Over the last year, there has been a tremendous increase in the use of broker’s price opinions (a.k.a. comparative market analysis, broker’s estimate of value, etc.) that are being performed by real estate brokers and salespeople, in lieu of appraisals.  While BPOs were previously used for very limited purposes, they are now being used as valuation products in the finance arena, primarily for the review of distressed properties prior to short sales or foreclosure.  They are also being used in areas previously unimagined several years ago, including segments of the commercial market.

The increase in the use of BPOs for these purposes is largely a result in the downturn in the real estate market, and a reduction in the commissions being earned by brokers and salespeople on the sale of property.  Real estate professionals have seized upon BPOs as a way to supplement their incomes.  In addition, other industries, particularly in the lending arena, have picked up on the fact that they can save a significant amount of money by ordering BPOs instead of appraisals, regardless of their quality level.

However, the BPO work being done by brokers and salespeople may not be legal.  In fact, in West Virginia brokers and salespeople may not lawfully issue a broker’s price opinions or any other estimate of the value of real property for compensation, even in connection with the sale, or potential sale of real property.  According to the West Virginia Real Estate Commission, “the rendering a broker’s price opinion for compensation constitutes the activity of real estate appraisal for which a license issued by the Appraiser Board is required.”  In many other states, the ability of a real estate professional to perform a BPO is only authorized if it is directly related to a listing or a prospective listing.  For example, in Mississippi, it is permissible for a broker or salesperson to “in the ordinary course of business, give[s] an opinion as to the price of real estate for the purpose of a prospective listing or sale.”  In that state, any other expression of the value of real property is an appraisal and is subject to appraiser licensing/ certification laws and appraisal standards.  Laws similar to Mississippi’s  are on the books in at least 17 other states.

The appraisal profession does not dispute that BPOs have their place in the real estate sales marketplace.  However, including the review of distressed properties within the definition of the listing process is a stretch.  The likelihood that a broker or salesperson will obtain a listing as a result of performing a BPO for a short sale or foreclosure is remote.  As such, a broker or salesperson that is performing a BPO for these, and other, purposes could be violating the rules applicable to their profession, or the rules applicable to the performance of appraisals.

Because of this gray area, there has, not surprisingly, been a flurry of activity at the state legislative and regulatory level as it relates to expanding the use of BPOs.  Just in the last several weeks, proposals have been offered to expand the use of BPOs to what are typically appraisal assignments, begging the question – if it looks like an appraisal and carries virtually the same information as an appraisal, why isn’t it called an appraisal and subject to the same regulations as an appraisal?  In Nevada, the state brokers’ and salespersons organization has approached the Real Estate Commission to issue regulations to expand their authority to perform BPOs outside of the listing process.  In Utah, the Department of Natural Resources has proposed using BPOs as an alternative to appraisals when purchasing or selling state land.  And, in Alaska the Department of Administration has awarded contracts to determine the market value rent for the properties that it leases throughout the state to several brokers who perform BPOs, rather than to appraisers. 

In each of these states, the Appraisal Institute’s chapters are working to protect requirements that certified or licensed appraisers be utilized to perform all valuation assignments.  However, beginning in January, 2009 the decision whether to grant additional authority to brokers and salespeople will rest with the state legislatures.  The industry can only hope that our elected representatives will recognize the added consumer protection benefits that are inherent in valuation services performed by regulated appraisers, as opposed to non-regulated sales agents.

The Appraisal Institute also continues to remind policymakers, clients and appraisers themselves that the Uniform Standards of Professional Appraisal Practice position appraisers to offer competitively priced products that leverage their unique knowledge and skills. The Scope of Work rule allows appraisers to offer USPAP-compliant services that can effectively compete against BPOs, should they desire.

“Many may see this as an appraiser versus broker issue. It is not,” says Scott DiBiasio, Appraisal Institute’s Manager of State & Industry Affairs.. “The questions being asked by clients are critical to the proper function of today’s real estate markets. However, real estate brokers and sales people are experts in the marketing and sale of real estate and can competently prepare a price estimate as part of the listing process,” he said.

“On the other hand, protecting the interests of the lender, the buyer and the public by using their education, training, and expertise to provide an independent opinion of the value for a property is something a regulated appraiser can best provide,” DiBiasio concluded.

Inside the Beltway welcomes your thoughts on this issue. Send us an e-mail at insidethebeltway@appraisalinstitute.org.

At an October 24 hearing, Yankees President Randy Levine testified that if it were not for the payments in lieu of taxes (PILOTs) that are the topic of much debate at present, the new Yankee Stadium would not have been built and the team would have left the Bronx. His comments came before the House Domestic Policy Subcommittee, in which he also addressed allegations that New York City officials used a higher valuation of the project to obtain tax-exempt bonds to fund construction of the new stadium.

The city initially valued the land at $26.8 million and later revised it to $204 million. Martha Stark, the city’s finance commissioner, testified that the value was revised because the initial assessment was based on the property's condition at that time, and did not take into consideration the state of the stadium after completion. However, Rep. Dennis Kucinich, D-Ohio, the subcommittee’s chairman, referenced correspondence from city officials to the city’s Department of Finance regarding the Yankees' interest “in seeing that the assessed valuation [would] be high enough to generate as much PILOT for tax-exempt debt as is lawful and appropriate.”

Based on the revised value, the Yankees received PILOT-backed tax-exempt bonds totaling $950 million. Levine said that “contrary to some assertions, debt service on the bonds to finance the costs of constructing the new Yankee Stadium will be paid entirely from PILOT payments made by the Yankees.” However, Kucinich argued that this has forced construction costs onto city and state taxpayers, and has denied federal tax revenue totaling hundreds of millions of dollars.

Other subcommittee members expressed different views regarding the investigation. Rep. Elijah Cummings, D-Md., stated “the federal government was simply taken to the bank,” while Rep. Chris Cannon, R-Utah, voiced concerns that the allegations were "demonizing the city of New York.”

In light of the recent $700 billion government bailout, Congress and banks recognize that tighter regulations need to be developed and enforced. The question that remains, however, is how to implement stricter regulations. Thus, despite Congress being in recess, former government officials and leaders of financial-services industry groups met October 21 with the House Financial Services Committee to discuss what form the looming increase in federal oversight over lending institutions will take.

As currently structured, oversight over financial institutions and markets is shared by eight different committees, with four in the House and four in the Senate. Many believe the oversight by multiple committees hinders Congresses ability to quickly address the issue of regulatory reform. One idea put on the table at that meeting would see the House create a special committee to rewrite the regulatory rulebook for the financial services industry. This special committee would likely have the ability to cut through bureaucratic red-tape.

When asked his opinion regarding the idea of a select committee, Rep. Barney Frank (D-Mass.) expressed his openness to the idea."I think that's probably going to happen," he said.

On October 22, the House Oversight Committee held a hearing to discuss the role of the major credit ratings agencies in the financial crisis. The ratings agencies were heavily criticized by both Democrats and Republicans for abusing the trust of the system and not working in the best interests of the economy. The committee looked at whether the business model of companies such as Moody's, Standard & Poors and Fitch might inherently represent a conflict of interest that contributed to the overvaluation of subprime residential mortgage-backed securities. It has been suggested that a new credit rating model may emerge in which companies are paid by investors.

According to James B. Lockhart, III, Director of the Federal Housing Finance Agency, assisting borrowers at risk of losing their homes and reducing foreclosures are the most “critical components of stabilizing the mortgage market.” , His comments came before the Senate Committee on Banking, Housing, and Urban Affairs, where he spoke about loan modifications, the importance of available credit, and how to prevent credit standards from tightening to a point that he believes would be detrimental to the economy.

“Keeping people in their homes is critical, not only for their families and their neighborhoods, but also for the overall housing market. A more systematic approach to loan modification is essential,” Lockhart said. To that end, the FHFA has encouraged the GSEs to accelerate their loan modifications with features that include a principal write-down or forbearance. IndyMac Federal Bank, which services mortgages for both Fannie and Freddie, has already agreed to join the FDIC’s loan modification program.

Lockhart went on to say that he expects “the ongoing work on loan modifications being done…to continue to be a high priority for the Enterprises, both as a matter of good business and as a matter of supporting the Enterprises’ mission.”

He also noted that since placed into a conservatorship, both Fannie Mae and Freddie Mac have been working hard on behalf of homeowners – something members of the banking committee have been strongly urging the GSEs to do.

To read Lockhart’s full statement to the Senate Committee on Banking, Housing, and Urban Affairs, visit, www.ofheo.gov/media/testimony/revisedtestimonySBC102308.pdf. 

As previously reported in ANO, the Securities and Exchange Commission is today (10/29) holding its first of two roundtable forums on mark-to-market accounting and current market conditions. The SEC roundtables, which are part of a congressionally mandated study under the Emergency Economic Stabilization Act, are intended to provide input on fair-value accounting practices.

Expected to be a key point of discussion is the Federal Deposit Insurance Corporation’s proposal that would pave the way for the federal government to start guaranteeing home mortgages by using part of the $700 billion federal rescue package to address the blight of foreclosures affecting the nation.

As already presented to the Senate Banking Committee, the FDIC’s proposal would allow a lender to receive a government guarantee that troubled loans would be repaid. In exchange, the lender would be required to significantly drop the interest rate, reduce the principal or extend the life of government guaranteed loans.

The date and time of the second roundtable has yet to be announced.

In early November, the Appraisal Institute will release Capitalization Theory and Techniques Study Guide, third edition, authored by Charles B. Akerson, MAI, and edited by David C. Lennhoff, MAI, SRA. While markets, methodologies and technology may change, the need to understand the mathematics of finance does not. Capitalization Theory and Techniques Study Guide is an essential resource for practitioners and students of the income capitalization approach to value.

This updated study guide contains in-depth coverage of the capitalization approach, including a historical perspective and practical instructions for applying capitalization techniques. It also offers key terms, symbols, formulas, financial tables and calculator keystrokes as well as references to important appraisal resources. The text also features 15 lessons with hands-on exercises, more than 50 practice problems and two case studies.

To access the table of contents or order online, visit www.appraisalinstitute.org/captheory or call 800-504-7440 (8 a.m. – 5 p.m. ET) to order. Use promotion code CAP08E when ordering. Member price is $40; non-member price is $50 plus shipping & handling.

The Appraisal Institute certificate program Appraising Historic Preservation Easements is being offered in New York city November 12 through 14. Intensive training and discussion on the valuation of historic preservation easements and a focus on appraising the value of preservation easements donated as charitable gifts under the Internal Revenue Code comprise the content of this course. The methods and techniques learned can also be applied to the appraisal of preservation easements granted in order to obtain either state or local income tax or property tax deductions/credits.

All Appraisal Institute members successfully completing and passing the examination for Appraising Historic Preservation Easements will be listed in our Certificate Registry in the "Find an Appraiser" directory. Designated members’ listings include a direct link to their Member Profile. 

Appraising Historic Preservation Easements is geared toward certified real estate appraisers who appraise income-producing properties or single-family homes, IRS agents, real estate attorneys, preservationists and anyone involved in historic preservations.

Registration fee is $325 for members; $375 for non-members. This course has been approved for 20-hours of Appraisal Institute continuing education credit and has been submitted for 20-hours of state continuing education credit. For more information and to register for an upcoming offering in New York or Alexandria, Va., visit www.appraisalinstitute.org/education.

Fitch Ratings said that it expects home prices to drop another 10 percent before stabilizing in 2010. So far, home prices have fallen 22 percent and will likely decrease by 30 percent from peak prices in 2006. Fitch indicated that the expected drop would reverse the home price increases achieved between 2004 and 2006. Prices are currently at early 2004 levels and will likely return to 2003 levels before the pace of decline will moderate, the agency said.

“Should economic conditions become much worse than expected, home prices would decline more than Fitch’s projection and price stabilization would be delayed,” noted Huxley Somerville, Group Managing Director and U.S. Residential Mortgage Backed Securities Group head at Fitch. “Higher mortgage rates and tighter underwriting also will continue to put downward pressure on prices.” Appraisal Institute Frank Lucco, SRA, of Houston, stated, “I’m glad people are realizing that home price stabilization is not going to be a 90-day fix. More and more experts are referencing 2010 and beyond, which makes much more sense.”

According to Suzanne Mistretta, Senior Director at Fitch, “Government programs such as the U.S. Treasury’s Trouble Asset Relief Program and expanded mandates for Fannie Mae, Freddie Mac and Federal Housing Administration to increase loan purchases and originations may facilitate liquidity in the housing markets, which could have a positive impact on prices.”