Chicago Appraisal Blog

Although commonly recognized as a valuable tool, BPO's have their limitations.  First and foremost, reas estate salespeople and brokers are not held to the higher standard of valuation law that we appraiser's must comply with.  I know, I am also a licensed salesperson.  Property valuation is very dynamic, especially now with pockets of our market declining. 

The same area of a neighborhood may have declining multi unit value trends, but increasing single family value trends.  Even more specifically, 2-bedroom homes may be declining, while 3 or 4 bedroom homes may be stable or even increasing.  It is inappropriate to look at only single family homes as a whole, which is often the case in BPO reports.  Further, if a real estate salesperson or broker is vastly inaccurate in their BPO report, they do not share the risk of losing a valuation license.  They are not licensed in property valuation.

How can you be sure you are getting accurate information?  ORDER THE APPRAISAL.  Appraisers value property for a living, while salespeople and brokers facilitate the sales.  Yes, these two are intertwined but the laws governing the licenses are very different.  A broker or salesperson can accept an assignment in a neighborhood they do not know, resulting in an increased risk for errors.  An appraiser can not accept an assignment unless they are competent, not only in the neighborhood, but in the property type as well. 

It has been my experience that asset managers reviewing short sale files will often not accept an appraisal as a refutation of a BPO.  This is tantamount to refusing to talk the actual attorney, and demanding the report from the paralegal.  The fields are interelated, but have different duties with different areas of expertise. 

If you would not an appraiser to sell your house, don't have an sales person do a BPO. 

CASE STUDY:  (The address has been changed due to protect the identity of the parties involved)

A high end townhome in Chicago went to short sale.  A buyer came in that was willing to pay cash, close quickly, and wait for the bank to respond.  The bank ordered a BPO.  The real estate salesperson said the property was 45% larger than it actually was, thus inflating the value by 30%.  (We're talking about hundreds of thousands of dollars....)  They obtained their information from a builder's listing a decade ago, when the advertising rules were different, and seller's could include garages, decks, patio's in their square footage.  The bank rejected the offer because they relied upon the salesperson's estimate of value.  An appraiser was hired by the selling party to provide a more accurate report to the bank.  The apprasier's report included a sketch, interior pictures, and a detailed analysis.   The bank wouldn't open the file because it wasn't a BPO.

RESULT:  The property went to auction and didn't sell.  The property was vacated and not winterized in time.  The pipes within the property burst, and mold developed.  The bank the received 50% of what the cash buyer wanted to buy at the time the short sale was being negotiated.

IF THE ASSET MANAGER HAD CONSIDERED THE APPRAISAL INSTEAD OF THE BPO, THE BANK WOULD HAVE RECOVERED HUNDREDS OF THOUSANDS OF DOLLARS MORE FOR THIS SAME PROPERTY!! 

MY PLEA TO THE ASSET MANAGERS:

Appraisals cost a little bit more, but what's $350.00 when you stand to lose $300,000. more?

THE 1004MC DOESN'T WORK FOR CHICAGO!!

Yes, I said it!  Those boxes on the form are virtually meaningless. 

They do allow us to tell the intended user when there are no sales of comparables within 90 days, which is sometimes the case in the greater Chicago Metro area, but Chicago has a cyclical sales cycle. 

Of course housing numbers are picking up!!  It's Summer!  Of course they were depressed from December - February.  It was Winter!  This happens every year, even in times of market stability!  Geeeeezzzzz!

My solution:

Because Chicago is a Cyclical market, and because sales fluctuate seasonally, even in times of market stability, it is necessary and appropriate to annualize the value trends for the purposes of the 1004MC.  The appraiser considers comparable sales for the 24-12 months prior to the date of the appraisal, and compares these to comparable sales in the period 12 months prior to the date of the appraisal.  Based on the median sales prices the market......

Feel free to use this, I find it is very accurate.  BE CAREFUL!! COMPARABLE IS THE OPERATIVE WORD!    Do not generate median sales prices from the neighborhood alone!  You  must consider the property type!  A 2-bedroom condominium buyer will not buy a 1-bedroom condominium!  Do not analyze properties that are not real, viable buyer alternatives.  Neighborhoods are dynamic.  Sometimes the demand for single families is great, and thus values are stable or increasing, while inventory of 1-bedrooms has become very high.  The same neighborhood could have very different rates of increase, stability, or decline based on property type.  The 1004MC asks for comparable sales.  The total number of sales of 12 months should match the total number of sales above the comparable grid. 

The predominant sales price for the neighborhood for that property type (detached or attached)will usually be different than the median sales over the 12 month period you indicate in the 1004MC.  This is where you get to tell your intended user how your property type relates to the composition of the neighborhood.  If you 1004MC for detached homes indicates the median comparable price over the last 12 months is 500K, but the predominant price for the neighborhood is 350K, tell your user that your neighborhood is mostly 50 year old homes and the subject is a new construction.  Hopefully they read it. :)

Believe it or not, I have turned down work recently. 

Appraisals are getting harder.  Even in my backyard deciphering the recent sales, determining if REO's are a factor, short sales, etc., is a lot of work.  Asking me to provide a value estimate for a property 50 miles away when I haven't worked there in a year, could be a little tricky.  Sometimes there are enough sales occurring of a given type of property to have a clear understanding of what value trends really are.  Sometimes there aren't enough sales.  When there aren't enough sales, if I can not write a competent addendum that I could stand behind and be confident is accurate collateral protection for my client, I turn it down.  I'm just not the person for the job.  No shame in admitting that you don't know.  It does go the other way too.....Sometimes a property may be grossly undervalued because the appraiser does not have a good understanding of the neighborhood.  In this case, better to err on the side of caution, right?  WRONG!  Do not accept these assignments.  Taking the work for the sole purpose of cashing the check while grossly undervaluing property for the purpose of a CYA mentality leads to lack of sales!! We need the sales!!  The world is not ending, people would still like to buy homes.

I recently read a review where an appraiser working in Chicago told me that the MLS defines neighborhoods.  They believed that the Chicago MLS code was the end-all, be-all determination of median sales prices.  (Appraisers, you know what I mean.)  A neighborhood doesn't consist of "80XX", but rather is composed of where the value boundaries lie.  Further, within these neighborhoods you may have a mix of decreasing 1-bedroom condominiums, with stable single family prices.  Please, fill out the 1004MC accurately! Use your real, neighborhood boundaries!  Consider viable buyer alternatives!  Just because Belmont Ave may be 1.0 mile from Armitage Ave doesn't mean that a buyer will buy there as an alternative!  Don't review based on 1-mile radius median sales prices!  Don't review based on MLS codes.  Review work is tough.  You'll probably learn something everytime you accept an assignment.  I know I do.  Just make sure you know the area you are appraising.  It's just USPAP. 

Back in the day we use to be able to research any given neighborhood in a short amount of time because the data pool was so large.  Not anymore.  All I ask is that we all follow the Competence Rule.  It is becoming a defining problem for purchase transactions. 

A RULE I LIVE BY:

KNOW THAT YOU DON'T KNOW