Appraisers—also known as valuers outside of the United States—play an important role in the real estate market.
Whenever someone is buying a property and needs financing, appraisers are the unbiased professional hired by the lending institution to determine the property’s value and make sure that the bank isn’t lending out more money than it’s worth.
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But banks are just one of their clients. Appraisers are also hired by individuals for estate purposes, taxes, divorce settlements or other types of litigation. They can also evaluate a primary or secondary property’s value for a high-net-worth individual’s wealth management portfolio, or determine how much a property is worth before an owner lists it or starts renovations. And even if a buyer is paying all cash, he or she may hire an appraiser to have some assurance that they’re not overpaying and are settling on the right price.
"Whether we’re hired by an individual or by a bank, our task is to determine the current market value of a property," said Jonathan Miller, the president and CEO of Manhattan-based residential appraisal and consultancy firm, Miller Samuel Inc., "which always means following the same process."
To better understand when you might need to enlist the help of an appraiser and how this process works, we spoke to several industry experts to hear what they feel their role is in luxury real estate specifically, why they think it’s important to hire the most experienced professionals to determine a property’s true market value, and how the job has changed and been commoditized in the United States—and why that matters—since the 2008 financial crisis.
All About the Appraisal Process
As Mr. Miller noted, the appraisal process is generally the same regardless of the type, scale or location of a property.
The first step, experts say, is to know who the client is. About 25% of the time, Mr. Miller said that his client is a bank or lending institution, and 75% of the time he is hired by a private individual. But 10 years ago, the opposite was true.
Michael Hobbs, the president of Chicago-based PahRoo Appraisal & Consultancy, said that while lenders still make up about 50% of his business, he also gets plenty of queries from individuals.
"I get a lot of calls in January and February from people that are thinking about selling their home in the spring but haven’t chosen a realtor," Mr. Hobbs said. "A lot of times, they want an independent opinion to help them gauge the value of their home before they get enticed by a broker who only wants to tell them good things." Other individuals hire him when they’re considering an addition or improvements to see what their home could be worth with proposed updates, he said.
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For James Thompson, head of the residential valuation team at Knight Frank, his client mix differs depending on what’s happening in the market. "In a difficult financial time, I might find there’s a lot of refinancing work," Mr. Thompson said, "while other times, there may be a lot of work related to tax triggers or estate planning."
Regardless of the client, appraisers are bound to keep their valuation confidential, and keep it between themselves and the person who ordered the report. "A lot of people get annoyed with us because of this," said Karen Mann, a senior residential appraiser based in the San Francisco Bay area, who’s affiliated with the American Society of Appraisers, "but these are the rules we’re bound to, and most of us take the job very seriously."
Luxury lives in the mind.
Wealthy buyers in the U.S. are more likely to bid on homes sight unseen https://t.co/RKEEduxujv pic.twitter.com/DBYcwtMMLz — Mansion Global (@MansionGlobal) June 30, 2017
The second step, Ms. Mann said, is to determine why the client needs an appraisal. There are a lot of reasons someone might request a formal price evaluation, but while the process won’t change, the type of report the appraiser fills out to satisfy that request will.
The third step—and this is an important one, Ms. Mann said—is determining the highest and best use of a property. In most cases, like when there’s a single-family home on a residential street, this is straightforward, Ms. Mann said. But if there’s a commercial structure on a busy street that’s been re-zoned residential, appraisers need to consider this information, and determine whether a property’s current zoning is legal, and likely to generate the highest price.
The fourth step is identifying some comparable properties and starting to analyze data gathered from Multiple Listing Services, public records and other sources. This is where an expert opinion is vital, Mr. Hobbs said, because the more unique the home’s features, the more analysis and research an appraiser needs to do to get the valuation right.
"We’re seeing a greater demand for professionals who can not only identify, but then analyze what the impact of things like high performance, green features or indoor/outdoor living spaces," he said.
After 30-plus years of experience, Ms. Mann said she knows homes with leased solar systems come with no additional value, and are more difficult to sell than homes without them, while homes with updated kitchens are where sellers can reap the most added value.
Mr. Miller, who founded his appraisal company in 1986, agreed that experience is key. "While appraising an Upper East Side studio requires the same process as appraising a triplex penthouse with a ground lease, the time spent and the integrity of the information is vastly different," he said. Because Manhattan doesn’t even have a Multiple Listings Service database, "that’s where the specialization comes in, and where it’s valuable to hire someone who has a deep and entrenched experience base in the market."
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For Ms. Mann, finding the right comps for one-of-a-kind properties is part of the excitement of the job.
"Appraisers often have to be creative to determine what a property would sell for on the open market," Ms. Mann said. While 20 to 30 comparables all located in the same neighborhood and sold within about a year is an ideal amount, that’s often not possible. "You just need enough comparable properties to tell the whole story so that the client can follow along with what the appraiser did, and understand how the appraiser reached his or her value conclusion."
The final step is to write up a valuation report that lays out the appraiser’s findings, and covers the nine items required by the Uniform Standards of Professional Appraisal Practice (USPAP). These come in two varieties. If the valuation was completed for loan financing, the appraiser must fill out the standard Fannie Mae / Freddie Mac 1004 form, although for luxury properties, this is barely adequate, Ms. Mann said.
Because there’s no space for an analysis of unique amenities, like stunning views, acres of vineyards or private swimming pools and tennis courts, appraisers must include addendums that detail these features.
The other type of unstructured narrative report, which can be five pages or 70 pages, is often a better fit for a luxury property, Ms. Mann said.
The length of time an appraiser has to complete this report varies by client, experts say. Although in most markets, banks are looked for a more streamlined approach and a quicker turnaround, Mr. Thompson said, noting that about five working days is typical in London.
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A Lingering Post-Crash Hangover
There’s been chaos and upheaval in the U.S.-based appraisal industry related to mortgage lending since the 2008 financial crisis, Mr. Miller said.
"The appraisal industry is still in this post-financial crisis hangover period," Mr. Miller said, the result of which has been that, "the quality of luxury appraisals or general appraisals that go through financial institutions are the worst they’ve been in history."
So, what happened to the industry, and what does it mean to the luxury buyer and seller?
Answering the first question means looking back to 2009, when in the wake of the mortgage crisis, a document called the Home Valuation Code of Conduct, or HVCC, made it illegal for appraisers to have contact with loan officers or mortgage brokers.
People worried that appraisers were being pressured to needlessly increase their valuations between 2000 and 2008, Mr. Miller said, and, it was decided that in order to remove this possibility, the appraiser shouldn’t have contact with decision makers.
"The idea was to distance banks from appraisers," Mr. Miller said, "which enabled an institutional middleman, known as Appraisal Management Companies, or AMCs, to embed themselves in the process and take half the appraiser’s fee." Similar restrictions were carried over into the Dodd-Frank Act when it was passed in 2010.
Practically overnight, appraisers were making half of what they used to make for the same amount of work, Mr. Miller said, which caused many industry experts to walk away from either real estate mortgage appraisals or the industry. "There’s been this mass exodus of talent since then," he said.
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Today, AMCs continue to take half the appraisal fee, and hire appraisers who don’t have the right credentials and experience—like an Albany-based appraisal hired to appraise a property in Brooklyn.
The result of this process has been that valuations of complex or luxury properties don’t always represent market value, experts say, because the appraisers hired by AMCs don’t have the experience necessary to get it right. These missteps can sink deals contingent on financing, while ones that rely on cash—like those made by foreign buyers—can continue to drive prices up.
The best defense against all this, experts say, is to hire the experienced appraisers with expertise in your geographic location and property type to complete private valuations before listing a property or before putting in an offer. "It’s very important that luxury buyers and sellers interview appraisers and make sure that they have the correct qualifications to do the job right," Ms. Mann said.