Tidings of Spring
May 2003
The last few years have been extraordinary years in many respects. The appraisal business in particular has once again confounded conventional wisdom.
Back in the dark days of 1995-1996, the demise of appraisers was being predicted by various pundits. The profession and the appraisal process were regarded as prehistoric relics to be replaced by promising technologies to be delivered by rapidly evolving development on the internet and world wide web. Digital technology would replace the slow moving, slow witted work of analog appraisers.
Appraisals would be completed in a wink of an eye with an unheard of accuracy and clarity that would remove the errors and subjectivity from the
process and usher in a new era of lightning fast and crystal clear valuation. Loans could now close in days if not hours as the process was freed from the delays caused by the appraisal.
In terms of the delivery and administration of appraisals, it was predicted that reports would be sent with the click of a button, orders would be sent, received, and executed without human intervention. Information - sales, rental, market data - would easily be extracted from large databases of fresh, accurate data..
The attitude among many lending-based market movers was that appraisers and appraisals were an impediment. It was opined that markets would become so transparent and participants so knowledgeable that an appraisal was an unnecessary step in the process.
Appraisers were predicting their own demise; some changed careers. Many appraisers felt (still feel) hamstrung by licensing which obligated them to perform work using USPAP minimums in competing with unlicensed appraisers who had no such obligation.
Indeed, even USPAP created the means by which the appraisal process could be curtailed in certain instances. The odd notion of an appraisal
intentionally conducted (and with the agreement of the parties) to include less than the necessary information prevailed. (This notion still strikes most of us as odd, even after nearly 10 years).
The incidence of “exterior only” drive by appraisals increased. The most essential part of the appraiser’s job, inspecting the improvements in order to arrive at the basis for further value conclusions, was trivialized. The arrival of concise (to a fault) reporting formats became the de facto norm in residential appraising.
Despite the best efforts of market forces, the appraisal profession still exists. Many would say its thriving. In fact, it has grown. Most states have seen net increases in the number of licensed appraisers. The Appraiser Registry maintained by the Appraisal Sub Committee has shown net increases in appraiser numbers.
Greatest increases in appraiser numbers have occurred at the entry level, with residential trainees in greatest profusion. In a down economy, real estate holds great promise for refugees from other professions. Appraisal and sales agent classes are flooded with eager career changers. While there is boundless promise in these real estate sector, how much real opportunity is there?
In a low interest rate environment, homeowners were busy refinancing. The economy
benefited from this activity; consumer activity was fueled by low interest rates. It was our duty as citizens to spend and refinancing was one way to raise cash to do our duty.
Lenders reaped windfall profits and appraisers worked around the clock. Appraisers were in great need, sometimes regardless of experience or aptitude. Values were rising, the system was protected, and product in the form of loans could be brought to market.
As rates bottom out, the refinance spiral will slow. It’s a bit of musical chairs. Is there room for all these appraisers?
What is the longer term outlook for the profession? In all the chaos of the great refinancing boom and the not quite yet burst housing “bubble,” has the industry
benefited? Are appraisers better off then they were before?
Technology has improved the work and work product. Appraisers are freed from many repetitive and mundane tasks and can concentrate on analysis. Drive by residential appraisals continue to increase, along with increasing certainty about their reliability in many circles. Comparable and market information improves constantly but still requires human
judgment in order to be confirmed as accurate.
A lot of the appraisal work was done a cost to appraiser integrity and independence. Appraisers found status in this cycle in the rather questionable “necessary evil” category, but this won’t last. Throughout this current cycle widespread appraiser pressure, willful (and unintentional) violations of USPAP, participation in predatory lending schemes, inflated values, falsified data, improper appraiser conduct and outright fraud and incompetence abounded. Bad lenders and bad appraisers were matches made in heaven, leaving the good ones shaking their heads and wondering what they missed.
While many appraisers thrived on the business derived from refinancing and sales activity, it was this same boom and bust cycle that crippled the industry last time out. Those appraisers who survived the last bust learned that diversification is key and that lending work is like chocolate: you always want more, but a lot is not good for you.
The appraisers that will continue to thrive will learn that the quick buck is not always the best buck and that cultivating a client base that will last over the long term is the surest way to long term success and sound sleep. The profession will survive and thrive because there is a need by an increasingly wider group of clients for accurate, impartial, and independent appraisers to create and maintain some semblance of order in an increasingly chaotic real estate marketplace. Even consumers suspect that all appraisers are not created equal.
For appraisers, the key is to find clients that want real answers. And to avoid clients that are not looking for real answers. There are plenty of clients that find appraisals useful, necessary, and, indeed, essential in order to provide guidance in important decision-making. The flood of bad appraisers and bad appraisal work during this last cycle is distressing and provides fodder for all the prophets of doom.
For those entering the business, it should be clear that the learning curve is steep and long and that easy money is made only at the expense of one’s self-respect and further professional integrity. Those that enter the business, lured by promises of easy money should be cautious. The first bad appraisal decision may be made before the first appraisal is done, in the choosing of fast profits over adequate training.
What is the future of the appraisal business? It is what appraisers want to make of it. The need for qualified appraisers with objectivity and independence has never been greater: the market needs real answers, not pre-determined answered. If not satisfied by current appraisal practices, the market will ultimately find other ways to get to needed answers.
William J. Pastuszek, Jr. MAI, is principal of Shepherd Associates, a real estate consulting firm located in Newton, Massachusetts. The firm provides real world solutions to a wide variety of local, national, and international clients.
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