Evolving Educational Needs in Assessment: Transforming Poor Practices into Opportunities

Increased Education Requirements:

• The Appraisal Qualifications Board of the Appraisal Foundation announced increased educational standards for all licensing stages in 2003, effective from 2008. Additional requirements were implemented on January 1, 2015.
• The immediate impact of these requirements was limiting access to higher certification levels to university graduates (four-year bachelor’s degree).
• Reasons for the increase include the increasing complexity of real estate markets, keeping up with technological advancements, improving the quality of appraisals, and raising the level of the profession.
• Basic course materials should cover a wide range of topics, including appraisal principles (such as the principle of substitution, the principle of supply and demand, and the principle of highest and best use), appraisal methods (such as the sales comparison approach, the cost approach, and the income approach), statistics and real estate analysis, real estate laws and regulations, and professional ethics.
• In addition to basic course materials, appraisers should attend specialized training courses in areas such as residential, commercial, industrial, agricultural, and specialty appraisals.
• Most countries require a practical training period under the supervision of a certified real estate appraiser before obtaining a license.

Revisiting the Bad Old Days:

• Lenders sought to reduce costs by using Automated Valuation Models (AVMs) and Broker Price Opinions (BPOs) instead of traditional appraisals for loan purposes.
• AVMs are valuation tools, not appraisals, and require expert adjustments for accuracy.
• BPOs are used to determine sales prices, not to estimate the true value of a property.
• Appraisers deal with value, while brokers deal with price.
• “No doc” loans were offered without verification of income or proper property appraisal.
• The “Greater Fool Theory” was prevalent, based on the belief that property prices would always rise.
• These practices led to the mortgage crisis in 2007, causing the collapse of Wall Street firms, major lenders, Fannie Mae, and Freddie Mac.
• The SAFE Act and Dodd-Frank Act were enacted to regulate the financial services industry and protect consumers.
• These laws restricted the use of AVMs and BPOs for mortgage lending.
• The SAFE Act mandated licensing and education for loan officers.
• The Dodd-Frank Act created Appraisal Management Companies (AMCs) to act as intermediaries between lenders and appraisers.
• Dodd-Frank stipulated that AMCs pay appraisers “reasonable and customary fees,” sparking debate over the definition of this term.

Current Situation in the Appraisal Field:

• A 2006 U.S. Department of Labor study indicated that the number of appraisers in the United States was aging, and a shortage was expected by 2012.
• The Great Recession exacerbated the shortage, and the Dodd-Frank Act along with new educational standards made it more difficult to enter the profession.
• As the economy improved, the demand for appraisals increased, leading to bottlenecks in lending pipelines.
• Experts predict a “new golden age” for the appraisal field due to the shortage of appraisers, rising wages, and increased opportunities in government, legal, and insurance appraisal.

The Technological Revolution in Appraisal:

• The use of smartphones, tablets, and apps in data collection, information analysis, and report preparation.
• AVMs are used as an aid in appraisal, with awareness of their limitations.
• Digital maps and GPS systems are used in locating properties and determining distances.
• Cloud storage allows access to data and reports from anywhere at any time.
• Hybrid vehicles are used to save on fuel costs.

“Bad Old Days” Resurfacing:

• Inappropriate use of Automated Valuation Models (AVMs): Some financial institutions sought to reduce costs by using AVMs and Broker Price Opinions (BPOs) instead of professional real estate appraisals.
• AVM Disadvantages: AVMs are valuation tools, not complete appraisals, as they rely on historical data and statistics and do not take into account the unique characteristics of the property or local market conditions. AVMs require adjustments by an expert to ensure their accuracy.
• Broker Price Estimates (BPOs): BPOs are used to determine sale prices, not to estimate the true value of a property. Appraisers deal with value while brokers deal with price, two different concepts.
• Basic equation in valuation: Value = Price ± Adjustments
• Poor lending practices: Offering mortgages without verifying the borrower’s income or properly appraising the property.
• “Greater Fool” Theory: The belief that property prices will continue to rise regardless of economic conditions, and that there is always a “greater fool” willing to pay a higher price.
• Toxic Loans: High-risk loans that led to the mortgage crisis of 2008.
• Increased regulation: The SAFE Act and the Dodd-Frank Act were enacted in response to the 2008 financial crisis, aimed at protecting consumers and regulating the financial services industry.
• Restrictions on the use of AVMs and BPOs: These laws prohibited the use of AVMs and BPOs in mortgage lending.
• Licensing and Education Requirements for Loan Officers: The SAFE Act imposed licensing and education requirements on loan officers.
• Appraisal Management Companies (AMCs): AMCs were created as an intermediary between lenders and appraisers to prevent undue influence on valuations.
• Reasonable and Customary Fees: Dodd-Frank stipulated that AMCs pay appraisers “reasonable and customary fees,” sparking debate over the definition of this term.

Current status in the field of valuation:

• Shortage of appraisers: A 2006 U.S. Department of Labor study indicated that the number of appraisers in the United States is aging, and a shortage of appraisers is expected by 2012.
• The Great Economic Recession (2008-2012): The economic recession caused many appraisers to lose their jobs, exacerbating the shortage problem.
• Impact of Dodd-Frank Act and New Educational Standards: These factors have made it more difficult to enter the profession, leading to a decrease in the number of appraisers.
• Increased Demand for Valuations: As the economy improves, the demand for real estate valuations has increased, leading to bottlenecks in lending lines due to a shortage of appraisers.
• Higher Wages and Opportunities: When there is a shortage of a good or service, prices and wages rise.
• New Golden Age: Experts expect the valuation field to experience a “new golden age” thanks to a shortage of appraisers, higher wages, and increased opportunities in government, legal, and insurance valuation.
• Technology and its impact on the work of the appraiser: Use of smartphones, tablets, and apps in data collection, information analysis, and report preparation.
• Automated valuation models (AVMs): Using AVMs as an aid in valuation, while recognizing their limitations and the need for necessary adjustments.
• Digital Maps and Global Positioning Systems (GPS): Using digital maps and GPS systems to locate properties and determine distances.
• Cloud storage: Storing data and reports in the cloud, allowing access from anywhere at any time.
• Hybrid Vehicles: Using hybrid vehicles to save on fuel costs.