English
From Crisis to Opportunity: Golden Challenges in Modern Real Estate Appraisal
The Challenges and Opportunities in Modern Real Estate Appraisal
Introduction:
The real estate appraisal sector has undergone radical transformations, especially during economic crises. These crises often create golden opportunities for professionals who can adapt and innovate.
Increased Education Requirements:
- Prior to 2008, education requirements for real estate appraisal were not unified.
- Starting in 2008, the Appraisal Foundation through the Appraiser Qualifications Board (AQB) began imposing higher❓ educational standards for each stage of licensing. Further requirements were implemented on January 1, 2015.
- These changes raised the bar for the profession, now requiring a four-year college degree for advanced certifications. This ensures appraisers have a higher level of education and knowledge, potentially increasing their income and equipping them with specialized skills.
Revisiting the “Bad Old Days”:
- Automated Valuation Models (AVMs) vs. Appraisals: Lenders used AVMs and Broker Price Opinions (BPOs) to cut costs. AVMs are valuation tools but are inaccurate without expert adjustments. Appraisers deal with value, while brokers deal with price.
- Value vs Price: Value represents an independent, objective opinion of what an asset’s price should be, based on data analysis. Price is the actual amount the asset sold for.
- Poor Lending Practices: Lenders offered “no doc” loans without appraisals or proof of income. They relied on the belief that home values❓ would continue to rise (“greater fool” theory). The financial crisis started in 2007, leading to the near-bankruptcy of Wall Street firms, major lenders, Fannie Mae, and Freddie Mac. Fraudulent practices led to “toxic” loans that contributed to the financial crisis.
- Increased Regulation: The financial crisis led to the SAFE Act and the Dodd-Frank Act, impacting lenders and appraisers. Lenders were told they could not use AVMs and BPOs to originate loans. Appraisers were directed to receive orders from Appraisal Management Companies (AMCs). Banks were exempt from this rule for mortgage companies. AMCs were supposed to pay appraisers “reasonable and customary fees.” The increased regulation led many appraisers to leave the field.
- AMC takeover: Many appraisers did not want to deal with the increasing requirements.
- Technology: Technological advancements did not stop while this was happening.
Current State of Appraisal:
- fewer appraisers❓: A 2006 US Department of Labor study noted the aging of appraisers in the US and predicted a growing shortage by 2012 due to attrition.
- The “Great Recession” and Dodd-Frank: The financial world collapsed from 2008 to 2012. Dodd-Frank, along with stricter appraisal education standards, created a perfect storm.
- Current Opportunities: There are whispers of lending pipelines backing up because there are not enough appraisers to handle all the work.
- Rising Prices/Wages: When there is a shortage, prices/wages rise.
- “New Golden Age”: There may be fewer appraisers for a while, but they will be better educated, better paid, and able to take advantage of new technologies.
- Growing opportunities: In addition to lending, there are also growing opportunities in the government, legal, and insurance markets.
Appraisal Technological Revolution:
- Technology in Practice: Appraisers use smartphone apps to check appraisal requests and schedule inspections, mapping apps for navigation, and weather/travel apps for planning.
- A Day in the Life: A newly certified appraiser checks for new appraisal requests, plans inspections, and uses a mapping system to navigate to properties.
Relevant Formulas and Equations:
- Present Value (PV): PV = CF / (1 + r)^n, where CF = expected cash flow, r = discount rate, and n = number❓ of time periods.
- Net Operating Income (NOI): NOI = Total Potential Revenue - Total Operating Expenses
- Capitalization Rate (Cap Rate): Cap Rate = NOI / Property Value
Conclusion:
Modern real estate appraisal requires continuous education, adaptation to technology, and a deep understanding of market dynamics. Appraisers who embrace these changes will be well-positioned to thrive in this new golden age.
Chapter Summary
The valuation profession faced transformations and challenges, turning crises into opportunities. Educational requirements increased since 2008, mandating a university degree for accredited levels, viewed positively due to a correlation between graduates and higher❓ income. Poor lending practices, like “no-doc” loans, emerged with attempts to replace traditional appraisals with Automated Valuation Models (AVMs) and Broker Price Opinions (BPOs) to cut costs. These alternatives are not true appraisals, and AVMs require expert adjustments.
The 2007-2008 financial crisis, triggered by poor lending practices, led to government intervention and regulations like the SAFE Act and Dodd-Frank, protecting consumers and preventing AVMs/BPOs in lending. Dodd-Frank mandated that appraisers❓❓❓ receive requests through Appraisal Management Companies (AMCs) with “reasonable and customary” fees. Many appraisers left the profession due to increasing requirements, transitioning to government, law, and insurance.
A 2006 US Department of Labor report indicated a rapid decline in appraisers due to retirement and insufficient new entrants, exacerbated by the financial crisis and Dodd-Frank, causing a shortage during market recovery. The profession experienced technological advancements like green buildings, digital storage, fax-printer-scanners, tablets, smartphones, apps, electronic portals, and cloud computing.
These challenges improved professional standards and regulation. The current appraiser shortage and increased demand create an opportunity for qualified appraisers, potentially leading to a “new golden age” with better-educated and higher-paid appraisers utilizing technology. A new generation of qualified appraisers needs to be encouraged. Current appraisers should keep pace with technology and regulations. Educational institutions must develop training programs that meet labor market needs and prepare appraisers for future challenges. There are growth opportunities in governmental, legal, and insurance appraisal sectors in addition to the real estate lending sector. The average income of real estate appraisers is expected to increase.
