According to Chitester, the Dodd-Frank Act that was signed into law in July 2010 represented the largest overhaul of appraisal regulations since the savings and loan crisis of 1989. Most of the changes, he says, have to do with appraiser independence to prevent banks from pressuring them to hit a number. It also seeks to pay a reasonable fee to appraisers, since low wages and quick-turnaround jobs result in inexperienced people doing the bulk of work.
“Most appraisers say this is still not happening,” Chitester says. “Typically, banks hire an appraiser through an appraisal management company (AMC). The firewall put into place between appraisers and lenders exists, but the role of middleman may be played by a non-lending department in the same bank. Many of the largest AMCs are owned by the largest banks, and the best qualified appraisers typically aren’t the ones receiving assignments from AMCs.”
The only way around this flawed system, he says, is to ask the bank to assign the appraisal to the most experienced person they can find. (As backup, the Dodd-Frank bill explicitly states: “Persons who perform evaluations should possess the appropriate appraisal or collateral valuation education, expertise, and experience relevant to the type of property being valued.”) Usually that’s someone certified through a professional association. For example, the Appraisal Institute, which represents 25 percent of licensed appraisers, bestows MAI (commercial) and SRA (residential) certification on those who’ve attained a level of education, ethics training, and peer review beyond basic licensure. Banks might not honor the request, but you can ask for an appeal. Another option is to hire an appraiser directly and give the report to the bank, although the bank ultimately will hire its own.
Dave Porter, founder of PorterWorks, Stanwood, Wash., a former mortgage lender who provides training for builders, appraisers, and insurers, urges architects to get specific: Give appraisers a package outlining not just a house’s fine qualities, but how it’s different from the comps.
“What really frustrates me is the conversation about dollars per square foot,” Porter says. “A lot of builders are building cheaply to drive down the cost per square foot because appraisers continue to use it as a measuring stick. Conversely, during the market-driven bubble, people were paying $800,000 for an 800-square-foot condo. There’s a place in the valuation process for the cost-to-build approach, not just comp sales.”
That idea resounds with Chitester, too. “Data is the lifeblood of the appraisal profession,” he says. “The more they have, the more effective their analysis. There’s a tremendous amount of education available—we have scores of courses and seminars. It’s simply not the case that appraisers don’t know the first thing about a good house.”
The challenge is to find the right one. There’s no cookbook for adjustments, but there are many ways to arrive at a credible opinion of value, Chitester says. The difference between an experienced and inexperienced appraiser is how they find the number and how well they can defend their work.
It’s hard enough to establish a home’s value once, let alone twice. With the economic outlook uncertain, San Diego’s Segal is a proponent of construction-to-permanent loans, which roll the construction loan and mortgage into one. “It’s a great way to do something if you have qualifications that you might not have next year,” he says. “You’re not doing appraisals and escrows and points twice, but the biggest thing is you don’t have to qualify twice.”
Segal recently settled on such a loan for his own house, which he says appraised at $4 million but will cost $3 million to build. He paid a 1 point origination fee to lock in a 2.5 percent construction rate, changing to 4.3 percent when the building receives a certificate of occupancy. “It’s unbelievable the amount of leverage you’re getting versus a traditional loan, especially when the appraiser doesn’t know what he’s doing,” Segal says, adding: “Money is cheap, and if you can get comps, now is the time to build. People need to understand that building a house is a business, and make sure it’s solvent. Architects can take a more active role in the business world and solicit the banks for clients.”