VALUATION
The Valuation Wars: There's No Substitution
Don't even THINK about saying that appraisals, Broker
Price Opinions, Competitive Market Analyses and Automated
Valuation Models are all the same. An understanding of their
differences can be a valuable lesson.
BY NICK SALAMONE
One of my hot buttons is valuation reports - appraisals,
Broker Price Opinions (BPOs) and Competitive Market Analyses
(CMAs), and Automated Valuation Models (AVMs) - and how they
are used.
The fact is, there is a real need for each of these products when
used correctly. But they are different products with different
applications. You should not substitute one for another, although
they may be used together to produce the desired results.
For those of us in the REO management and valuation
services business, valuations are often viewed as the easy side of
the business. It generally is easier to get an appraisal or do a drive-
by BPO or CMA than it is to manage the fix-up and security of a
house that has been trashed by a former owner, tenant or vandals.
But it is hardly a cakewalk. Everyone in mortgage lending,
servicing, and valuation is tugged in several directions by costs and
regulations.
In an increasingly competitive environment, mortgage lenders
are looking to cut costs wherever possible, and who can blame
them? Appraisals are expensive. If they can get by with a BPO,
they want the BPO.
But sometimes, after paying $75 or so for a BPO, the lender
finds he needs more information. Often, it is what would have been
provided by an appraiser, so the lender ends up needing an
appraisal, too.
On the other side of the coin are the appraisers. BPOs/CMAs
and AVMs which are performed by non-appraisers are viewed as a
threat to their industry.
Appraisers carry a lot of clout and have considerable impact
on regulation. In a recent article in Pennsylvania Realtor, the
chairman of the Pennsylvania State Board of Certified Real Estate
Appraisers proclaimed, "There is no BPO." The Board had
concluded that a BPO is an appraisal.
So when clients with properties in Pennsylvania and states
with similar regulations are looking for an estimate on a property,
regulations are forcing them to get appraisals. They may pay four
to five times more for an appraisal than a BPO/CMA, and may wait
far longer to get it.
It does little good to complain about appraisers, especially
since there are times when nothing except an appraisal is
appropriate. Every product is different and has a different use.
In between
The real estate professional can also find himself or herself
between a rock and a hard place. In a state that labels any
valuation performed for a fee an appraisal, the real estate
professional providing a BPO/CMA cannot collect a fee. The only
incentive for doing a BPO is the prospect of getting the listing when
the property goes on the market.
Those of us in servicing want to give our clients what they
want, and also what will provide the information they need. These
objectives are not always in harmony. We must abide by the
regulations which differ from state to state.
We do not want to put our clients at risk by providing a BPO
when an appraisal is required.
Another wrinkle is the federal Financial Institutions Reform,
Recovery and Enforcement Act of 1994, which says appraisals are
not needed for mortgages under $250,000.
The turf wars have begun. A title and valuation company has
filed an anti-trust lawsuit in Oregon charging that the state's
appraisal certification and licensing board is protecting the
appraisal industry by prohibiting valuations by anyone other than a
certified appraiser. The company filing suit seeks a ruling that if
the state does prohibit AVMs, the federal law mentioned above
takes precedence.
It is time to stop the haggling. We need everyone at the table -
mortgage lenders, servicing companies, appraisers, and
representatives from real estate - to resolve our differences in favor
of the end user of all our services: the consumer.
Together, we should come up with ways to provide a variety of
valuation services to fit the circumstances. Loan originations and
asset recovery have different requirements.
Together, we should come up with ways to fairly compensate
real estate professionals for providing their services.
While we're at it, we should also agree on the nomenclature.
Trying to decide if a valuation is BPO or a CMA is like trying to
decide whether that piece of living room furniture is a sofa, couch
or davenport.
In the meantime, the best course for everyone involved is to
use the right tool for the job.
Nick Salamone is president of Keystone Asset
Management Inc. in Lansdale, Pa. He can be reached at (215)
855-3350.
This article was previously published in the August 2000 Issue of Servicing Management.
