Recently, I attended an Appraisal Institute Chapter Meeting where the speaker was Doug Potts, MAI, AI-GRS. Doug is Vice President and Chief Appraiser at Commerce Bank in the St. Louis, Missouri area, an AI instructor and a national leader for the real estate valuation community. Doug’s unique perspective is valuable to everyone in the valuation community so I have summarized his presentation and added some thoughts of my own.
The use of evaluations in the valuation of real estate is here to stay. The question for appraisers is how best to handle it.
One option is to accept the change in the industry and do nothing. As I will point out in this article, this is the worst thing we can do as practitioners.
The best option is to embrace the market changes and be prepared to compete for this business.
The term evaluation was first introduced in the 1994 FIRREA revisions and expanded in the 2010 Interagency Evaluation Appraisal Guide. These regulations provide an alternative to an appraisal for some federally regulated transactions.
As access to information has improved, the market is rapidly adapting the use of evaluations as a fundamental tool in the monitoring and assessment of real property. In order to maximize profits, participants are reallocating resources to better balance portfolio risk vs. workload. They are doing this as larger loans are the most profitable but carry the most risk to an institution. While smaller loans are the least risky, they’re at the same time least profitable.
This is occurring in spite of the regulatory hurdles. Eventually the regulatory environment will accept the use of this important tool and will permit appraisers to fully participate in this market. In fact, several have already adopted regulatory changes to permit appraisers to do participate in this emerging market.
The risk to the appraisal industry is obvious. The increasing use of evaluations means fewer appraisals. This is especially true for appraisers doing lender work. Right now there are 3 evaluations performed for 1 appraisal. As market information becomes more readily accessible the use of evaluations will only increase.
Is this shocking? Unfortunately, we only know about the work we see, not the work we don’t see.
Where there is risk there is also opportunity. No one is in a better position to provide this service than appraisers. Who else has the best information, knowledge and data to compete for this business?
To be competitive, we must become more efficient in analyzing, collecting and processing this information.
Data we use in our day to day practice is our competitive edge. We must be prepared to harness it and offer the services our clients demand. If we don’t do it, someone else will.
Tim Keller, MAI
Tim is CFO at realquantum and the president of Keller Craig and Associates, a commercial real estate appraisal firm with offices in Overland Park, Lawrence and Topeka, Kansas. Read his bio here.
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