elements within each section. It was a tedious, but thorough analysis of a property that required the appraiser to scrutinize the property and report the findings on the VC Form.

The second was HUD Form 92564-HS, which was a “Notice to the Homebuyer” form. This form summarized the findings on the VC form into a palpable format. If there was a problem identified on the VC form, it was noted and explained on the “Notice to Homebuyer” form. Fortunately or unfortunately, depending on which appraiser you ask, these HUD forms were retired.

Also changed was the FHA requirement of reporting separate “As-Is” and “As-Repaired” values for properties that had observable defects, whether they were major defects, e.g. cracked or sinking foundation, roof leads, health and safety issues; or minor defects, e.g. missing handrails, cracked windows, worn out flooring. This “As-Is” and “As-Repaired” requirement created problems for everyone. It necessitated the appraiser to act as a contractor and determine a repair cost that was, for the most part, unsubstantiated. This requirement also caused significant delays in the delivery of the reports as well as an administrative nightmare.

Still confused as to what differentiates an FHA appraisal?

It all boils down to the underwriting requirements of FHA insured mortgage. The FHA requirements are different from those used for a conventional mortgage. These FHA requirements are stricter and may disqualify a home from the FHA program altogether. An example of a condition that would disqualify a home from the FHA program would be environmental contaminants, noxious odors, proximate location near an oil well, high-powered transmission lines, or anything that is clearly a health and safety violation.

Many requirements extend to a property’s eligibility for an FHA insured mortgage if not corrected or repaired. One example is the roof. A home may have a maximum of three layers of roofing. However, if more than two layers exist and repair is necessary or there is less than two years of remaining physical life, all of the old roofing must be removed as part of the re-roofing. Also, a home with a flat roof must be inspected by a qualified roofing inspector.

Another example are the private water and septic systems. They are allowable as long as they are functioning; meet the required setbacks and the requirements of the local health department. However, connection to public water and sewer must be made if the total cost to connect is 3% or less than the estimated value of the property. Furthermore, FHA requires that shared wells service no more than four properties and a shared well must have a shared well agreement in title and that agreement shall also be recorded in a deed or public records.

One more difference between the FHA and conventional appraisal are the reporting of the physical improvements, i.e. home or condominium. The most confusing of the guidelines is how the FHA considers gross living area (GLA). The GLA is the total area of above-grade residential space. Above-grade living space is the area above a crawl space or a basement. Finished basements or attics are not included in the GLA, however their existence, size, quality, and functionality are valued.

According to FHA requirements, basement space does not count as habitable space unless certain criteria are met. For example, basement bedrooms must have a window, the windowsill must be no higher than 44 inches from the floor, the window must have a clear opening of at least 24 inches wide and 36 inches in height and the window must be at ground level or higher or have appropriate window wells.

The above examples are just a few of the FHA requirements pertaining to single-family housing. There are many more FHA requirements and issues regarding eligibility. A copy of the FHA Handbook (4150.2), in Word or PDF format, is available on the HUD website.

Thanks for reading.

• Seattle Real Estate Appraisal Information , Uncategorized
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Observations: There appears to be three general categories of TDRs: first, there are rights transferred within a municipality. For example, the Seattle, Redmond, and Black Diamond programs transfer rights between certain specific areas within their city. The second broad category involves inter-local agreements between cities and their county planning divisions. King County has an inter-local agreement with Issaquah; Thurston County has one with Lacy, Olympia, and Tumwater (at present, there exists no similar agreement regarding TDRs between those cities). Generally, the county will designate a region or class of property as the sending site and the city will designate an area for its receiving site. The third broad category involves private sites as both the sending and receiving sites. One example of this had a developer “sending” 4-units of density from a site near Auburn to a site near Redmond/Kirkland. Both sites were county jurisdiction.

Beyond these general categories, TDR practices can differ greatly. King and Pierce Counties and Seattle operate TDR banks in addition to private credit transactions. Many municipalities, however, require private transactions while maintaining approval rights. The pilot program in Snohomish County sends credits from farmland along the Stillaguamish River to a master planned neighborhood. Landowners seeking approval for new development projects in the Arlington Receiving Area must purchase and use transferred development rights for at least 25% of the proposed single family residential dwellings. And in Redmond, the sending sites include urban recreation sites and critical natural growth areas to receive in a commercial building area. In almost all cases, some level of participation is required for development in the receiving areas; in some cases, participation is only necessary to achieve maximum density. It remains to be seen if the forced acquisition of credits will have an impact on private developer’s attitudes and participation.

The issues associated with allocation rates and exchange rates are likewise varied. For example, in King County 1 urban TDR credit equals additional urban unit for private purchase, while 1 rural TDR equals 2 additional urban units. The unit of exchange in the City of Seattle is the square foot, and the city acknowledges that there is often not a one-to-one correlation. The variety of variables suggests a negotiation process.

Transfer price information is hard to come by and somewhat open to interpretation. During the approximately 12 years that Redmond has offered a TDR program, some 560 TDRs have been transacted generating an estimated $16.5 million. (The number of sending and receiving sites involved is unknown by us.) This averages $29,464 per TDR credit. But the actual purchase price will reflect prevailing market conditions of the time and the needs of the principals. And these are all private transactions as Redmond does not maintain a TDR credit bank.

Of course, the most informative sales data may come from public-to-private transactions. The City of Seattle estimates that their bank of 1.3 million square feet sold in a range from $15-$20 per square foot (it is notable that this figure usually applies to up zoning in a small downtown area and not raw land outside of the urban core). King County ranges private urban prices from $10,000 to $15,000 per credit, and rural to urban prices average $15,000 to $25,000.

Great care must be taken in valuing the allocation and exchange rates to provide the financial incentives necessary to interest buyers and sellers. In 2006, Snohomish County, while never intending to act the role of a TDR credit bank, felt pressured enough to commit $2.1 million for one-to-one exchange to the receiving area, this rate may divert potential development interest elsewhere and serve as a challenge to the program’s success. The county acknowledges its flawed valuation and plans to recover, the but the message is clear: market-based transactions are risky, particularly if the asset may be held for a period of time. Expert impartial guidance helps mitigate the risk.

When all is said, it appears that the range of values demonstrated for TDRs falls into the rather broad range of $10,000 to $42,857 per credit. For the most part, the market appears to be under the control of various governmental jurisdictions, either directly or via their police powers. The sales data is quite thin, given that it has occurred during a time span that has seen the Puget Sound Region going through a record setting period of development.

The market for TDR credits also does not seem to be in any way organized. We cannot find that the values of reported sales were established by any means other than negotiations between the principals to the transactions, be they public or private.

Given these conditions, it is quite speculative to assign a value to a potential transferable development credit. The client who commissioned our study had facilitated the sale of only 2 credits, and these fo an amount of $40,000 each. This may or may not have been a market value, but was the result of negotiations between the city and the buyer/user of the credits. Since the study was caused by the client looking at acquiring land from which more TDR credits could be harvested, and since the client already has some unsold TDR credits banked, does it follow that their modest success at selling already banked credits really define a market? We would caution that the answer is “probably not”. Would it be highly speculative of them to acquire additional TDR credits to add to their bank based on the expectation of selling them at $40,000 each? We would say, “Absolutely.”

Another consideration that must be taken under advisement is that it appears that the prospective inventory of Sending sites is much larger than the inventory of Receiving sites. This raises the question as to whether TDR programs may cause the harvesting of credits to create substantial banks of usable TDRs. If this happens, will supply and demand act as it does in a typical market by driving the price down? Perhaps it will, as one of the underlying precepts of market value tells us that if all other things are equal, the lowest price will sell first. Competition may therefore act to drive prices down.

This is of particular interest if both public entities and private parties are holders of TDRs. It seems reasonable to expect that the private parties would react quicker to fulfill the conversion of TDRs to cash, and would therefore lower prices to the point that the governmental jurisdictions would be non-competitive if their price levels were not similarly adjusted. Government jurisdictions would still hold the trump card, though, as they wold have to approve the greater density proposed for the receiving sites.

In those circumstances where the governmental jurisdictions hold a monopoly on TDRs, it still remains that prospective users would buy or not buy based upon the economics of any given transactions. It should be financially feasible before a private party buys TDRs so government’s various asking prices may not find a ready market. Could this lead to developers being forced to add density (which could mean buying TDRs at “asking” prices) in order to attain project approval?

It is tempting to offer an opinion that the value of TDRs would be tied to some degree to the cost of land in any given location. For example, an acre parcel of land in Jollytown, zoned for 6 units/acre, could sell in the market at, say, $240,000, or $40,000 per unit. Would it follow then that if a developer would pay $40,000 per unit for land, he would also pay $40,000 per TDR to expand the density by say, 2 units/acre, to a total of 8. Maybe, but maybe not. Clearly, an acre parcel (assuming no wetland, steep slopes, setbacks from critical areas, or other limitations to cause a loss of effective usable land) would typically yield lots somewhere in the range of 6,000 SF each, on average, after the removal of land for streets, sidewalks, stormwater facilities, utilities and other such uses required to provide infrastructure to the site.

If 2 TDRs were acquired to enhance the yield to 8 units on this acre, the probability is that the lot sizes would then fall to something a bit below 4,500 per SF each. Is it probable that a lot of 4,500 would have a lower market value than a lot of 6,000 SF? Yes.

Would the aggregate of values for the 8 lots, despite a lower per lot value, be greater than the aggregated value of the 6 larger lots? Probably so.

Would development costs rise due to having to accommodate 8 lots with infrastructure as opposed to 6 lots? Yes, but likely at a less than pro-rata basis.

Would development costs on a per lot basis rise, stay the same, or reduce somewhat? Probably reduce somewhat.

There are other similar questions that would need to be asked in doing a pro forma development costing sheet for such a project. Moreover, it is reasonable to expect that such costs will change from one specific site to another in response to the differences in the features of the sites.

When such questions are answered specific to a prospective receiving site, it should then be possible to make a reasonable effort at evaluating TDRs on a comparative basis based upon market values for the land. The value for the TDR should always be less than the unit value for the land for a like use, however, due to the influences addressed above.

Another aspect that is worth being addressed is the condition of supply and demand. There appears to be no way to measure how much demand there is in the actual marketplace. Further, it also is not really ascertainable whether the demand is higher than demonstrated by sales – but sales are curtailed by the price at which TDRs are available.

To further the difficulty of analyzing TDR values, they are personal property – not real estate. There is no device that causes sales of TDRs to become recorded and therefore public information. It may be possible to track every project that is approved for development and/or construction to see if there is a TDR component present, but this would be quite labor intensive and would likely yield relatively little data for the effort. Who wants to become an “expert” in such a limited arena, and therefore spend the necessary time – without any certain compensation for having done so?

Another difficulty derives from the fact that TDRs can be harvested from sending sites by private parties – at least in some jurisdictions. As the governing rules appear from our survey, it would be possible for the governing agencies to track how many of these are currently available, but a constant surveying of those records would be required to maintain an accurate accounting of the inventory.

With all of this being addressed, it becomes obvious that establishing a price for TDRs without specific knowledge of the details for each potential transaction appears to not be feasible at present. On the other hand, given the details of a specific transaction, it should be possible to reasonably establish a value for TDRs associated with that specific transaction by measuring the economic impact for both the sending and receiving sites.

That being said, the data appears to show for residential units can be shown to have enjoyed some market acceptance in the range of $15,000 to $40,000 per TDR unit.

Perhaps more order to the market could occur if the various jurisdictions that are currently utilizing TDRs or considering incorporating them into their land use planning were to establish more uniform methods. This would potentially benefit the understanding of the market and market values. It could also facilitate the development of Interlocal Agreements so that TDRs could be harvested from a sending site in one jurisdiction and transferred to a receiving site in another jurisdiction, which is now possible in only a very limited way.

• Seattle Real Estate Appraisal Information , Seattle Real Estate Appraisal Market Conditions
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What can we expect that gas prices will do to real estate? This is an interesting question, and the answers may prove to be “a great deal” over time.

A part of the reason for suburban sprawl comes from people trading high commute times and costs for lower home prices and a different quality of living in the ‘burbs. Many folks think it is better for variety of reasons. But now the cost of commuting is growing quite rapidly. Someone who drives from Marysville into Seattle on a daily basis not only contends with the growing congestion on I-5, but has had the monetary cost of their commute double over just a few years. Of course tires, oil changes, repairs and maintenance are all over and above this and driving more miles means more of these costs.

Diesel, for some reason, costs more than gas (it didn’t used to), and is tucked in there just under $5.00/gallon and rising. Truckers drive rigs that typically get 7 miles to the gallon. This meanins over $0.70/mile, just for fuel.

What are the reasonable guesses for the future?

1. More people will opt to ether stay in the city, near their jobs, or move closer to the job. This will, of course, increase demand for “close in property”. The opposite effect of lessening demand for properties that require long commutes can also be expected, but not to the equivalent degree so long as overall population growth continues. The trend toward attached housing will continue in order to create more density in the urban areas. People will accept condo, townhouse, and apartment living to a greater degree than at present.

2. The costs of shipping goods will be mitigated by more water or rail traffic, with trucks being used for shorter hauls. This may result in mega-distribution centers fading away in favor of smaller, more local distribution centers, as one example of a result. It could also mean that large suburban shopping centers would become less prevalent, with their functions taken over by smaller, more localized strip malls. It may also mean that west coast ports will see a reduction in growth as more efficient ships take goods directly to east coast ports rather than truck the Asian-made goods across country.

3. Free time activities will be more locally concentrated, and the popularity of “out of the way” places will diminish as they become less affordable to reach. It may well include a per capita reduction in flying due to rising airline costs and the plethora of reduced servies and higher fees coupled with increasing inconvenience.

4. Telecommuting, teleconferencing, and other electronic methods of meeting will continue to escalate at the cost of fewer face-to-face meetings in the businesses and industries that allow for it, and this includes more work-from-home activities (at least part of the time).

5. Some enterprises will alter the way that they do business, entirely. More and more businesses will charge their customers “trip fees”, and why not if it costs both time and a lot of fuel. Maybe your local Realtor will not spend a day hauling you around an area to look at a bunch of houses, but rather will have you select just one or two from video presentations before burning gas. Maybe there will be a dollar aded to the price of a home-delivered pizza. Lettuce and frit from California will permanently cost more. Home mail delivery could be reduced to fewer days per week. You might even finding yourself riding a bus or a light rail to some of your destinations, moving your home, and selling one of your cars. How will these changes impact real estate demand and land use?

The list of possible impacts is much longer than this, but these are just pointed out as a variety of diverse probabilities and possibilities. What is certain, though, is that people will naturally migrate toward a less energy consumptive lifestyle as energy costs rise.

The first changes to make will probably come from changing transportation costs. And the purpose of all transportation is to move someone or something from one piece of real estate to another. How, in your opinion, will the real estate be changed by transportation changes?

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I remember back to those blissfully ignorant days when I said “yes” to be an appraisal trainee. I was lucky and worked for a large corporation and thus, a salary and benefits were included in this career change. It was not until several years later when I left that company to become a fee appraiser that I really began to appreciate the abject poverty and financial worry that I had been spared during my apprenticeship.

Trainee Selection
Therefore, when a potential trainee consents to go through that financial struggle, I do not take the responsibility of training someone to be an appraiser lightly. One, their success or lack thereof will reflect back on me; and two, I do not want someone to lose their license and career because of something I did or did not teach them. And so, the task of taking on a trainee should be considered – like marriage – soberly and carefully with all due consideration for the amount of time that will be expended, and likely never recouped, during the three year process.

It is important for a supervisor to pick someone who has the potential for greatness as an appraiser. Sometimes, that is not always readily seen in the interview process. So, I look for several things: intelligence, writing skill (yes, I do ask for a writing sample), articulation, education, and the all important computer skills. I also look for someone with a backbone and enthusiasm for doing the job. I also have the heart-to-heart talk about the financial struggles that are expected. I usually get one of two reactions: “That will not happen to me,” or, “Uh, maybe I’ll work for McDonalds. They pay better.”

As an aside, I will just mention here about the backbone part. I have fond memories of my review sessions with my supervisor. We would discuss the report at length and then I would exit her office and my coworkers would ask me if I was okay. I realized that our discussions got sort of loud as we both passionately “discussed” appraisal theory and practice. However, I look at it this way; it was great training for responding to those pesky clients who “insist” that the value is too high or too low – whichever position is to their advantage. Further, a backbone will help offset the rejection and downright rudeness encountered when trying to confirm comparables with buyer, sellers and brokers. Ya’ll are smiling right now cause you know what I mean.

Defining Supervision
Merriam-Webster defines the word supervision as “the action, process, or occupation of supervising; especially: a critical watching and directing (as of activities or a course of action).” In applying this to trainee supervision, the meaning here is to watch or review critically whatever a trainee does. The same source defines critical as “exercising or involving careful judgment or judicious evaluation.” Therefore, supervising and critically evaluating a trainee’s work does not involve sending them out on their own and reading through the report and putting a signature on it. What it does involve is a lot of time and effort in carefully guiding a trainee’s thinking regarding how to look at properties, understanding the scope of work for the appraisal, defining potential problems, and understanding valuation and economic theory.

Client Relationships
I have several hard and fast rules regarding client relations and trainees. My trainees do not discuss anything with a client other than setting up the site visit or asking for specific documents. They are never to discuss the valuation or issues regarding the property with a client – EVER. During the site visit, they are to take pictures and wait to ask me questions later. (The no talking rule abates when the trainee has some more experience under their belt.) As a trainee’s education and experience grows and they get closer to sitting for their license exam, they become more involved in the business of dealing with clients and putting together proposals and marketing packages.

I expect the new trainee to be in my office almost 70 percent of their day for the first few months and joined at the hip when out in the field. My focus is commercial property and that is a very broad range of property types, each with its own unique issues that need to be addressed. I have forms for site visits and comparables visits to help direct a trainee’s focus. I have scripts for verifications so that that the main questions are asked and answered.

Every detail is looked at, reviewed, and discussed with respect to the final work product. Comparable searches are done together, at first. Later, the trainee performs searches on their own and then comes in to discuss them. While we are talking, I’m pulling up the databases as well to see if we get the same properties. Afterward, each comparable is analyzed and red flags are noted. At this time, I explain what is important for this property type to look at and what questions will need to be asked during the confirmation process.

When the valuation has been completed, the final report document is brought up and reviewed – line by line. The file and the trainee are at my desk during this process to answer questions. If there are holes in the report that need to be addressed, I ask questions like who, what, where, when and why. If the trainee cannot answer those questions to my satisfaction, they are sent back to their desk to get the answers. Obviously, this is a time consuming process. However, by the time I am finished
reviewing the report and concluding the final value, I know everything about how the value was derived.

It disturbs me when clients tell me that they hired a certified appraiser and when they call with a question regarding a report, they are passed to a trainee to answer their question. Basically the supervising appraiser is saying they do not know enough about how the value was derived to answer the question. This also undermines the client’s confidence in the value, because a person without the specialized knowledge they are paying for performed the appraisal. That should never happen. The
supervisor’s signature is attesting to the fact that the value is true. How can they attest to that if they cannot discuss how the value was derived?

The recent change in Washington law regarding the trainee’s bill was a good one. However, it is only half the battle. The remaining battle needs to be fought in each appraisal office with respect to what supervision entails. It is up to each designated and certified appraiser to ensure that appraisal quality is at its highest, and that trainees are adequately trained and supervised so that the next generation of appraisers are better than the last. My ultimate hope is to hear someone say, “That person is a damn good appraiser.” My response will be, “I know. I trained them.”

Comments regarding this article can be posted at www.lambhansonlamb.com/blog.

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In the 1930’s, in the depths of the depression, knowledgeable, intelligent, farsighted men organized what would become the two strongest, best known, and most professional appraisal organizations: The Society of Real Estate Appraisers and The American Institute of Real Estate Appraisers. When they were organized there was no intent, in my opinion, that they would become competitors, or that either group would seek to become the largest or more important professional appraisal organization. The men who gave birth to both of these excellent societies were genuinely and idealistically motivated to simply provide the very best professional appraisal service to the American public.

In the years immediately following, several other prestigious groups were formed, notably the American Society of Appraisers, the American Right of Way Association, the Independent Fee Appraisers, the Organization of Governmental Appraisers and others. All of these groups had various goals to achieve, but their primary aim was the same: To make real estate appraising a profession and all of their members true professionals.

Now let’s have the courage to call an obvious fact a fact. A whole passel of so-called appraisers licensed and certified have sprung up over the years, to a point where the public is overwhelmed and confused not knowing who’s the most qualified, because they all present themselves to be able to appraise or analyze all types of properties and real estate investments whether competent or not.

I don’t know why we can’t say what the problem is, because the public, our judges, attorneys, clients, lenders and knowledgeable laity, are saying it out loud repeatedly, writing letters about appraisers, the actions of appraisers, and reporting fraudulent, unethical and incompetent activities in ever-increasing numbers. And just what is it they are saying? The ones who only have a cursory knowledge of real estate and real estate appraising simply state that, based on their experiences, the letter designations don’t seem to mean a thing. The public does not seem to recognize the difference between a Designation and a State licensed or certified appraiser. They report that one seems to be just as bad as any other, and none of them seem to be real professionals. But the people who have a bit more sophistication, which include the courts, attorneys, lenders, and today the majority of the buying and selling public, are more articulate and more specific. They will mince no words and tell you that they know why most of the so-called appraisers came into existence during the past 15+ years: These johnny-come-latelies passed State exams with a minimal amount of training and dubious course work and have grown because it is relatively easy to get.

They have the minimum education requirements with very little work review, simply send in a log showing you have taken some courses and take a simple test; send in your money and you’ll be granted a license or certification. This plus the minimum continuing education courses of study are far below the rigid requirements that have made the Institute and like organizations strong, progressive, viable sources, and centers of professional growth and knowledge. The various designations of the Institute continuously demand hard work, dedication, additional study and a willingness to subscribe to a set of professional ethics and standards. Not the minimum standards found in licenses, certifications or designations COD by return mail.

I have talked about drawing in new members through our professionalism, ethics, continuing education, ability to make more money, and a strong, national, unified appraisal organization. These are different topics, but all inter-related and having a common goal. The public, our clients, are not talking about us as much as I would like, and I am afraid they don’t know who we are. I believe it is time for us to stand up, look at ourselves in the mirror of reality, and tell it like it is. The question is what are you, you, going to do about it?

Professional real estate appraising, in my opinion, is at a very serious stage in its history; we either go forward or backward. We are at a crossroad. We must take action. I believe we are in the position of the bicycle rider pedaling up a hill with a tiger on his tail: we can’t stop or stand still, and if we try to coast, we’ll go back downhill, so our only course is to keep on pedaling.

You’re right: Real estate appraising and real estate appraisers have come a long way since the middle 1930’s, but I believe the battle is just beginning, and we’ve still got a long, long way to go.

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A residential real estate appraiser’s primary job is to determine an “opinion of value” as of an effective date. The inspection is one of the means that an appraiser uses to gather data in determining this “opinion of value”.

Setting the Appointment:

A typical scenario is the refinancing of a home and the bank/lender is sending out an appraiser. When the appraiser calls to the schedule the inspection appointment, feel free to offer up some information on your home. However, stick with the facts regarding the physical attributes of the home and DO NOT discuss the value (how much you think your home is worth). (More about this later.)

My initial phone conversation with a homeowner includes the following:

• Does your home have a particular style?
• How many floors does your home have?
• Does your home have a basement? Is the basement finished?
• How many bedrooms and bathrooms are there?
• Does your home have a view, e.g., lake, mountain, city, territorial?
• What is the condition of your home?
• Have you updated the interior in the last 5 years?
• Have you replaced any major systems of your home?
• Is there any on-going construction in your home?

Honesty is the best policy when it comes to answering these questions. You can expedite the appraisal process, save the appraiser a lot of time and frustration and the overall cost of the appraisal by being forthright with these answers.

Before the Appraiser Arrives:

Once the inspection appointment has been and set, you should tidy-up the home before the appraiser arrives. I say tidy-up because cleanliness is not the goal. Instead, the goal is removing the everyday clutter so the appraiser can see the amenities of your home. Unbelievably, I’ve been to homes with so much clothing on the floor that I did not know whether the room was carpeted or had hardwood floors. Why is tidying up so important? Because, in addition to the required exterior photos of the home, front and back, most lenders now want to see interior photos of the home. These photos speak volumes about the condition of your home.

The living room, kitchen and baths have become the standard required interior photos, but photos of special features such as custom designed family rooms with floor to ceiling fireplaces or media rooms with built-in seating with movie screen, may also be include in the report. On the exterior, photos of sport courts, garages and ponds may be included.

An appraiser also has the responsibility of photographing defects of the home as well, especially when they affect value. So be proactive and finish those projects so the bank/lender does not see the hole in the wall where the door handle broke through the drywall, or the dangling light fixture that was missing one part, or the bathroom tile work that wasn’t as easy to install as they said on the home improvement show. The same goes for the exterior. Broken down cars, no matter how much you cherish them, should not be on blocks in your front yard. Do you have a ladder against the home? Take it down and put it away. The bank/lender may assume the ladder is there for an unfinished repair. Avoid the costly situation where the appraiser is recontacted to return to your home to take more photos or hiring a roof inspector to confirm that the roof is in good condition.

The Appraisal Visit:

The appraiser arrives, and your house is clutter free and looking good. The appraiser will walk through the home, look in every room and take notes. The appraiser performs the inspection in order to assess quality, condition and amenities to determine the home’s value. If there are items that you think are special features in the home that may be overlooked by the appraiser, feel free to bring those to the appraiser’s attention. You don’t want an appraiser to overlook a bathroom, wet bar or any finished living space that is behind a paneled or locked room. Many older homes have built-in features including desks, stereo/intercom systems and foldout ironing boards. The appraiser may not attribute value to all amenities, as some may not be fully appreciated in the market place to typical buyers, regardless of how much money they cost to build or replace.
Stay Professional:

Many homeowners ask the appraiser how much they think the house is worth. This is not an appropriate question to ask at the time of the inspection. The appraiser should actually refuse to answer this question to comply with USPAP (Uniform Standards of Professional Appraisal Practices) and respect the client/appraiser relationship that, in part, led to the credit crisis fiasco in the sub-prime market. You will learn the value of your home when the appraiser has delivered the completed appraisal report to the bank/lender. The homeowner has a legal right to view this report.

Good Luck.

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The designation doesn’t make the appraiser: The appraiser makes the designation.

The old cliché, the clothes make the man, is true only for a very brief instant, or while the suit is on a dummy, or in a photograph, because as soon as the image is animated, whoever is wearing the clothes, names, or expensive tailoring will hide or disguise the person under the clothes.

Designations are important, vitally important to our industry. To the people who retain us, to the bankers and lenders who rely on our professional ability, and to the attorneys and courts who listen to us as experts. Additionally, they prove a great deal both to the outside world and to the individual, because they represent the culmination of a great deal of study, hard work, and discipline. But acquiring the letters behind one’s name, earning the professional designations, is just the first step. As any very candid M.D., or D.D.S., or J.D. will tell you, once he or she has the coveted little initials after their names, that is when they really began to prepare, to study and learn. Doctors, dentists, lawyers, all professional people, really only begin to practice their professional AFTER they have been designated.

In the real estate profession a lot of us were interns for a number of years, working as appraisers, and working toward our designations, and harboring the hope that on the day we were designated we would be given enlightened intelligence, that the designation would be the key to solve all of our problems.

What a shock: We finally received that coveted group of letters, and an impressive document to frame and hang on our office wall, but the fact of the matter was we were just exactly the same person we had been twenty minutes earlier. We still knew as little, or as much, we were still filled with the same hopes and fears, but there was one essential difference: We had the knowledge, ability, and stamina to complete a very rigorous course of study and had been so recognized by our professional peers and associates.

Having earned a professional appraisal designation seems to make a person stand a little taller, look a bit sharper, and act more decisively. A professional designation doesn’t grant immunity to mistakes, or make the average appraiser into a genius, but it seems to make the person more aware of his responsibilities, to make him want to do a better, more thorough job.

In the last twenty-five years, we have gone from slide rules and mechanical typewriters to word processors and computers, and the speed at which the appraisal profession is changing is simply awesome. If the appraiser doesn’t keep up with the changes, the advances, he will surely be left behind.

A designation as a professional appraiser is a hallmark that the individual has dedicated a great deal of time, energy, effort and study to improving his ability to serve the public and I sincerely believe that the designation will become more important in the future. With the increasing speed of communications and all the other technological advancements, appraisers must devote more and more time each just to stay abreast of these changes. And the criteria of ability will trend more and more to be a professionally designated appraiser, because he or she will be involved in mandatory education recertification programs.

A professional real estate designation tells the world that you care enough to be the very best!

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Who knows when or where opportunity will strike next. It’s all around us. All the time. Almost every day we hear stories about someone who invented some apparently simple or trivial item, but it made him a millionaire. Or somebody else wrote a book, or a friend secured a wonderful new job, or your cousin got a fabulous raise in pay. It happens every day – but it seems to happen to someone else. And all we see are the results, and not the long hours and hard work that produced these results.

I think all of us daydream once in a while about finding the pot of gold at the end of the rainbow, winning the State Lottery, or inheriting a fortune from some long lost relative we’ve never even met.

But the dream passes, and we come back to reality, back to our jobs, and our daily routines. Too often though, we tend to equate back to work, or reality, with drudgery, or unpleasant tasks, and miss the fact that our golden opportunity, the key to future happiness and success, is right there in front of us and always has been just waiting for us to take the initiative.

If you are working to become a professional real estate appraiser, why not upgrade that goal to read, “I am working to become the BEST professional real estate appraiser.” Too many people sacrifice themselves to mediocrity simply because it is the easy way out. There is always an excuse available if needed. One can always justify the reason for not doing something. It’s just human nature at work. But remember, success and accomplishments don’t need to be rationalized, explained, or excused: They tell their own story.

One of the really serious problems of our appraisal profession has been that a large number of real estate appraisers have never taken appraising seriously. They arrived, sort of by accident, found they could make a fairly good living, and having reached a certain level they stopped reading, studying, learning, and trying to advance their knowledge and skills. As a result, we have a lot of people working in the appraisal profession who are actually satisfied with mediocrity, are willing to deliver just enough to get by, and will accept the income such work justifies.

They don’t want to join a professional organization because they say it costs too much, and anyway they get all the work they want without belonging. But these are the people who have benefited from all of the work done by professional appraisal organizations, by the research and techniques developed by members of professional groups, and they enjoy the standards of pay or fees that others have established. They are free loaders.

Human nature won’t change, so there is probably nothing we can do about this attitude of some appraisers, but we can do something about our own attitudes, our own approach to the problem of enlarging and increasing our professional expertise.

Instead of worrying about what “they” do out there, if each one of us will strive to improve his or her professional qualifications this coming year, by attending meetings, seminars and courses, we will discover that opportunity is right there knocking at our own front door. It’s strange, but every time you improve your techniques or capabilities, you find a need for them; you discover a market for your added skills, and a market that will pay for your professional services.

There are opportunities galore for the well-qualified, well-prepared, educated professional appraiser. He or she will find all of the “opportunities” he or she can handle, and then some. Just look back at our recent recession: A lot of “appraisers” dropped out of sight, but the qualified, the designated appraisers, kept right on working.

Opportunity: It’s right there in front of all of us, just waiting to be taken advantage of. And the key to success is preparation, education, and professionalism. Opportunity isn’t an accident, it isn’t luck; opportunity is the result of good hard work.

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Click the the link below to hear an on-air endorsement from Mr. Bill Schwartz, of KIRO 710 News Radio. This was provided after I personally appraised Mr. Schwartz’ Seattle area residence.

Appraisal

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