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What follows is a educational presentation for appraisers who are licensed in the State of California. I write this to help other appraisers avoid having problems with the Office of Real Estate Appraisers (OREA), the state-run organization that licenses us.
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What follows is a educational presentation for appraisers who are licensed in the State of California. I write this to help other appraisers avoid having problems with the Office of Real Estate Appraisers (OREA), the state-run organization that licenses us. Recently I was cited by OREA for writing a substandard report. This could happen to you too, no matter who you are. I have since learned of ways that I could have better written my report so that the OREA would find less fault with it. Those ideas are scattered throughout this presentation, but are especially on the blue screens. Read and learn. This may take you 30 minutes from your day. It can save you the screwtiny of your state-run licensing organization. Don Machholz P.O. Box 1716 Colfax, CA 95713 dontheappraiser@aol.com
How the handled one of my appraisals. This is a true story about me, Don Machholz, a certified real estate appraiser, AR031595, living in Colfax, California, about 50 miles north of Sacramento. Some of you might know me as the guy who wrote the 1004 MC Excel Spreadsheet that sorts data for the 1004 MC. You can get a free copy at www.donsappraisals.com, along with other spreadsheets that I’ve written. For the 8 years that I have been appraising, I believed that the Office Of Real Estate Appraisers (OREA) was comprised of fair, honest people who cared about the truth. I never said or wrote anything bad about them. Then I learned more about OREA, and that sometimes they interpret the Uniform Standards of Professional Appraisal Practice (USPAP) in a manner that goes beyond what we learned in USPAP classes. I think that you should know this, henceforth, this PowerPoint presentation.
On March 18, 2010, I received notice that the OREA will be investigating an appraisal that I did on a golf course property at Lake of the Pines some four months before. It was for a refinance, not a purchase. They asked me for the full report and a copy of my workfile. I sent them both, my workfile was more than 100 pages and included printouts from computer-generated spreadsheets I had developed. In fact, the investigator later said that this is one of the most complete workfiles he’s seen. This next part is related to that It just so happened that ten appraisers here in Northern California, myself being one, had been working on forming an appraiser-based Appraisal Management Company (AMC). Unlike most, we pay the appraiser 80% (i.e.: $360 for a URAR), we have no hold-harmless agreement, and you are allowed to state in your reports how much you get from us. By paying a fair amount, we are able to get local appraisers onto the properties. We are nearly non-profit, have no office, and are mainly volunteers. It is Appraisal Connection Center. I was elected president, and as the controlling person, I had to register our AMC with OREA. (At first OREA told everyone not to register, the next thing we knew they were telling AMCs that they were all past due in registering.) I sent my “Form # 5002” paperwork in to OREA. After a few weeks went by and I heard nothing I phoned OREA to see if it was being processed.
Michelle Doe (perhaps not her real name) of OREA stated in a phone conversation to me on or about March 29, 2010 that the paperwork was being held up because of a “pending investigation” concerning me. I asked if a person is considered guilty until they can prove themselves innocent. She said nothing in response. After a few days someone in OREA decided that the paperwork can proceed. We finally got our AMC license. On March 9, 2011, I had an hour-long conference call with both John Doe (the investigator) and Bruce Doe. These are not their real names. Bruce Doe told me that Michelle Doe no longer works with OREA, and that she should not have said this. He described this as a “training issue”. It is unfortunate that OREA allowed an employee, without being properly trained, the authority to delay the process of an application. Be aware of the fact that this can happen to any of us, a state employee can make a mistake due to improper training. Yet they have the authority to affect our career. Should we assume that Michelle was the only person in OREA to be untrained yet making decisions that affect us?
So, for a while, an employee of OREA had made a predetermined decision that I was guilty of these things, before they even heard the facts. Hopefully, this will not happen to you. I did not hear anything from OREA for many months. Then, I had a 2-hour phone interview with the investigator. We’ll call him “John Doe” in this writing. This discussion, on December 30, 2010, was nine months after I had received notice. It was a civil discussion, but I had, and showed, more respect for him than he did for me. He may have known the neighborhood, but I knew it too since I have been doing appraisals in Lake of the Pines for the past 7 years. I learned that it is not necessary for the OREA to have geographic competency in order to review and judge your report. For the most part they do not have MLS access, so they cannot pull up the same data you can. They describe their job as comparing your report to their interpretation of USPAP, not with a review appraisal. They did not do an appraisal of this property. Yet I was amazed to learn that without MLS data, they can tell us the direction of the market. More about that later.
There are no perfect appraisals, and John Doe did make some suggestions on how to do it better. That may be the only upside of this whole experience. I did learn how to write a better appraisal.* (In a follow-up conference call on March 9, 2011, I learned even more.) This is what I want to share with you. I learned at this time that I was being accused of “gross overvaluation” of a property. (Yet in the final analysis this was not included.) This was news to me, as I did not set out to do this. Golf course lots with partial lake views sell for about $400,000, and I came in at $390,000. Lakefront lots go for about a million dollars, with non-lake view and non-golf course lots sell for about $200,000 to $300,000. It took me about 11-12 hours to research, analyze data, inspect, verify data and write the report for the lender, the client. To me, each appraisal is like a science project (I like science, especially astronomy, www.thecomethunter.com), and my process includes research, data analysis, and verification, to discover the truth of the value of the property. I have no predetermined value and do not search for comps by price. I hope you do that too. My job is to seek the truth. Anyone reviewing or judging my work should be held to the same standard. *I also learned a lot about OREA and how they conduct business.
At the end of the conversation, John said that another appraisal was done for the same property, and it came in at $245,000, while mine came in at $390,000. My appraisal was being compared to that appraisal. This looks like “case closed”, doesn’t it? I look real guilty if that is all you went by. (Or maybe the other appraiser undervalued it. He is not being investigated.) Then I obtained a copy of that other appraisal, and the reaction to it at that time: It is 19 pages compared to my 32 page report. He had no graphs, I had 6. He measured 1700 SF and measured to the nearest 0.5 foot, and, I had 1814 SF, measuring to the nearest 0.1 foot. Public record is 1801 SF. My adjustment was $90/SF, determined by multiple regression, his was $35/SF. He stated the market was declining, but gave no proof. I discovered the values for Golf Course properties (comparables) were increasing, and gave proof. He used 3 closed sales, and one active, I used 5 closed sales and two actives, and I talked to the agents.
My first 3 sales were ALL more recent than ANY of his sales. He used a trainee, and according to the homeowner the trainee did most of the work. He stated in the report that he would give no value to the lake view. He did not use golf course properties as comparables. So he arrived at $245,000, the typical value for non-golf course properties. A letter was sent from one lender to another, complaining about this appraiser and his appraisal. The homeowner was so angry that she was not going to pay for it. The letter, in my possession, but not reproduced here, covers some of the other things indicated above. The homeowner was upset with the “disservice” of such an “erroneous report”.
I also learned of another appraisal, this was done on May 28, 2009, about 6 months before mine and the other one. It came in at $330,000, much closer to my value of $390,000 than the $245,000 reached by the other appraiser. I have a copy of that appraisal. This appraiser measured 1865 SF and used, mainly, golf course properties and/or lake views as comparables. His 1004 MC data sales price numbers shows that the prices were increasing, but in the 1004 MC checkbox he marked “stable”, and on page 1 of the URAR he marked “declining”. On January 7, 2011, I e-mailed a letter to John Doe, OREA investigator sending both the $245,000 and the $330,000 appraisals (I doubt they had the $330,000 one), and the letter from the lender describing the poorness of the $245,000 appraisal. John called me to acknowledge that he received my e-mail, so now they could consider this too, in their decision.
There are four ways that this case could be decided. About half are closed with no action taken. The next level is a warning letter. The next is a citation, which John Doe said is “minor”. Finally, the worst case is an accusation. John Doe said that since this is my first “offense”, this is a complex property, and even said at one point that if a bunch of appraisers appraised this property they could arrive at values spanning $200,000*, I would probably get off easy. Imagine my surprise, when on Saturday, February 12, 2011, I received a letter from OREA issuing me a citation. I’ve received many citations in my life, but this was the first one I’ve received that was bad. My penalty is to take a 15 hour course and pay a $1000 fine to OREA. *During my conference call with John Doe and his boss on March 9, 2011, John denied he ever said this. This brings up a good point. Record each phone conversation you have with OREA (let them know you are doing this). If I had done this, you would be hearing two sound bites at this place in this PowerPoint.
Below is a cut from the citation. On or about December 18, 2009, Respondent, Don Machholz completed a real estate appraisal report for the property located at XXXXXXX, California. The report contains certain errors or omissions, listed below, which are violations of the provisions of the Uniform Standards of Professional Appraisal Practice (USPAP) and the California Code of Regulations: (Bruce Doe) I was given 30 days to file for a “Notice of Defense” for an administration hearing. In the next few weeks I learned from other appraisers that it is not good to attend the hearing without a lawyer. This is because OREA would have their lawyer present, along with a lawyer from the state attorney general’s office. With the lawyers involved the truth becomes less important than winning. This administrative hearing is not about due process of law. You will not see a jury of your peers. The deck is stacked against you. Moreover, your report “opens up” again for further findings, and while you might successfully defend yourself against the listed charges, they could come up with more “findings”.
To learn more about defending myself, I spent $250 to meet with two lawyers, learning from them that a defense would require 15-20 hours of their time, about $5,000 of my money. I had asked Bruce Doe if the state would provide an attorney for the appraiser free of charge and he said no. I do not have that money to defend myself. I develop and write, and then give away free spreadsheets, and have kindly helped hundreds if not thousands of appraisers to better measure the market with the 1004 MC Excel tool and other spreadsheet programs. I do this for free, not because I have enough money for myself and my family, but because we have almost no money, and as an appraiser in near-poverty condition, I have empathy for those other appraisers in the same position. I did not think it was proper, when I developed the 1004 MC program in late 2008, to charge appraisers for this additional software. I know and understand their plight. So I did not file for an appeal, and on March 17, 2011, Bob Doe (not his real name) signed the citation, making it official. Thank you for reading this introductory information. Since my shortcomings were itemized, they can be discussed point by point. Read on. Remember, this could happen to you. With good writing you might avoid it.
This is charge #1: “Respondent failed to describe the subject neighborhood accurately. price trends were stated to be increasing, which was misleading. (S.R. l-l(a), l-l(b), 1-2(e)(i), 2-2(b)(iii) and Conduct Section of the Ethics Rule); ” The following is from my report, the URAR, page 1: Since this a was a golf course property, I used only golf course properties to determine market trend. I had to do this in order to not be misleading. Other appraisers may not do this and are writing a misleading report. What follows are the graphs I used to determine the direction of the market. OREA doesn’t have any. Perhaps they don’t understand graphing, or maybe I did not make this upward trend clear enough to them. Or both. Remember, this could happen to you.
On page 3 of the report, I discuss the various types of properties at Lake of the Pines: This was written to communicate to the client the types of propertiesin Lake of the Pines, and my consideration of the subject property. I also put four graphs into the report, here they are:
This graph is for Golf Course properties only, for the past 3 years. It uses a multiple regression program, written by me, which neutralizes for SF, lot size and age of property, to the subject property. As stated in my report, “the past 3 years show a decline”. Am I wrong about that? It also shows a recent uptick.
This is a second graph, using the same data, but not adjusted for SF, lot size and age of property. This too shows a long decline, But notice the recent uptick, also on the previous graph.
This is the third of four graphs in the report. It shows 1004 MC data, using an excel program I developed and made available for free to all appraisers. Question: Is the trend up or down? What if I say that the trend is down, when in fact it is up?
This graph, in my report, shows the same 1004 MC data, but shows the Price per SF over the past year. It appears to me that the prices are going up. Yet, OREA asks that I report that the values are going down. I hope that OREA never asks YOU to write a misleading report.
There were several other charts that were NOT in the report, but in my workfile, and, as a result, in the possession of OREA. They are from comparables, golf course properties, from 1004 MC data. These graphs show all sales, this includes the one REO and two Short Sales in the mix. The graph for the past 5 sales shows a decline, the other two graphs show an increase in prices.
If we remove the REO and Short Sales, we end up with only the “normal” sales. Below we see the 1004 MC data, which was in the report. It shows an upward trend
I know that the 1004 MC data is not the best data to measure the market. That is why I do the market trend analysis program, shown in the first two slides (5 and 6 slides back) detailing the last three years. I also did another study, of only the past year, of only golf course properties. It showed an increase of value of 1.59%/month. This is what I got: And on the next page we see price per SF, not adjusted for SF, lot size or age of property.
In which direction would you say the market has been going? This discussion was not a discussion with OREA of what data goes into page 1 of the URAR. I usually put the whole neighborhood into that box, but here, since the comparables were different than the neighborhood, I checked the “increasing” box.
But if we did take the whole neighborhood, and looked at the past year at ALL sales in Lake of the Pines, this is what we would get. Four Lakefront sales, all selling at or above $800,000, are at the start and end of the time span. The linear trend of the past year is downward. What if we look at the previous 8 months or 6 months? Then the first 2 lakefront properties disappear, the second two lakefront properties pull up the overall values near the end of the time span, and the final result is an overall increase in values. Without MLS access and without doing a study of trends for comparables, OREA told me that values were going down. They apparently have the authority to do that.
Here is what I could have done to better explain myself, when I said that values were going up. Although I attached four graphs in my report, enough for the lender (the client) to understand the upward trend, not every user of the report (OREA, and perhaps the homeowner) understands graphs and statistics. On March 9, 2011, when I asked both John Doe and Bruce of OREA how appraisers are to measure the market, I was met at first with silence. Bruce would only say that my graphs were not enough to prove the values were going up for comparables (golf course properties). You have seen the graphs in my report, the first four graphs in this PowerPoint. Other graphs were in my work file, they too were shown in this PowerPoint. I asked this question twice, because I know that you appraisers out there are learning graphing and statistics in order to become better appraisers. I have taught graphing and statistics to appraisers, and have written spreadsheets to help determine the market trend. If OREA told me that values were going down, then where is their data, and their spreadsheet, or whatever they use to determine market trend? The answer is they have none, and they depended, in part, upon the appraiser who did the $245,000 appraisal. So now I have to explain to them when they already have a predetermined idea that the values are going down. This can be difficult.
I wish that I had a better answer for you, the appraiser, who is trying like crazy to write a good solid report, and trying to measure the market. I can only hope that the investigator who examines your report has at least a basic understanding of statistics and graphing, access to MLS, and will not tell you that you should have written something in the report which all of the evidence shows to be untrue. Page 1 of the URAR does not say how far back in time you should go to measure the “1 Unit Housing Trend”, but it implies that all 1-unit houses be used. For this report, if I went back 6 or 8 months, the overall trend was upward. If I went back 12 months, due to the two lakefront properties sold early in the time span, the trend was down. So I could have written a better report by saying the 1-unit housing trend was downward, measuring all homes for the past year. But for the subset of golf course properties, the trend was clearly upward, and time adjustments were not only justified, but necessary if I am to write an honest report. This would produce a report in which the 1-unit housing was downward, the 1004 MC was upward, and the time adjustments in the grid was upward. And I could prove my statements.
This is their next judgment, shown under #2 “Respondent failed to adequately describe the subject property and analyze its features The report fails to discuss the two story floor plan which does not have a common bath room on the level of the common area.” Apparently, I did not clearly state that there is not a bathroom in the living room/kitchen area of this split-level. Having been in the house, I do not believe it made any difference in the value of the property, and can find no evidence that it does. Both of the other appraisals made no mention nor adjustment for this, and we, unlike OREA, saw the house. I did what my peers did.
This is what I could have done differently. In my March 9 conference call, John Doe said that all four of us appraisers (one of them had a trainee with him) could be written up for failing to “discuss the two story floor plan”. So even if my peers did what I did, I was not excused. It would have been best if I had pointed out that there is no bathroom on the same split level as the living room and kitchen. And then I could have said that in Lake of the Pines, with custom homes being built by builders of various Abilities and tastes, it is not uncommon to find patterns such as this. And that market data does not show such a floor plan to be a negative. I recommend to you, the appraiser, to explain in verbiage, and not just pictures, anything unusual about the floor plan, or anything that could appear unusual to an unintended user of the report. Remember, the homeowner almost always gets a copy of the report. So also mention that good stuff in the house and on the property, otherwise, if it is not mentioned in the report, they might say: ‘the appraiser never even noticed the $12,000 bay window in the kitchen!”
Next charge: Under #2: My report fails to describe and analyze the view of the lake. This is from page 1 of the URAR of my report: Later on that same page I wrote this: This is from page 3 of the report, this is what I wrote about the lake view: How does a partial view compare to a “full lake, but no golf course” view? Here is comp #7, and my adjustment.
Then I included pictures of the lake, four of them: Telephone pole: the main investigator (John Doe) complained in a phone conversation that I did not take into account the negative factor of having a telephone pole in the lake view. I did not mention it in the narrative, but included it in the photos.
What could I have done to better describe the view of the lake? When I asked John and Bruce on March 9, 2011, John asked what the view of the lake was from inside the house. So it is best to fully describe in verbiage in the report the view from all rooms, including some photos through the windows from inside the house. It might also be helpful to put in your sketch the direction to the lake, or whatever is the feature view from the house. An arrow with the words “to lake” might do. But this does not explain from which windows the lake is visible. Finally, if only part of the lake is visible, then state which part of the lake can be seen. And if trees are in the way, the view might be seasonal, appearing when the leaves fall from the tree. Also state if the intruding trees are on the owner’s property (and can be trimmed) or not. And don’t forget the telephone poles!
Another charge from paragraph #2 is that “It fails to describe and analyze the view of the golf course” This is from page 1 of my URAR. Note my remark about the view of the golf course Page 3 of my report further describes the view of the golf course
I also included two land-based photos in the report, here is one
Here is the second land-based photo from my report. It shows the house from the golf course. Then I included four aerial photos showing that the golf course is adjacent, that is right next to, that is, abuts to, the subject property.
This is the clearest aerial photo in the report. I labeled the subject, but did not label the golf course. One would think that the client, the lender, could find the golf course in this photo. For those of you who need help finding the golf course, it is here. The subject house is here. 50 feet spans this distance.
I put yet another photo of the house and the golf course into my report. I labeled the subject house in the report. See if you can find the golf course in this view (hint: it is to the right of the subject). In addition to all this, golf course views of the comparables were taken into consideration in the grids.
What could I have done differently to satisfy OREA’s requirement to describe and analyze the view of the golf course? First, as seen in the photos, it was a partial view of the golf course. I stated that in the report. Some may think that it is a negative that you do not have an expansive view of the golf course. Some golf course lots do, but most do not. This property had the advantage of not having golf balls ending up in the yard, an advantage I did not mention in the report. I should have. The distance from the golf course- about 50 yards- and the trees, allow the subject property’s residents to have a sound barrier between them and the golfers. The golfers will not hear kids playing in the yard, and the residents will not hear the golfers swearing, talking, singing, the sound of the golf carts, or whatever Tiger Woods does on the golf course. I should have mentioned that in the report too.
The next charge is that I: “failed to describe the shed on the property. (S.R. 1-1(a), 1-1(b), 1-2(e)(i), 2-1(a), 2-1(b), 2-2(b)(iii) and Competency Rule) ” If this means I put no verbiage about the shed in the body of the report that is true. Those reading my report will still find the shed in my report. Moreover, not every report is required to describe all structures on the property. An appraisal report can be as short as a couple of paragraphs. USPAP recognizes this and asks only for a limited number of specific remarks. I drew it as a “storage shed”, 194.4 SF in my sketch, but I gave it no value. Of the other two appraisals, it is also drawn in their sketches, one gives it value of $2000, the appraisal that came in at $245,000. The only mention he gives it in the body of the report is in reference that it is valued at 25-50% of cost. He does not describe it. He measured it at 139 SF, off by 28%. The other appraiser gives it no value. He measured it at 192 SF. He does not describe it, but mentioned it in the cost approach section. This was the appraiser who came in at $330,000. All three of us put pictures of the shed in our report. They each put one picture of the shed into their reports. I did one better, the next two pages show 2 photos of the shed from my report.
Here is my second photo of the shed, also from my report. Can you find the shed? Hint: it is behind a tree. Here we see it in relation to the house.
What could I have done to make this report better? I should have mentioned the shed in the body of the report, in verbiage. I do not have to say much, only that a shed is on the property, and that I was going to give it no value, or so much value. It is a good idea, said John Doe, to describe everything on the property. That includes fences, spas, above ground pools, decks around those pools, horseshoe pits, etc. Pictures and sketches alone will not do, per OREA, at least in the instance of this shed. OREA’s interpretation of USPAP: Let’s pretend you say in your report: “The sky is blue”. OREA may say you violated USPAP because you did not adequately describe the shade of blue, what time of day it is blue and then suggest that the whole sky is not blue, but in the direction of the sun it is very bright and yellow for one-half of a degree. Simply put, describe everything.
Next charge is that I: “Respondent failed to complete the Sales Comparison Approach properly. The report fails to adequately describe the sales and fails to analyze them properly. It includes sales and listings that are superior to the subject property and fails to recognize that in the analysis. (S.R. 1-I(a), l-l(c), 1-4(a), 2-2(b)(viii) and the Competency Rule)” Now let’s look at the facts. OREA said I used superior properties and did not recognize that in my report. I did use two that are superior and two that are inferior, and made adjustments. Below is a cut from my report, showing quality, age (effective age) and condition for Comps 1-3: For Comp #2, after seeing the house, the MLS listing and talking to the agent, I deemed it inferior to the subject and made an adjustment, even if its effective age is newer. For Comp #3 it is both newer and of SUPERIOR quality so a total adjustment of $20,000 is made.
Here is a cut from my report for Comps #4-6. Here I used another superior property (when you are limited to only golf courses homes, you do not have a lot of choices). I made an adjustment for this here. And then I used a property that was inferior in condition, it received an adjustment here. For effective age I adjusted here.
When there are a limited number of comparables, you need to take what you can get. The appraiser in the field understands this, the problem is communicating this to the client, and other users, who may be limited in appraisal theory and practice. I could have done a better job communicating this. Perhaps it would have helped to say in the report: “Only 5 golf course properties sold in the past 6 months that are not REOs nor short sales, so the appraiser had very few to choose from. Some are inferior, and adjustments are made for that, while some are superior to the subject, and adjustments are made for that.” Remember that the homeowner will be reading the report too, and oftentimes they do not even understand the DIRECTION of the adjustments!
Next charge from the citation: “Respondent failed to analyze the prior sale of the subject property properly. The report mentions the prior sale of the property, but fails to state what condition it was in, and what changes, if any, had been made to the property since the sale. It fails to reconcile the prior sale price of the property with the final estimate of value in the report which is much higher.” (S.R. l-l(a), 1-1(b), 2-1(a), 2-2(b)(viii) and Conduct Section of the Ethics Rule) Let me include a cut from my report: Here I state that the prior sale was an REO sale, and they they generally sell for less than normal sales. How much less? See the next page.
This is a graph that was in my work file, but NOT IN THE REPORT. I did not believe it was necessary to prove to a lender (the client) that REOs sell for less than the normal sales. But in case you miss the point, this is the difference-about $75,000 in this case. Typically it is more than this.
The next part of the charge is that I did not describe what the condition of the house was at the time of the October 24, 2008 sale, 14 months before I saw the house. I looked at the MLS listing, it has only 3 photos, and minimal description. I called the agent but got no response. But we are lucky. The appraisal done 6 months before mine has a description of the house at that sale. Here it is: So yes, a lot of things have been done to the house since it was bought as an REO in late 2008. Would it have made any difference in my final value if I had included this in my report?
Since the MLS listing and the prior agent did not help me determine the condition of the property when it last changed hands, my final source could have been the homeowner, who bought the house. Every appraiser knows the danger of relying on the homeowner. This is apparently the source that one of the other two appraisers used. I would have to couch the description in words such as: “According to the homeowner, who bought the property 14 months ago, this was the condition of the house at that time:” I should also have listed the number of days the property was on the market, according to John Doe, in a phone conversation on March 9, 2011.