Busting Appraisal Myths
By Drew Watson
The appraiser’s stated goal is to protect the public good. But if others are providing the services we will not, how is that achieving our stated goal? Whether it’s Dustin Harris, The Appraiser Coach, describing cognitive dissonance or other valuation visionaries like Tony Pistilli showcasing the economics and hoping to drive understanding of how to plug in, many are trying to wake appraisers up to this fact.
Unfortunately, the vagaries of USPAP contribute mightily to our problems. That said, our understanding or interpretations of USPAP do not make them true. The concept of opinion credibility framed within the scope of work must be based in the freedom USPAP provides through the scope of work rule, intended user, and intended use. Who is the intended user and what do they expect? What is the intended use? What are the assignment results and how do we arrive at value?
I would like to highlight some of the fallacies that have been adopted as truths and discuss why they are, in fact, fallacies.
Geo-Competency Has a Narrow, Literal Definition
Historically, appraisers have been data gatherers. Big Data availability has changed the idea of geo competency. It no longer (actually it never did) speaks to where we sleep at night. The old days of looking up comps in an MLS comp book are over. If you have the data over time and can analyze patterns and trends, you can become geo competent very quickly. When I say quickly, I mean in minutes. How do I know this? By reviewing and consulting with appraisers on 000’s of files over the last 10 years. Appraisers don’t like this idea, but that doesn’t make it false. Our clients believe it to be true, and the regulations don’t particularly describe what is required (this is an ongoing theme within USPAP). And worst of all, this fallacy is preventing us from claiming the position at the table that we have earned by spending hours analyzing markets and data and putting the work in to be the real experts. The time to claim that position is now – before it’s too late.
Stand-Alone AVMs are An Inevitability
This is not true – at least not in all circumstances. Artificial intelligence has not surpassed human intelligence.
Look at self-driving cars. 10 years ago futurists thought this was right on the doorstep. But as it gets closer, scientists are realizing even IBM’s Watson supercomputer can’t store and calculate all the variables quickly enough. It may work great at low speeds in bumper to bumper traffic, but driving around the neighborhood with pedestrians is another matter. Another example is medical diagnosis. This is a similar but slightly different problem. When it works, it’s fine. Flu, colds, etc. for big medical issues it doesn’t work. Medical groups are moving away from this technology, because when it’s wrong, it’s really wrong and can be catastrophic. Big data for the sake of big data is failing all around us. They need human intelligence to keep them out of the ditch.
The same can be said for AVMs. AVMs don’t currently have the capacity to diagnose Q & C for the subject and comps. Really diagnose with clarity and certainty. Some AI readers can process what it looks like, but they can’t tell true craftsmanship from lipstick on a pig. Nor are they able to explain, to a judge or lawyer for instance, why the classification decision was made. They can’t prove their work. They can’t defend their work. They need our training and judgement. They just want it delivered according to the market realities that all business is working under. They are begging us to meet them on common ground.
Producing More Value Opinions is Riskier
This is where we have to become USPAP experts and become confident in our competence. Can the client suggest a scope of work? Yes. Can they determine the scope of work? No. Can we agree with a scope of work suggested by a client that we determine will result in a “credible opinion of value”? Yes. We may not all agree here, but this is the blessing and curse of USPAP. If we can defend our credibility and work product in terms of client expectations and some of our peer group, we can be compliant.
Direct MLS Access is Required for Standard of Care and Scope of Work
What does analysis consist of: making a judgement about the subject (Q&C) then judgements about the Q&C of available substitutes and how they compare to the subject. This is used in the process of bracketing, which remains the most persuasive element of our economic argument. People can generally agree with the superiority or inferiority of substitute sales. This judgement can happen fast. If we’ve qualitatively bracketed the subject’s physical characteristics with a series of transactions, what’s left? To pinpoint or reconcile the value? To identify the probable range of value? How long does that take? If an appraiser has the comp inspection photos on one screen and the comps on another screen, how long does this process really take? To know within a reasonable range with a reasonable standard of care as expected by the client, who is fully informed of the risks of this level of analysis?
An Increase in De Minimis is the Death Knell for Appraisers
On the contrary, this is the saving grace for the industry. When we look back in 10 years from a position of strength, I predict we’ll look at increased de minimis as the catalyst that saved our relevance. Who is most prepared to conduct an evaluation level scope of work? Appraisers. What are banks currently using as evaluations? It varies greatly, but this is certain: they are not doing it right, they know they are not doing it right, and they have finally admitted they are not doing it right. Their regulators and advocacy groups are warning that to take advantage of the flexibility of evaluations, they are going to insist they do it right going forward. This is GREAT news for us. It is simply too expensive for lenders to create this capacity internally. Who would have thought that the ABA would save the appraisal profession?
There is the expectation that we use technology to work at our highest and best use, for shorter periods of time. Specialization of labor has been around since the Renaissance. This is just another iteration.
Is this going to be our entire practice? Certainly not for everyone. There will continue to be litigation support. There will continue to be complex and super complex properties. There will continue to be divorce cases and imminent domain. The fees for these assignments will grow exponentially as the supply shrinks but there will be far fewer of these assignments. High fee assignments will be [WHAT?]. How many times have you said you undercharged for complex assignments? Almost every time, right? If you are doing a base level of eval work, you can actually charge what it’s worth to do complex reports. If there were another “specialty’ with constant demand and lower pressure paying $100/ hour, couldn’t you afford to quote the $2,000 fee and make some money rather than $750 and really take a loss?
We Make More Money Churning Out 1004s
This may currently be true because the tools to conduct the type of analysis I’m describing don’t, or haven’t, existed. They do now and many companies are working on perfecting the presentation and platform that makes this type of analysis possible. Some shops have assembly line production set up and allow more than 1.5-2 reports completed a day. If that’s doubled, say 3-4 or 3.5 reports per day, that’s 12-1,400 per day. Or $120-$140/ hour, max. And it’s exhausting days. Very few people doing this output that computes to 875 reports per year/appraiser. It’s probably more realistic that these guys are working 12s. So that’s more like $108/ hour. We’re talking the top 2-3% of producers nationally living in high-density markets. With the right platform, I contend the same person could do $120/hour. And the less motivated people or those who desire a life outside of work could do the same pace and work fewer hours. Or, more likely, consider a slower pace at $60-$80/hour. 30 hours per week at $70/hour and you are providing more public good and creating value for your clients. And still making $100k / year. People are doing this right now. Many more will be doing this in the next year.
Selling a Menu of Services Cannot be Accomplished in a Compliant Manner
I think we should all be trying to create the most value for our clients on a daily basis. That, and not protection by regulation, is our key to relevance and prolonged success. Our clients’ needs and depth of analysis will be determined by their risk profile. Which by the way they are using technology to figure out and figure out quickly. Like when the potential borrower is standing in a potential house to purchase. What we can give them can also be understood in terms of their risk profile. So if we can use analyzed data to quickly set value parameters that are consistent with economic laws and are therefore accurate based on agreed upon assumptions – risks they are willing to take – we can’t be one size fits all and expect to remain relevant. False pride is trying to prove one size, extremely thorough appraisal reports when the client is willing to accept assumptions based on their understanding of a borrower’s risk profile.
Small Local Groups of Market Experts Can Control the Evolution of the Services Demanded by our Clients
Not true. It’s a national business. With increased regulation and therefore expense, lenders are consolidating. It’s the only way to pay for the compliance burden. As they consolidate, each singular link in the chain becomes less important. You think you are a valuable partner and you may be. Don’t hold your breath. The network is the key. Need proof? Look no further than the rise of the AMC. If you are unwilling to do evals they will find someone else. If we are all unwilling, they will find someone that is not an appraiser.
It is true that adherence to a common methodology and standards is necessary to protect our credibility. However, the idea of what is required to analyze data and capture our analysis is changing with technology. Google “changing appraiser environment” and see how many references are made to increased use by appraisers of analytical tools. Our clients expect us to figure this out.