Fee Simplistic is a regular post by Martin Tessler, whom after 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing the both the trees and the forest. He has never been accused of being a man of few words and his commentary can’t be inspired on a specific day of the week. In this post, he chews the fat with us about the easy credit syndrome and begs the question: “Do you want fries with that?.” …Jonathan Miller
This past Wednesday the Wall Street Journal reported on how US auto parts suppliers were successfully resisting the price-cuts demanded by Detroit’s Big 3-GM, Ford & Chrysler. The article explained how attrition among the US parts suppliers through bankruptcies, consolidations, etc. had resulted in giving the remaining survivors the necessary leverage to resist Detroit in price reductions demanded by the Big 3 in their attempt to lower costs. Thus with fewer plants, smaller operations and lower overhead the suppliers did not have to take on unprofitable contracts in order to keep their plants busy as they were now more efficient than in the past.
Compare this to the current state of the appraisal industry and you will find the exact opposite in terms of the relationship between supply and demand. The appraisal world has burgeoned over the past decade as a result of the vast residential and commercial CMBS market that has sopped up the investment capital pouring into US real estate. Preceding this boom, however, the supply side of appraisers had already expanded thanks to the enactment of FIRREA in 1989 in answer to the savings and loan debacle in the mid- late 1980’s when state certification enabled every Tom, Dick and Harriet to take a core of appraisal courses, pass a test and hang out their shingle as either a residential or general property appraiser. Moreover, and equally as important, many of these newly hatched appraisal savants were single practitioners operating out of their basements with no staff and little overhead. This is not meant to belittle the capitalistic society in which we operate but merely to set the competitive scene.
To handle the growing volume of deals and the expanding need for appraisals as well as keeping their overhead costs low the financial institutions commoditized the appraisal process and resorted to on-line standardized engagement letters that gave almost no information to the appraiser as to the number of tenants on the rent roll other than being told it was an office building or single-user industrial building, along with the property’s address and a contact name and telephone number; organized the lending process into a production line so that the loan officers had little knowledge of the collateral. Anecdotally, in the large bank that I worked for I found myself fielding requests for appraisals from our out-of-state branch offices whose customer/borrower may have banked at that location but whose property was somewhere back in the New York area (when I requested information about the property, its gross building area, rent roll, leases, etc. so that I could talk intelligently to the various appraisers in order to obtain a fee quote and timing in many instances the field office had no basic property information). To handle either appraisal reviews and/or engagements (especially by the smaller institutions) banks retained appraisal management companies (AMC’s) to administer the process. And thus conditions for the PERFECT STORM in the appraisal world were set in motion:
- growing appraisal volume
- growing appraiser supply
- 3rd party AMC’S under orders to obtain lowest bid fees
- newly minted appraisers eager to obtain work
- AMC’s & institutions able to exploit the appraiser oversupply
- contented client-lenders able to comply with FIRREA/USPAP minimum standards where any appraisal mistakes were bailed out by geometrically rising sales prices
Fast forwarding to the present and the various SOAPBOX articles of my fellow bloggers reporting manifestations of today’s appraisal business world: lenders shopping to see if the appraiser can support the loan/value amount; a quick “verbal” value before the written report arrives and any other quirky requests to prevent the deal from being lost due to the appraisal and it is apparent that business can be rough.
There is no question that today’s appraisal world has been transformed into a high volume rush business stoked by Wall Street’s need to keep the bonfires of CMBS in ample supply to sop up the large capital flows seeking investment outlets. The vast volume of business means that the originators, lenders and underwriters are the bosses while the appraisers have become the sweatshop workers if they want the business. State certification of appraisers has raised the supply of people willing to work at sweatshop fees. As often cited in SOAPBOX commentary, appraisers have become “form filler-outers” and downloaders of web-based data, sales comps and practitioners of applying sales price or rental rate averages to subject properties. Lucky is the appraiser if Co-Star has a photo of the selected comps. If not, a trip to the field may be mandatory if the reviewer does not accept the caption: “no photo available”. Gone is the appraiser who can look his client in the eye and say-“you know what, my experience tells me that market value is not represented by the average of the sales comps and here are the reasons why”.
If I have given the impression that appraisers are being paid for their production and not for their ability to discern market value based on market dynamics you are not mistaken.
Tags: Appraisal Management Companies, Soapbox Blog, Martin Tessler, Appraisal Pressure, Appraisal Process, Fee Simplistic
Marty, So eloquently said, I have tears welling up…Not that log ago I had the opportunity to meet with a delegation of Korean appraisers investgating the appraisal profession in the US, and they were absolutely horrified when I showed them the on-line “bidding” system that has become the standard. Unfortunately our colleagues are partially to blame, as they are the ones fighting for the scraps at any price…the lenders favor those that are willing to sell their labor the cheapest. Having been through a real estate cycle or two in the past, I know that it’s just a matter of time before the regulators step in and shake things up again. Question is, will it be for the better or the worse?
As order takers, appraisers have painted themselves into a corner with the separation from NAR in the 1980s. Now the industry is a headless Hydra running in all directions just to obtain business, forget about being paid a reasonable wage for your work, or that all the others up the lending food chain plagiarise their work. The appraisal business has allowed itself to be the scapegoat of last real estate recessions (remember the late 80s early 90’s) and has never really gotten over it. The best and brightest have left the field in search of positions that pay better, offer advancement (whats that?) and appreciation for their skills. It’s a sad commentary to say, but being an appraiser use to be an admirable profession and is now just a stepping stone to another job.
By the way, how many current appraisers have seen a cycle (or even two)? Very few. I rest my case.
Keep it coming Marty!
Ruevenator: I don’t think the Institute has a class that teaches “cycles”.Maybe we should all just get a Harley and look for Corrigan and the Holy Grail….