Happy New Year everyone and sorry my blogging has not been consistent of late. For appraisers, particularly those in the Portland area, last year was an incredibly busy year. Fees for appraisals went up by 50% or more in Portland. This was a shock to home buyers and others looking for appraisal services, but it represented the first raise for appraisers since the 1990s. Finally, fees in Portland are at a place where appraisers can attract fresh talent into an aging industry. Let’s hope that these gains do not disappear in the next real estate slump, leaving appraisers looking for other ways to earn a living.
Speaking of other ways to make a living, many of my blog subscribers know that our company, A Quality Appraisal, LLC maintains a home measurement service, in addition to our appraisal business, that provides square footage estimates independent of an appraisal. Many appraisers also provide similar side services.
This last year was eventful for our home measurement business. Luckily, after a little research and not a claim or problem, we found that most appraiser Errors and Omissions (E&O) insurance providers do not cover appraisers when they are doing a measurement that is not part of the development of an opinion of value.
I was shocked when told this by one of the largest appraiser E&O providers because most appraiser E&O policies claim to protect customary professional services performed in the insured capacity as a real estate appraiser, and that many of the services appraisers can provide do not involve an opinion of value. How much more customary of a service is a measurement when almost all appraisers measure homes on almost every appraisal assignment?
After I pushed back against the E&O provider, a senior underwriter of the company responded that it would come down to the definition of appraiser as described by the insurance policy, and that they would need to decide if the measurement service was “usually and customarily rendered by a real estate appraiser.” The underwriter explained that square footage estimates are not unique to the appraisal industry and non-appraisers can provide them. Coverage would only be triggered if an appraisal report underlies the square footage estimate.
The senior underwriter went on to explain that when a real estate agent or broker asks an appraiser for a measurement, it is because they seek to shift liability to the appraiser. The senior underwriter also said that measurements are considered risky by insurance companies and added that “about 50% of claims presented to our company involve sq. ft. issues.” This was contrary to what I believed was true — that measurements are only a small piece of the appraisal liability and are easily verifiable. I knew if we wanted to keep our measurement customers, we needed to fix this problem.
To solve it, we contacted all companies that we could find in the US that are exclusively measurement businesses and asked where they secure E&O insurance. After chasing down numerous leads and talking to many insurance providers, we found that most home measurement businesses think they are covered through architectural or real estate policies. However, like appraisal E&O policies, when we contacted the insurance companies, we found out that measurement services are not actually covered.
For this reason, we sought legal advice. Thus, A Quality Measurement was split into its own business name and website, separate of A Quality Appraisal, LLC. After committing many dollars and countless hours, we believe that we have resolved our specific insurance and liability problems. We are not offering legal advice here, nor can we provide the plan our attorney put in place specific for our business. I merely suggest that if you are an appraiser doing home measurements, contact your E&O provider first to see if you are covered.
Are you an appraiser who does home measurements? We would love to hear from you.
Did I leave anything out or do you want to join in the conversation? Let me know in the comments below.
If you find this information interesting or useful, please subscribe to this blog and like A Quality Appraisal, LLC on Facebook. Also, please support us by making Portland real estate appraisal related comments on our blogs and YouTube videos. If you need Portland, Oregon area residential real estate appraisal services for any reason, please request appraisal fee quote or book us to speak at your next event. We will do everything possible to assist you.
Thanks for reading,
Gary F. Kristensen, SRA, IFA, AGA
I just returned from a daytrip to Las Vegas where I addressed the attendees of the Appraisal Summit and Expo. It was such an honor to speak at this event alongside my business mentor Roy Meyer and to meet some of the most involved and inspirational people in the appraisal industry. My only wish is that I would have been able to stay longer to build more connections and listen to more of the speakers.
Also while in Vegas, I was interviewed for an upcoming episode of the Appraiser Coach Podcast with Dustin Harris, I got to meet Jeff Bradford and demo the new Bradford Technologies Appraiser Mobile App, and I received a live a demo of ANOW appraiser business management software. Talking directly to the people behind these brands and seeing them in action is so much more valuable than visiting a website. It was definitely a worthwhile trip.
If you were at Appraisal Summit and Expo, hopefully we got a chance to meet. If we did not connect, please get in touch with me online and perhaps we can meet up at the next big appraisal event. One of the things that I most enjoy about being an appraiser is meeting appraisers from all over the country.
One small part of what real estate appraisers do is measure homes to calculate the living area or “square footage.” The standard that is typically used by most home appraisers to measure and calculate living area is provided by ANSI (American National Standard Institute). However, in this post I’m focusing on the geometry and simple math of determining the total area.
Normally, appraisers draw homes using software that automatically calculates the area. Our company recently measured a home of an engineer by using just such software. After examining the computer generated home sketch, the engineer said that the upper level of his home (shown in the illustration above) had been incorrectly calculated. He then provided his handwritten calculations as support.
When I heard this, my stomach knotted up and I thought, “Did this engineer find a bug in our software?” A Quality Appraisal associates measure many homes each year all around the Portland area. I thought, “Is this an isolated bug or something that could have caused errors in hundreds of appraisals or measurements?” We don’t manually check the calculations of the software on all of our measurements before they are delivered to a client. Maybe we should.
I could not wait to get back to my office and check for myself. Once in the office, I deconstructed the drawing into five smaller shapes (a composite figure and some appraiser software will do this automatically) and then I was able to easily calculate the area as shown in the figure above. To my relief, I came up with exactly the same number as the software total for the upper level. After this experience, I concluded it is good practice for appraisers to occasionally check the calculations totaled by our sketching software. For more information on how to deconstruct a composite figure and add up the individual areas, here is a short helpful video from Mathtrain.TV.
World class appraiser blogger Tom Horn wrote a great article titled, “Things agents do that appraisers hate.” Tom’s article inspired me to think about the opposite side of that coin. Whenever I speak at real estate offices, agents often tell me about off putting things that some appraisers do when interacting with agents. It is important for both appraisers and real estate agents to understand the thoughts and frustrations of the others so that we can conduct our work in a manner that is both efficient and respectful. Here are my top three agent irritators.
1. Agents complain that appraisers go to vacant lockbox properties without first calling and asking the agent. This is against the rules of the Portland area RMLS (Regional Multiple Listing Service) and to me, it is trespassing. Appraisers do not have the right to use the RMLS lockbox anytime we want.
2. Agents complain that appraisers will show up at the property, not talk or ask questions, and then leave quickly. I understand that appraisals are business and that time is money. It is difficult to make a living as an appraiser these days without being quick. However, the real estate agent and the homeowner hold a wealth of information. Each should be interviewed carefully by the appraiser. From my experience of having several appraisers who work for me, the ones who take time to chat with homeowners and agents build trust. Their appraisals do not get challenged nearly as often, even if the appraisal report quality is similar.
3. Agents complain that appraisers will call them and say, “Can you tell me what the concessions are on this recent sale?” Once answered, the appraiser quickly ends the call. As an appraiser, it irritates me that other appraisers would be short when someone else is helping them, but is also annoying that many appraisers would only be interested in concessions. The concessions are important, but there are many other important things that an appraiser should know about a sale that do not make it into the RMLS. In addition, agents are not only sources of information for appraisers, real estate agents are important sources for continued appraisal work. A Quality Appraisal, LLC is built on non-lender or private appraisal work. Real estate agents generate most of our private estate and divorce appraisal referrals. It is important for appraisers to be courteous, humble, and grateful on the phone or in emails when requesting information. Our company has received many referrals directly resulting from data verification emails and phone calls.
Did I leave anything out or do you want to join in the conversation? Are you a real estate agent with appraiser grievances? Let me know constructively in the comments below.
A discussion among Portland appraisers occurred recently. The debate centered on whether one of those large and exclusive infill Portland homes constructed among older and smaller homes, should be considered as an over improvement. This stems from the appraisal principle of conformity which holds that value is maximized when properties conform.
I hold that (speaking in general without regard to a specific house), “It might not be an over-improvement, just because the home is larger and does not conform.” Another appraiser posits, “If there are no other homes that large, then it is an over-improvement period.” I said, “Maybe it is, but maybe not. What if the large home is the first of a new trend in buyer demands? A new trend is much more difficult to prove, but appraisers cannot just rule it out based on it being the first big house in an area.”
An over-improvement (otherwise known as a superadequacy), is obsolescence or loss in value as a result of being larger or having more amenities than the ideal improvement. An ideal improvement is a home (or other legal structure) at its “highest and best use” that maximizes the value returned to the land. In other words, the ideal improvement is the house or building that would be most profitable to build if the land was vacant.
My thinking is that when older homes are replaced or infilled with newer larger homes, often it is because the ideal improvement (or highest and best use) has shifted to meet the demand of the times. This is particularly true if the big new home is a speculation home (spec home) and not a custom build. Click here for a blog post that explains how spec home builders and developers are particularly in tune to which home will bring the most profit.
Today, buyers of close-in Portland homes can afford and are willing to pay for much larger homes than when many of the original early 1900s homes of those neighborhoods were first built. I concede that sometimes (particularly with custom builds) the home built is in fact an over improvement. But if the house is being built to sell after construction, builders and developers have usually done their homework and are trying to maximize profits for the lot they are developing.
Here are some ways an appraiser might be able to determine if the subject is an over improvement when a big new home is the first of its kind.
1. If this property is an arm’s length new purchase, the appraiser could subtract the estimated replacement cost from the contract price to see if the remainder is equal to or greater than the estimated land value, plus site improvements. If so, then the current contract suggests that for at least one buyer, the subject is not an over improvement. One pending offer does not represent an entire market; it is just evidence. Therefore, the appraiser’s job of supporting a conclusion would not be finished.
2. The appraiser could look to other similar neighborhoods to see if there are sales of other similar large homes starting to infill, then do the math to see if those homes are over improvements or not. If there is sufficient evidence to show that trends in one neighborhood connect to the subject neighborhood, then that would provide additional evidence for the appraiser’s conclusion.
3. The appraiser could interview developers and ask about trends. If experts are saying that trends are headed toward larger homes, then that could be used by the appraiser as anecdotal evidence of the conclusion.
4. The appraiser could study the trends in relationship between land values and home value of newer homes within similar market areas (or neighborhoods) to see where the subject falls on the spectrum. If the subject is outside the typical ratio of new homes, then this could be evidence of an issue with over improvement.
5. If the property would likely be used for income, the appraiser could compare its value from estimated rent income with its estimated replacement cost and land value. If rental income supports the construction costs, that would be evidence that the subject is not an over improvement.
My point is that things in appraisal are not always as simple as they seem. High stakes are riding on appraiser opinions, therefore appraisers need to perform due diligence and always test their own perceptions or gut feelings with actual data. We owe it to our clients.