REQUIRED READING: I have become somewhat addicted to a television show: Food Network's ‘Iron Chef America.’ I believe the program's draw factor is in watching each chef piece together the mechanics of dishes based on a secret ingredient. Thus, they have to plan on the fly, refine the taste as they go, work through unintended issues, arrange the item on a plate so it looks appetizing, and duplicate their efforts so all judges receive the same brilliant creation.
Hey, wait a minute! That sounds a lot like the property valuation process – except that the digestion process is very, very different. Instead of a lukewarm culinary creation, mortgage bankers wind up with the potential of valuation fraud.
Each of the ‘Iron Chef America’ participants is introduced as a master of his or her profession; this is not a show for amateur cooks. In the same vein, the certified appraiser is assumed to be a master of his or her profession. Thus, the onus is on the appraiser to be able to become familiar with a property as soon as an assignment is levied – well prior to the field inspection.
Familiarity from the onset of an assignment not only prepares appraisers for what they may see in the field, but also provides a background so that they can be savvy to any issues with a property, its surroundings or its neighborhood that may cause consternation as the assignment continues.
And in these days where valuation fraud, purposeful and negligent, is on the rise, according to the Interthinx Fraud Risk Report, statistical familiarity in the areas of transfers, amounts, and conditions is essential information to possess from the beginning. Thus, having a handle on the appraisal process can help whittle down all possible fraud openings.
‘Iron Appraiser America’ differs slightly in the game rules from ‘Iron Chef America,’ in that some of the participants in the game have dietary restrictions. For instance, some lending institutions have special requirements for each type of assignment levied and may know certain essential information about a property that isn't readily available.
Just as you would communicate with your chef to prepare your steak medium rare, it is important that lenders provide appraisers with a detailed scope of work and any essential financial or transactional information that ensure digestibility the first time around. It will streamline your process and save on antacid when you are trying to close a deal and an essential component hasn't been addressed.
One of the things that I notice while watching ‘Iron Chef’ is just how many times the participants dip a finger into a sauce or sample the quality of an ingredient to taste their creation in its development, thus making sure it's exactly what they want at presentation. While there is a certain flinch factor to that – do you really want some stranger's finger in your soup? – it is essential that each portion of the whole is holding its own and will contribute nicely to the finished product.
Likewise, in appraising it is essential to utilize quality ingredients and sample your work as a valuation is developed. So what are quality ingredients in valuation, you ask? These would be data and intelligence sources, and lots of them.
Today's appraisers are faced with a number of complex challenges in developing their masterpieces both in property and in situation. Is the property compatible with the neighborhood? Will the property be first or last in a potential purchaser's eye in this buyer's market? Is the property in marketable condition, not requiring a large amount of repair or upgrade? How do neighborhood and community values influence the subject property – from a sales and appeal standpoint?
Are most sales arm's-length or something other than that? Will a potential purchaser see a flourishing neighborhood or a sea of listing signs? So many questions can be answered by research or by the many preemptive strike data tools available to the appraiser that render intelligence prior to inspection. These provide answers to the preceding as well as sales, listings, and information on distressed properties coming into the marketplace like mold on bread. Liberal use of these valuation ingredients makes for excellent results.
Excitement in some of the ‘Iron Chef America’ episodes grows when a chef de partie or sous chef creates a portion of a dish that is contrary to the original plan. This is typically due to miscommunication or creative differences. In these instances, the two chefs have to throw out the original plan and work together on the fly to come up with a flavor combination that will positively contribute to the whole at presentation.
This is tricky business in modern valuation. Past indiscretions and recent regulations have all but placed a cone of silence around any conversation that a lender and appraiser might have. Nevertheless, proper and meaningful communication is essential to success in the overall assignment.
Yes, the Dodd-Frank Act says that you cannot speak to the appraiser directly if you are in a position that could benefit from the positive closing of a deal. Thus, lenders need to make sure they can communicate succinctly with their equivalent of the sous chef and ensure that party is able to enunciate their desires to the valuator performing the deal.
Once hiccups in communication are ironed out, it is time serve the meal. The assembly of the food on the plate counts for 25% of the overall score on ‘Iron Chef America.’ A similar percentage applies to valuation. A well-organized valuation is easily understandable to its intended user and leveraged so that a smart loan decision can be made.
My advice to appraisers is to remember English class when developing a report – which, by the way, is much more than a form with a bunch of boxes checked. (That's how fraud seeps into the picture.)
In English class, one learns to define the topic succinctly, develop the story crisply while utilizing descriptive wording, and close with an easily understandable outcome. Likewise, the appraisal report that goes beyond the boxes and codes takes its reader on a well-described tour of the neighborhood; subject property from a functional, conditional and appeal standpoint; and market indicators in sales, listings and any hidden specters that would certainly earn its place as a five-star component of a loan file.
Consistency in valuation makes for good loans and eventually good securities in the marketplace. In order to produce regular masterpieces in valuation, appraisers must continuously keep up with the latest market trends in their area by investing in data and other technological tools to stay at the forefront of the marketplace and communicate good useful information. Just like good knives for a chef, the appraisers' data tools and office processes mean the difference between success and failure in their mission.
Fraud is about as welcome in today's valuations as a frozen dinner is welcome on ‘Iron Chef America.’ Today's industry needs to ensure it doesn't get fraud-induced indigestion from the valuation process.
Mark Chapin is the former chief valuation officer at Interthinx, based in Agoura Hills, Calif.Â
(‘Iron Chef America’ photo courtesy of Food Network)