Dona DeZube is a writer based in Clarksville, Md., and regular contributor to HouseLogic.com.
Buddy, Can You Spare an Appraisal Job?
January 1, 1996
Times are tough for residential appraisers. Artificial intelligence software that calculates a property's value in three minutes is working to replace them. Demand for appraisals has dropped as lenders turn to limited evaluations in lieu of full-blown appraisals for some types of loans.
"The residential appraisal business in the future will be very limited in the way it's done, because it's going to use technology and data that make it simple to do limited evaluations," explains Norman Goldberg, GAA,Hannoch Appraisal Co., Roseland, N.J.
The NATIONAL ASSOCIATION OF REALTORS®' Appraisal Foundation trustee, Goldberg sits on a board that supervised the creation of the Uniform Standards of Professional Appraisal Practice (USPAP) and a national registry of 88,500 state licensed and certified appraisers.
But just as thousands of appraisers finished becoming licensed or certified and learning USPAP, the federal financial institutions that regulate banks raised the thresholds, or de minimus, above which their services were mandated--to $250,000 for residential and commercial loans.
In response, bankers began to use technology and limited appraisals, particularly for low loan-to-value products such as home equity loans and refinanced mortgages that lower a borrower's monthly payment.
How slow is business for residential appraisers? Appraiser Peter W. Carissimo of Real Property Consultants in Beverly Hills, Calif., switched to the expert witness business after the appraisal threshold rose and the demand for appraisals dropped.
Ronald Ortosky, owner of Ortosky & Associates, Griffith, Ind., has recently diversified into buyer agency, opening The Buyer's Broker Plus Inc. "I never plan to close my appraisal business, but look at the economics of it. There's an excess supply of appraisers."
Drena Frady, RAA,owner of Combined Investments Inc., a Gallup, N.M., appraisal company, says she has seen business drop off by about a third. "First, everyone who was planning to refinance has done so," she says. "As for portfolio loans, lenders are doing their own kind of drive-by evaluations. They're not even getting a full appraisal."
Bankers say they're still ordering appraisals for most mortgages, despite the higher de minimus levels. "I don't think many lenders among our membership would make a mortgage loan without using a licensed or certified appraiser and a full appraisal," observes Sam Pincich, program manager for real estate markets for America's Community Bankers (ACB), a Washington, D.C.--based trade association.
At least for now, Fannie Mae sides with ACB. But the secondary market giant has a new limited appraisal program for refinancings. Appraisers still use three comparables, but interior inspections aren't required, and public information (such as tax and assessment records) and the local MLS are now relied on.
Chip Coffay, Fannie Mae director of credit policy, says the key to the program is its link with the company's Desktop Underwriter software, which assesses a potential borrower's creditworthiness. If the program works well, he adds, Fannie Mae could expand it to purchase money loans in the future.
Machine Replacing Man
Technology that links public databases is the driver behind automated appraisal systems. One such program, REASON, performs appraisals in three minutes using comparable sales and a rules-based artificial intelligence system.
Critics of the software, including Carissimo, argue that it won't discover hidden problems, such as a load-bearing wall that's been removed by the owner.
And software that depends on public records, says Frady, can run into problems in states where home sales prices aren't divulged by local officials.
Barry Bates, chief appraiser for equity lender The Money Store, tested REASON, a product of PMI Mortgage Services Co. in San Francisco. Bates found that it could generate a value for only about a third of the properties it was asked to evaluate nationwide, because the underlying public records were incomplete or inaccurate.
When Bates compared REASON's evaluations to a live appraiser's work, he found the software's value came within 7.5 percent of the appraiser's value, on average.
REASON creator Joe Cuffaro Jr., CEO of CLM Technologies, San Diego, says REASON works best in homogeneous neighborhoods and has the toughest time in upscale areas where large homes, large lots, or high-priced views make properties unique.
With technology bearing down on their market and lenders taking advantage of higher de minimus rules, it would be no surprise to find fewer people entering the field and current appraisers leaving.
In California, where one out of every eight appraisers works, the Office of Real Estate Appraisers reported this spring receiving 20 percent to 30 percent fewer entry-level licensing applications.
The agency's director, Robert West, says there were about 17,500 appraiser licensees in California in November, when the first of the state's licensed appraisers was due to renew his certification. That number will most likely drop, largely because of the bleak economy. "On top of that, the federal regulatory agencies have decreased the requirement to use licensed and certified appraisers," he says, adding that if the number of licensees goes down to 12,000 after the renewal period, "I won't be in shock."
USPAP: Not a Best-Seller
It has been four years since Congress passed the Uniform Standards of Professional Appraisal Practice (USPAP), the result of a savings and loan crisis that was blamed at least partially on faulty appraisals. But would USPAP prevent another such crisis in the banking industry? Hard to say, but one indicator--the number of appraisers who have USPAP on their desk--suggests the answer would not be an immediate yes.
Ron Peppe is director of policy and programs for the Appraisal Subcommit-tee, which maintains the federal appraisal registry. Peppe says the number of appraisers is holding steady in the high 80,000s. Yet, only about 71,000 copies of USPAP have been sold since 1992. And only about 1,700 people subscribe to the Appraisal Foundation service that sends out the newest version of USPAP each year.
For the latest version of USPAP (cost: $25), contact the Appraisal Foundation, 1029 Vermont Ave. N.W., Suite 900, Washington, DC 200053517. Telephone: 202/347-7722. Fax: 202/347-7727.
What's an Appraiser to Do? One Word: Diversify
When the going gets tough, the tough appraiser gets going--into other avenues of business, that is.
"Appraisal is just like any other real estate business. It's always a roller-coaster ride. You have to be prepared for the boom times to end, " says Drena Frady, RAA, owner of Combined Investments Inc., a Gallup, N.M., appraisal company. "I always tell people, `Be as diverse as possible. Don't get locked into one lender or one type of appraisal, such as FHA appraisal.'"
Frady has handled this latest downturn by diversifying her fee schedule and marketing her services to attorneys doing divorce and estate work. She has also diversified into related fields that don't present a conflict of interest to her appraisal business. "I don't list or sell real estate," she says, "but I do property management and consulting."
Other fields that appraisers are moving into include business valuation and home inspection, according to Dick Maxson, director of the NATIONAL ASSOCIATION OF REALTORS®' Appraisal Section. "Or, you could work to meet your state's requirements for certified general appraiser and move into commercial appraisal," Maxson says.
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