English
Real Estate Valuation: From Crisis to Golden Opportunity Era
Education Requirements:
- The Appraisal Qualifications Board (AQB) of The Appraisal Foundation increased educational standards for each licensing stage by 2008, effective January 1, 2008. Additional requirements were implemented on January 1, 2015.
“Old Golden Days”:
- Lenders used Automated Valuation Models (AVMs) and Broker Price Opinions (BPOs) to evaluate properties for loans instead of traditional appraisals. AVMs are valuation tools, but not accurate without expert data adjustments. BPOs are used to determine property selling prices. Appraisers deal with value, brokers deal with price.
- Lenders offeredโ “No Doc Loans” (no appraisal, no income proof). Lenders believed home values would keep rising. This was called the “Greater Fool Theory.”
- The financial crisis started in fall 2007; by summer 2008, Wall Street firms, major lenders, Fannie Mae, and Freddie Mac were near bankruptcy. The housing market’s subprime loans were called “toxic.”
- The financial collapse led to increased regulation with The safe actโโ and Dodd-Frank Act. Lenders were told not to use AVMs and BPOs for creating loans. The SAFE Act required licensing and minimum education for loan officers. Dodd-Frank amended the Truth in Lending Act (TILA). Appraisers were directed to receive orders from Appraisal Management Companies (AMCs). Banks were exempted, but most chose to implement it. Loan brokers were no longer allowed to order appraisals.
Appraisal Management Companies (AMCs):
- Dodd-Frank required AMCs to pay appraisers “reasonable and customary fees.”
Current Situation:
- In 2006, the U.S. Department of Labor indicated that the number of appraisers in the U.S. was aging, and predicted a shortage by 2012 due to natural attrition.
- The financial world collapsed between 2008-2012.
- The Dodd-Frank Act and stricter appraisal education standards created a perfect storm.
- Currently, there are whispers that lending pipelines are backing up because there are not enough appraisers.
- There is a consensus that prices/wages are rising due to a shortage.
Technology:
- Green buildings, terabytes of digital storage, scanner packages, fax machines, printers, tablets, pads, smartphones, apps, portals, and clouds have emerged.
- An appraiser checks their smartphone for new appraisal requests. They download property profiles onto a tablet/pad which include tax disclosures, legal descriptions, square footage, number of rooms, floor plans, comparable sales, Multiple Listing Service information, street maps, and satellite images.
Equations and Models:
- Market Value (MV) = Net Operating Income (NOI) / Capitalization Rate (Cap Rate)
- Land-to-Building Ratio = Land Area / Building Area
- Replacement cost depends on estimating the cost of materials and labor to replace the property with a similar asset.
- Discount rate is used to discount future cash flows to estimate present value.
Chapter Summary
The chapter addresses the profound transformations in the real estate appraisal sector, from the 2008 global financialโ crisis to emerging opportunities. It analyzes the root causes of the crisis, regulatory actions taken to prevent recurrence, and technological developments that have changed the profession.
Key points: The 2008 financial crisis is traced to poor lendingโ practices, including “No Doc Loans,” reliance on inaccurateโ Automated Valuation Models (AVMs), and Broker Price Opinions (BPOs) instead of professional appraisals. Regulatory response included laws like the safe actโ and Dodd-Frank Act, restricting AVM and BPO use in lending, and increasing licensing and education requirements for lending staff and appraisersโ. Appraisal Management Companies (AMCs) were mandated to ensure appraisal independence, but controversy arose regarding “reasonable and customary fees” paid to appraisers. The crisis and increased regulations led to appraiser shortage. The profession experienced technological advancements, including smartphones, tablets, digital maps, aerial photos, and large databases, increasing efficiency and accuracy. Education and licensing standards for appraisers were raised.
Conclusions: The financial crisis led to fundamental changes in the appraisal industry, aiming to enhance transparency, accountability, and independence. Despite challenges, the current appraiser shortage and technological advancements create golden opportunities for qualified appraisers. Skilled appraisers who embrace modern technology will be well-positioned to capitalize on opportunities in the growing real estate appraisal market.
Implications: Appraiser shortages are expected to drive up wages and fees. Demand for specialized education and training programs in real estate appraisal is expected to increase. Appraisers should adopt modern technology. Besides real estate finance, there are increasing opportunities for appraisers in government, legal, and insurance sectors.
In summary, the chapter views the real estate appraisal sector as transitioning from a crisis to a new era of golden opportunities, driven by new regulations, technological developments, and a shortage of qualified appraisers.
