Friday , 21 September 2018

The Appraisal Process in the “Land Down Under”

Valuation Expo was held March 18th-21st in Charleston SC where we featured many informative speakers, but a special guest travelled from the “land down under” to make an appearance and share with us how the appraisal process has been modernized in Australia.

Brendon Hulcombe is CEO of Herron Todd White, Australia’s largest appraisal firm with over 850 people in 66 offices across all Australian States. Brendon gives us a look into the differences between the U.S. and Australian appraisal process and his ‘outsiders’ view of the U.S. appraisal landscape.

Buzz: What are some of the major differences in Australia compared to the U.S.?

Brendon: Our model is one of staff appraisers; we don’t use any contractors. Our fees are lower, ($185 for a 1004 equivalent) not our preference obviously but a reality of the free market. The other major difference is that our gross average turn time is 2.4 days. I also understand that the average appraiser remuneration in the U.S. might be $80k or $90k. In Australia, valuers might average $120k /$130k. While the standard fee in Australia is much lower, the difference is we can do many more appraisals per day. Most hardworking valuers would probably complete 6 or 8 valuations per day, but some could complete up to 10 valuations per day. Because the earning power for a valuer in Australia is comparatively good, we don’t really have the same problem of attracting young people into the sector. The average age of valuers in our company is about 28-30.

The valuers themselves must do the inspection; we don’t outsource that to third parties which is a practice in the U.S. I will watch with interest – that feels risky to me. To become a residential valuer in Australia you need a 3 or 4-year university degree (with a major in a property discipline), followed by 12 or 24 months (depending on the State) of ‘on the job’ training paired with a qualified valuer before you can legally inspect a residential property solo.

Buzz: What’s your impression of the valuation industry in the U.S.?

Brendon: I’m conscious your readers will have forgotten more about the U.S. landscape than I will ever know, but I’m happy to share my impressions for what it is worth.

We conduct valuations in accordance with the Australian Property Institute Standards, which themselves are aligned with the International Valuation Standards (IVS). They are more “principles based” as opposed to how I see the U.S. space, which feels to me to be overly and unhelpfully regulated via ‘hard and fast’ rules on multiple levels (depending on the State) for the individual appraiser to navigate. It seems to me that the appraiser in the U.S. gets asked to spend too much time on ultimately unimportant regulatory hurdles, as well as things like 26-page letters of assignment that are slightly different to other letters of assignment, but not materially different enough to derive a better risk outcome. In my view, the time and energy of the appraiser should be spent highlighting the risks and assessed value of the property rather than wading through the compliance minefield that the system unintentionally creates.

I learned at the conference that the re-work rate in the U.S. is about 50%. And by that, I mean, 50 out of every 100 appraisals reportedly get returned to the appraiser to rework for some reason. That seems crazy high to me and indicative of a huge amount of waste in the overall process. No one can run an efficient business, as an individual, a 1000-person appraisal firm, the bank or GSE with a 50% rework. That seems like a huge opportunity to me.

Because there are so many slightly different regulatory, client and GSE requirements, the poor appraiser at the end of the process has a very difficult job to do. It seems to me that no one has been able to sufficiently invest and build an appropriate end to end technology piece to both manage the workflow and collect the data at the property and convert that into a compliant report format suited to the client at the end.

I think it’s pretty rough on the appraiser to send their appraisal back to them weeks later to re-do some particular element of it. The systems should be sophisticated enough so that all the relevant information is gathered and analyzed, there and then, on the day of inspection. We do all of that before the appraiser leaves the property and therefore our rework is consequently much lower – somewhere around 4 or 5%.

From what I could tell, the appraisers in the U.S. are hardworking, intelligent people trying to do their best to navigate a difficult system. I heard AMCs and some banks say what the industry needs is more education of the appraisers. It felt like they were (in some ways) blaming the appraisers, whereas I tend to think that is not the right tree to bark up. My impression is the overall system is asking them to do it with one hand tied behind their back. More education is not the silver bullet in my opinion; a cleaner process and system is probably 90% of the issue around the crazy high rework.

Buzz: The valuation industry in the U.S. is starting to take advantage of modern technology and how Appraisers can use it to help make their jobs easier. Do you see the same thing happening in Australia and if so, can you give us an example of how the Australian industry uses technology to help modernize their process?

Brendon: Yes, we’ve been using our own in-field technology for over 15 years now and it’s undoubtedly been a driver of further and further efficiencies. We’re lucky that we’re big enough to have our own team of IT guys continuously making our systems better and better. Our valuers are intimately involved in the design and decisions around the priorities of the next new feature of the system, then IT builds it, and then the valuers test and improve it again. So in a way, our valuers have designed and built our system to suit what works best for them.

With our systems, the valuer is sending the report to the client from the field about 80% of the time as they are leaving the property (assuming they have previously inspected and analyzed the sales they are using). Our systems run about 2500 automated checks before the valuation can successfully be sent to the client. It can pick up a high number of compliance issues, whether the sales used are within a reasonable price range from the subject or whether the date of sale of the comparable is too old. It flags these issues to the valuer while in the field so that they can address it there and then by correcting or overriding the issue as necessary. We think it is much better to deal with the issue while the property is either still visible or at least fresh in the valuer’s mind, as opposed to days or weeks later. This is largely why our rework rate is sub 5%. Some weeks it’s as low as 2%.

I know that some appraisers in the U.S. are starting to adopt better technology and I’d personally encourage that. If the systems are actually good systems, incorporating workflow management and compliance checks/checking against client requirements etc. and not just a digital version of a form or basic field sheet, I think it can be a great driver of efficiency. It has been for us at least.

Buzz: Do you think the U.S. appraisal industry will adopt some of the efficiency drivers you’re referring to?

Brendon: While there is no doubt a lot of problems that need to be solved (which is true of most industries), it’s heartening to know there are also lots of intelligent people working on them to create a better tomorrow for the appraisal professional. The utopian view would be that all of the regulators, GSEs, clients and appraisal associations could adopt a single valuation standard and then resist the temptation to tinker with it. If that were the case, processes could be streamlined, sophisticated systems could be built to support those processes, errors and rework would plummet, quality of appraisals would increase; E and O risk would reduce, turn time would decrease (purely by better systems and reduced rework – not by working any harder), appraiser efficiency would substantially increase and earning power for appraisers would increase. This all would ultimately attract more young people to the profession. Overall, GSEs would be happier, the banks would be happier, the borrowers would be happier, the E and O insurers, the mortgage insurers, the regulators, and the appraisers would all be happier.

With all of that in place causing much quicker turn times, there would no longer be the same pressure on “waivers” and the whole appraisal profession would continue to be relevant and appreciated for the long term.

I know utopian views like that can be hard to execute in the real world, but where there’s a will there’s a way. Even if the rework could be cut in half to start with through the implementation of sophisticated systems that’s a huge reduction of waste in the multi-billion-dollar appraisal landscape.

When I look at the US appraisal landscape, I see potential. It’s actually energizing to see so much opportunity.

Buzz: Turn times are a big deal in the US. How does this play out in Australia?

Brendon: I suspect turn times are a big deal in all markets. Clients want the valuation back as quickly as possible, so they can take their borrower off the market and close their loan.

As I mentioned, our gross average turn time is 2.4 days (that’s across the 27,000+ valuations a month). We try to give each valuer as small a geographic patch as possible, so they know their area really well. They know their comparable sales really well and know the good, the bad and the ugly of everything in their patch. This definitely helps with efficiency as opposed to a lot of individual appraisers driving past one another in traffic to get to the far-flung corners of the same city.

Additionally, our clients measure many elements within the end to end process. For example, we have to accept the assignment within 30 mins and make the first call to arrange access for the inspection within 2 hours. We need to log all of that in our system – that information then flows back through the AMCs systems and to the client’s lending system so everyone is kept updated as to current status and the loan officer can communicate with their borrower as to status. Each milestone is measured and added to other scores such as our ‘rework’ or error rate and other elements such as how well we kept the systems updated. Our ‘scorecard’ performances are then pitted against each of our competitors. If we do really well in comparison to our competitors, we may get more work the following month. If we have a bad month, we may see work taken from us the following month. It’s a pretty competitive market but on the positive side, it’s all open and transparent and if you do a good quality job with good turn time and other performance metrics, the idea is you will be rewarded with more work the following month.

It’s probably also worth saying that in Australia, the individual loan officer has no influence at all on which valuer or valuation firm should undertake their work (which is a good thing – we want our valuers to be able to act without fear or favor in calling the issues as they see it without any influence). The bank’s valuation work is distributed to a pre-approved panel (the bank’s credit/risk departments appoint the panel through a proper Request for Tender process) and then work is randomly allocated in accordance with previously agreed allocation splits (e.g. within Zip Code 90210, 40% to ValFirm A, 40% to ValFirm B, 20% to ValFirm C).

Buzz: After attending Valuation Expo and speaking with other Appraisers, what will you take back with you to Australia?

Brendon: I think the ValExpo is a really important platform for interested parties in the U.S. to come together to share ideas, learn and develop.

Scary as this may sound, the truth is I think my key takeaway is that unless there is a pretty large shift in thinking and more importantly execution in the profession, the “waivers” mentality may well open up the possibility of a leapfrog disruption. Small little iterations of the current process won’t drastically cut the turn time, won’t increase appraiser efficiency and earning power and won’t reinvent the profession to meet the needs of the clients in a meaningful way today. The leapfrog disrupter will be assisted and enabled by the current system that is seemingly groaning under regulated complexity.

Buzz: Would you encourage other Valuation Professionals to venture to other conferences outside of their State/Country to explore how others practice?

Brendon: I think it’s important for all of us to continue to learn and develop, constantly questioning whether there are better ways to do what we do. Venturing outside of our territory allows us to compare and contrast our own practices and to explore other alternatives or opportunities. I always believe we can do things better. I find attending conferences like this allows for that time to reflect and deeply consider what we do and whether we can improve. I’d definitely recommend the ValExpo – and commend the team for providing such a wonderful platform to share ideas and plan for a better outcome for the profession.

Buzz: Thank you for taking the time to speak with us Mr. Hulcombe. We enjoyed learning more about the appraisal process outside of the U.S.

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About Brendon Hulcombe

Brendon Hulcombe
Brendon Hulcombe is the CEO of the largest independent Australian property valuation firm Herron Todd White, with over 850 staff across 64 offices. Prior to that, Brendon held Operations roles within Herron Todd White and was previously an Executive / Orchestra Manager with the Australian Chamber Orchestra (ACO) and Queensland Symphony Orchestra (QSO). Brendon completed his Master of Management at Macquarie Graduate School of Management and holds a Bachelor of Arts. Brendon is a Graduate of the Australian Institute of Company Directors, an Australian Financial Review Boss Magazine Young Executive of the Year, and an Australian Property Institute (API) Excellence in Property Award winner.

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