Neutral Valuation

Wednesday, November 23, 2011

Allowing appraisers to provide the service they were built for

Written by Jonathan J. Miller, CRE CRP 

As a real estate appraiser for the past 25 years, I’ve always viewed my role as a provider of a neutral valuation benchmark for clients to become empowered to make more informed decisions. Of course this is a fantasy-based, in-a-perfect-world depiction rather than an actual practice. In mortgage lending, residential real estate appraisers are not able to provide an independent market value without some sort of reprisal if the results do not match the client’s needs.
Since the credit crunch began with the Lehman Brothers bankruptcy that roiled the world economy in September 2008, our profession has actually strayed farther from being any sort of neutral valuation benchmark.

Recent financial reforms, HVCC, USPAP and other policies and regulations, while perhaps initiated with the best intentions, have done nothing to enable the appraiser to provide the services for which the profession was created.

Moral flexibility required

Over the past decade the global credit boom ultimately forced most experienced appraisers to choose between feeding their families or changing their business models and even their careers. The refrain “always hit the number” would get you more work. After the credit crunch, the refrain was modified to “occasionally hit the number” and you get more work. The sheer critical mass of the moral flexibility of many in our profession during the go-go credit era nurtured a whole new class of appraiser: the form filler that dominates the profession to this day. They work well with the gum-chewing 19-year-old appraisal processors who call every day on the status of an assignment, having no idea what an appraiser actually does and only cares when the report will be delivered.

Rage against the machine

In 2005 I noticed I was beginning to lose my long-cherished national retail banking clients because, in hindsight, I wasn’t morally flexible enough to consistently provide “the number” for them. My client mix had long been 75 percent national retail banks and 25 percent everything else. I began to realize that national retail banks really didn’t want my neutral market value opinion. Instead, banks wanted me to become a “transaction advocate” or a “deal enabler” because volume was all that mattered and the boom mantra declared that housing prices always go up. Everyone had gone mad with greed in the eventual systemic global credit crisis.

Despite the hard lessons of the past few years, most experienced bank appraisers operate in fear of reprisal from their banking and appraisal management company clients. Nothing has been learned, largely because executives in place during the boom have remained in charge. The lack of reliance on the process that should provide a neutral valuation benchmark to enable a financial institution to manage its mortgage exposure has not materially changed. Bank lobbying efforts and financial reform continue to debase and commoditize the appraiser within the mortgage process.

Why? Because the sales function in a bank continues to overpower the underwriting function in a financial institution when the U.S. government provides a backstop. That’s the ultimate risk management for a bank. While underwriting remains at its tightest level in decades, it’s not because high-quality appraisals are being performed. The constrained mortgage environment results from more attention being paid to the credit side of lending rather than the collateral side of the lending.

Before the credit crunch, a respected appraisal colleague told me that in a purchase transaction, all parties were smarter than the bank appraiser because they already knew the market value: It was always the sales price. The listing agent, buyer’s agent, seller’s attorney, buyer’s attorney, seller, buyer, title company, mortgage broker, and banker were smarter than the appraiser. They already knew that if a buyer was willing to pay the price offered, then the property must be worth the selling price. The appraiser was only there to fill out the forms and simply confirm what was so obvious to all other parties 100 percent of the time. Just fill out the form. Of course, in theory, only the appraiser was neutral to the transaction.

Following the credit crunch, the valuation bias is now in the opposite direction. In fact many of the morally flexible appraisers that were biased toward higher valuations for mortgage brokers during the boom, are the same appraisers biased toward lower valuations for appraisal management companies the in post-boom world. These appraisers are rewarded for performing high-volume work at low fees and conservative values. And these values aren’t just low by a few percentage points. We have observed values from a nationally well-known appraisal management company as much as 50 percent below current market value for a property with multiple bidders, largely because the appraisers they use have no local market knowledge.

It’s insane yet logical for national retail banks to view the market generically if they are trying to protect themselves to live another day. Banks don’t want to lend unless dragged kicking and screaming. “Form fillers” fit into this system because lenders view the profession as yet another way to filter out any variances or the slightest blemish on a transaction, whether actual or perceived. Banks are truly issuing AAA mortgage loans, if not AAAA mortgage loans, because they remain afraid of their own shadow. Considering the massive legacy issues of bad lending decisions during the boom, the wave of foreclosures and a weak national economy, who can blame them?

With this marginalization of our profession I could see that I would be out of business within three years unless I capitulated or expanded my long-held views of being a neutral valuation expert and seek out clients who actually wanted a neutral valuation expert. I chose the latter and I lived to tell the story and revived my business at the same time.

I decided to reverse my emphasis so I eventually fired all my national retail bank clients (or they fired me). Now only 25 percent of my clients are banks and these are primarily private banking or wealth management groups. These clients actually care about appraisal quality because they generally hold their loans in portfolio due to the higher price point of the collateral and disappearance of the jumbo secondary mortgage market since the credit crunch began.

The era of experienced appraisers making a living from mortgage work is over

The mortgage lending industry has destroyed the collective experience in the appraisal industry and this knowledge has been lost forever.

It is time for experienced appraisers to look for greener pastures because most retail mortgage work doesn’t require much valuation experience – in fact experience is specifically shunned by the requirements that are adhered to in the AMC-dominated world:

• 24- to 48-hour turn times that don’t permit adequate market research or understanding
• local market knowledge is not a primary criteria
• fee splits remain in place that force corners to be cut to levels that require willful negligence or fraud

Simply review a dozen appraisals performed for national appraisal management companies and it becomes apparent that quality is paid lip service and passes muster only to the uninformed.

Despite newly minted financial reform phrases such as “common and customary fees,” experienced appraisers continue to pay for bank compliance with the Home Valuation Code of Conduct. Despite the sunset of HVCC, it was long ago embedded into institutional policy.

Unleashing the power of neutrality

Since the beginning of my career, I’ve always held out hope that most of my clients actually wanted me to provide “the number” that represented market value. Some clearly did.

I’ve found the concept of neutral valuation to be intoxicating and powerful in my business. As a result of shifting our practice toward clients that actually want to know “the number,” we have remained at our most profitable level in our 25-year history.

Fire your retail banking clients and stop burning calories for clients that don’t want your expertise and will only pay for a form filler. If you don’t they are going to fire you eventually and your practice will die a slow death.

It is better to serve and expand on clients that actually want to know what “the number” really is. You’ll be surprised at how your quality of life improves and how much more business you are able to get.

Think of a non-neutral appraisal as a lie

Someone who tells a lot of lies is inconsistent in their interaction with others. From a practical matter, it is hard to keep track of what story was told to whom. When you lie to someone just once and they discover it they will never trust you again.

As an industry we pay a lot of lip service to the notion of being neutral. We have USPAP, Code of Conduct, HVCC and other rules and regulations to keep us in line. If they were effective, then why is our industry reputation so poor and getting worse? All these efforts provide no day-to-day guidance or practical penalties on behavior because users of our services in the mortgage lending process are not economically incentivized to encourage better quality. It is not in their best interest, as crazy as that sounds.

How is it in virtually every litigation and divorce case where appraisals are done for each side I have observed, one has a low value and one has a high value, both always consistent with their client’s needs? I see appraisers that use the same “comp” in two different reports with different physical characteristics presented. I see appraisers presenting different market conditions described within the same location. I see appraisers attack each other on bank review appraisal assignments for things they actually do themselves.

What message does that send to users of our services?

Being “neutral” means that you believe in your value and could care less about your client’s problems unless you made an error. It means that all interactions with your client are transparent. All information that leads up to your conclusion is disclosed. If the information is not consistent with your result, explain why. If you are providing services to several parties, all communication and presentations, as well as perceptions of communication, are completely transparent. It’s that simple.

Some reading this must be thinking, “I’ll never get any work if I act this way.” Wrong. If you live and breathe neutrality 100 percent of the time, your clients and others will notice.

Neutrality in daily practice

After firing my retail bank clients a few years ago, we expanded our more lucrative legal-related work, specifically litigation support. As a result, we perform a lot of “neutral” appraisals in divorce matters. We are hired by both parties and represent both of them. Courts regularly appoint us as the neutral appraiser for cases in front of them.

Both parties have to trust that you will not omit them from any conversations. I insist that neither or both parties are present during the site inspection. Even the perception of the appraiser favoring one party over another is not tolerated. All correspondence via email is copied to all parties and any party that sends me direct emails is forwarded to the other party. My assistant takes direct calls if one party makes an inappropriate call to sway us and directs the party to conference in the other party to the call. The engagement letter is addressed to both parties.

The appraiser has to detach themselves from the situation and focus on the appraisal itself. Of course we’re human and this is always a challenge. For example, in divorce matters where there are small children at the property during the inspection, after the inspection I always call my wife and tell her I love her and my children and how fortunate we are. I get that out of my system and I proceed with the assignment as neutral as I can be.

I was in a situation recently where both parties hired their own appraisal experts for arbitration and both ended up citing my public market analysis in their reports, with one party embellishing my results. I was brought in as the neutral expert to clarify what my own market analysis actually represented.

A neutral reputation is contagious. I have had many attorneys come to me after my firm was engaged to say the other party settled because they knew we would be providing a neutral valuation and there was no point in playing games.

There have been many instances where a potential client will call to engage us because another appraiser involved in the matter came up with a valuation conclusion that was clearly biased to an extreme result. I beg off on those assignments and suggest they find someone else. It has been my experience that a value straight down the middle would be averaged with a biased high or biased low result, creating an unfair position for my potential client. Both parties often end up coming back to me for a third, neutral report after the original appraisers, predictably, are significantly apart in their valuation estimates.

The glass is simultaneously half empty and half full

Maintaining your neutrality as a valuation expert is tough and requires constant review and feedback. Although I view most mortgage-related work through national retail banks and appraisal management companies as incompatible with the concept of neutrality, yet there are many other opportunities out there. Consider weaning yourself off of it and you may be surprised at how much better you view your career and profession.

Neutrality is a powerful code to live by as a valuation expert.

And that’s no lie.


Jonathan Miller, President/CEO and co-founder of residential real estate appraisal firm Miller Samuel and co-founder and Managing Principal of commercial real estate appraisal firm Miller Cicero has been a real estate appraiser and consultant for 25 years. He is the author of a series of real estate market reports with an annualized distribution in both print and Internet downloads of more than 1 million copies. These reports are widely used by local, regional, national and international media, as well as national and local lending institutions and government agencies. Jonathan provides real estate commentary, speaking often in the media on national and local housing market issues. He is a frequent speaker at real estate and appraisal functions and sits on a number of advisory panels.


well i have been in the appraisal profession for 34 years and i can tell you the issue you address has been around since i got into the profession with savings and loans/banks.  the currrent process with amc is just another regulatory effort to correct this nuetrality issue.

Jonathan, while I agree with your broad concerns and observations, I would appreciate more attention to specific concerns that continue to plague the mortgage and valuation markets.  Particularly the divergencies caused by such measures as S&P's Case-Schiller index and the exclusion of Manhattan and other 'divergent markets,' v. the effect of the 'grey inventory market' in new construction in urban centers, is worth addressing.  Also, where concentrations of value per square foot become dramatic, the eternal discrepancies in square footages between 'as measured' v. verified, and 'as certified' within qualifying language used in offering plans, or from tax rolls.  There are a myriad of other relative and impactful valuation factors that weigh heavily in Manhattan real estate more than in most - in smaller apartments, values tend to be driven particularly by immediately usable space and light v. storage and hallways v. larger apartments for example.  While there may be neutral ground on all these issues, as there is an underlying value judgment that we as appraisers are ultimately saddled with qualifying, let's recognize that the real villain was the quant version of a swapable universe where a sunny one bedroom with a doorman on Park could be bundled with a back unit in Las Vegas on a lower floor. 

What a great read.  Straight to the point.  If every real estate appraiser would adhere to these morals, what a better profession we would have.  The good thing is, do it right and you don't have to look over your shoulder. and, by the way.....goooo LSU.Doug Cross, Alexandria, La

Mr. MillerI am humbled by your ability to speak with such clarity at a time when my mind is rattled and blinded with anger. I can’t thank you enough for your articulate expression of how scattered our industry really is. You are 100% accurate that non neutral appraisals are a lie. I have been in the business 25 years myself and after reviewing some of these appraisals I soon realized I was training my replacement. I no longer am doing that. It is an amazing struggle we have but I will keep at it until I get out or I find something more profitable to do. This push for non neutral appraisal or lies is absolutely a top down problem not a bottom’s up issue. I hope to keep in touch with your clear thinking.

How many times will we read dicourses such as the well written narrative of Mr Jonathan Miller, and continue to nothing to save ourselves. Do we all really believe that such well meaning narratives will change to direction of our profession? I have read mnay similar arcticles over and over and have written a few myself. In 2005 I was labeled by HHH, "an Unhappy Camper" for railing against out of control real estate inflation and the lack of ethics in our industry. Simply put, we failed ourselves..or better yet fooled ourselves hoping someone, or some entity (HVCC, Congress, The Appraisal Institue, etc) would come to our rescue. No fellow appraisers, we did this to ourselves by our lack of professionalism, an unwillingness to "get involved" and sitting on the sidelines.  As a very tired veteran of 23 years battling lenders, AMCs and other unethical appraisers. I will be taking a position in goat herding, an honest if not well compensated profession.   

The long-winded description of your experience mirrors my practice.  I no longer play flunky to lenders offering steady work and extremely low fees to the first appraiser (and I use the term loosely) to accept their terms. I have shifted my concentration to appraising within the legal process and have received court appointments as well as other recognitions that embrace quality and talent. Thirty-five years of work have seen many unfortunate changes in the appraisal profession and it is difficult to "make a silk purse" but those who aspire must soldier on.  If not, we become our own worst nightmare. I am not afraid to submit my name - signed Jonathan Falk

I have managed to retain a few of my commerical bank customers and remain neutral.  I have also retained a couple amcs, though they don't send much my way.You are correct in noting that the customers recognize when you don't play games with the numbers and you put out a good report.  This does not always make for happy borrowers, but I sleep well in knowing that my customers are covered.The trick is to ignore the din from the "need the number" crew and do what you do according to the Code of Ethics and USPAP - and always keep centered on your purpose.I subscribe to the Code of Ethics and USPAP of the American Institute of Real Estate Appraisers.  If you look into the old AIREA CofE and USPAP, you will find that both are short, succinct and that absolutely nothing essential or basic has changed in the requirements and process over the past, very expensive and bombastic, 40 years.My CoE/USPAP booklet put out by AIREA is as vital and pertinent today as it was then and it fits in jacket pocket without making a bulge.Bottom line:  If you want to be, and be known as, an ethical appraiser, ignore the din from the gallery and do what you know is right.  Some may not like you, many will not use your services, but the important ones will respect you and continue to use your services.   

If more appraisers took the neutrality road, what a wonderful place this would be, and the power of the appraiser and "public trust" would walk hand in hand and live happily ever after. I for one am glad to see someone speak out about the appraisers original and neutral role! I find it ironic that just about any other appraiser profession (automotive, art, insurance, timber, etc.) gets to do what they do without any feedback per se, but real estate appraisers, well, it seems like everybody's breathin down our backs to be appraisers, surveyors, attorneys, home inspectors, flood specialists, census specialists, etc.. Thank you Mr. Miller for a great and very needed article!

Amen! and Amen!  Residential work now is totally a form-filling nightmare with UAD requirements, etc.  Evidently underwriters can't read and appraisers aren't always ethical -- there are two sides to the equation.   Totally agree that appraisal work other than mortgages is best -- mortgage lenders still want "the number"; want the cheapest report; and want it yesterday.  Just not worth it. 

This was a fantastic read. Thank you Jonathan! You get it.

Why are we to give up 90% of the fee appraisal business to parasitic AMC's hiring form filling crooks who are manipulating the data just to get past underwriting and "quality control"???I don't want my house or market appraised by this current process and it is destroying the REALITY that has historically been a part of REAL Estate. I don't want FNMA (which we all own) to keep being filled with this worthless paper - it doesn't have to be this way.At this time real estate is a joke and the real investors know it. I will continue to fight for the eradication of AMC's and for ENFORCEMENT of existing regulations to control rogue appraisers. VA loans are the highest ranking loans in the country using a rotation panel of EXPERIENCED appraisers with a legitimate review contol system.  They do this without AMC "quality control" and "automated underwriting".  It's really not that hard to fix this debacle with some ethics and a sheriff in town that ain't scared to pull the trigger once in awhile.Lender owned AMC's have proven to be worthless parasites to this system and our national economy.  With little to no ethics in their fees or appraiser selection, they have become just another profit center for the lender and a serious hindrance to the borrowers. For all my appraiser friends out there - just say NO to low fees and unreasonable turn times.  Inform your lenders and borrowers of the BS we are facing as a nation in this housing market.  Fight to do the right thing and don't give up... this ain't over yet!

Finally someone has the testicular fortitude to say the TRUTH about our Appraisal Industry.  When I turned away from going to hack work and answering questions that would never be asked if someone actually read the reports - I though maybee there was something wrong with me. As time goes by, although still poorer for it, I see that I have been true to the appraisal process along with the few like minded thinkers.I do enjoy watching the hacks fail and fall away though, and listening is so much more enjoyable now as they report nothing, value nothing, and add another packet of words to fill a loan portfolio.Who cares about quality when the Govt. guarantees your loan?  Preach it Brother!

I see someone else that is dealing with reality. What has happend to our business is sad to say the least. Great article with a lot of truth! Thanks for sharing.

Your column comes at a unique time for me. After 18 years of residential appraising, I've finally decided to leave the industry for a new profession. While a small part of my business has involved assignments other than mortgage work over the years (relocation and estate transactions, although I've always avoided divorce work where I can, since I don't enjoy it), I've been one of those appraisers who enjoyed completing residential mortgage assignments. Since I've never had a strong desire to branch into some of the areas that are now the strong majority of your business, I'm left with little choice but to find something else to do with my life. I'm sad about this - my father trained me and I worked with him for 13 years until he passed away a few years ago. Between us, 38 years of real estate valuation expertise in my market is going to disappear. USPAP and ethics has turned into a joke because the lending industry makes the rules. They've always viewed appraisers as impediments to making money (getting loans closed) and have wanted to be rid of us for as long as I've been in the business. Since the HVCC and Dodd-Frank, I've run across some of the worst appraisals I've ever seen in my 18 years in the profession. AMC's are a plague, because when your only criteria in picking appraisers is how little they charge and how fast they can complete the assignment, well, you get what you pay for. There is one thing I've never figured out, though, and maybe someone here knows the answer to this. Why are lenders who have equity stakes in AMC's allowed to force borrowers to use them without it being a RESPA violation? In any case, I've seen the writing on the wall for a few years now, and I have little interest in continuing a career in what is, for appraisers like me, a dying profession. I wish the rest of you who choose to remain the best of luck and the hope that someday, the public will acknowledge the value of our role in the valuation process.

Jonathan,Thank you for this article that is an encouragement to all those appraisers searching for a solution.  I made the transition eight years ago and have not regretted it.  Staying on top of your game by taking challenging appraisal classes and seeking to always do a better job is the key to success.  There are clients seeking the professional expertise we can offer.  Keep up the good work and encouragement of your peers.Sandy Adomatis, SRA

I shared this link on FB, both in a closed appraiser's group and with all my friends on my wall. My comment there: This is such a great article in more ways than one. For a long time I thought my story was unique... then I started talking to people on the Internet and found out that there were a few others who had similar stories. Now this guy comes along and writes it down in a very succinct manner.


Your comments mean so very much to me - like you, I have long wondered if I was all alone in these beliefs.  Our industry has little if any voice in the public discourse and when it does, it does not speak along these lines.   I find it hard to believe that after all our economy has been through over the past decade, that our neutrality would be so serverely challenged.Best regards,Jonathan Miller

A round of applause, because it's not easy speaking of non-popular topics so candidly. Happy indeed to know there are many, many others who weathered a tumultuous storm. Encouraging to know that emotions of anger are replaced by strength, knowledge, and courage.Respectfully,nobleappraiser

I begam my real estate appraising career in 1980 with innitially completing the Society of Real Estate Appraisers "Introduction to Real Estate Appriasing"I was hired as a trainee and continued taking higher level appraisal courses offerred through the "Society" which was later incorporatd into the Appraisal Institute.These courses were thorough and tought by seasoned and professionaly designated appraisers.  In addition, these courses lasted for a full college semester and as challenging as any degree required courses I took in college.For my first 3 years working as a full time residental appraiser, I was an employee of an appraisal firm and for the next 10 a sub contractor for an appraisal firm. During those 13 years I was continually mentored and all my assignments were reviewed.  During those years I also obtained my real estate sales license and associate brokers license. I continued taking appraisal courses too.My point being: Some might think that experience lengthy but I was still apprehensive to strike out on my own as an independant fee appraiser.  However, during the later of those 13 years I saw the writing on the wall as even my superiers began to cave to unreasonable requirements from mortgage lending undewriters and loan officer turn time demands.  Eventually I felt pressed to compromise my standards so I departed amicably.I managed to earn a living with the loyalty of just enough ethical mortgage lenders and loan officers that still had enough integrity to appreciate a detached unbiased appraisal and understood that a certain percentage of mortgage applicant business will always be lost in an honest process.Like, I think, many of my colleagues did, the beggining of the housing bubble and subsequent inflated property appreciation fiasco was going to inevitably result to our current crisis.  It was during that time that mortgage client business was drastically deminishing to my esteemed newly state licensed (tongue-in-cheek) seasoned competittures whom perpetuated free-for-all.It was during that time that I prepared myself for the inevitable and began to wean myself off the residential morgage appraisal business. While I never became wealthy as a real estate appraiser I was able to support myself for 30 years in the proffession and still take on assignments from clients that depend on an unbiased and reliable estimate of real property value.In concluding, I was working prior to the S&L crissis in the early 80's, sufferred through the federally regulated beaurocratic solution (state licencing, USPAP, RESPA, ect.) so that it would never happen again proclomation and sure as the sun rises in the east and if I live long enough will see history repeat itself again after federal beaurocrats impose another realm of new standards on residential real estate appraisers.  Will we ever learn that an appraiser can complete a phone book full of forms and still either fraudulantly or incompetantly increase the risk with home morgtage loans if they are not proffessionally educated and mentored for the lengthy time it took most of us to perform to the standards required for what use to be a proffessional real estate appraisal.  And lastly, prosecute the lenders who are still perpetuating undue influence on appraisers to hit the number!   

Look, it'is very simple. Residential appraisers should consider representing buyer/borrowers as consultants - providing valuation, inspection, and other due dilgence services. The appraiser could be the one party the buyers could turn to in looking out for their interests. A lot of people just want someonme they can trust to make sure they get at least a fair deal on the Property, whether on the purchase or on the financing. Potentially there is much more rewarding work in that direction rather than doing low priced work for ungrateful lenders.