Saturday, March 17, 2012

Some thoughts about "geographic competency" in international assignments

U.S. appraisers are largely governed by a document known as Uniform Standards of Professional Appraisal Practice. One key rule in USPAP is called the Competency Rule.

The Competency Rule requires that the appraiser determine his own competency prior to an appraisal assignment, and if he lacks certain competencies necessary to complete the assignment, he must disclose the lack of competency to the client and then take all the steps necessary to acquire the competency needed to complete the assignment correctly. This Rule also specifically states that “in an assignment where geographic competency is necessary, an appraiser who is not familiar with the relevant market characteristics must acquire an understanding necessary to produce credible assignment results for the specific property type and market involved.

Sometimes when I’m socializing with other appraisers and I mention my international work, I encounter an indignant residential appraiser who asks “What about the Competency Rule!?”

For instance, during a coffee break at an appraisal seminar, I told a Senior Residential Appraiser that I had just returned from appraising one square mile of beachfront land in Fiji. He sternly rebuked me with “What about the Competency Rule?”, as if an American appraiser cannot possibly conduct market research there without a subscription to the Fiji residential MLS (multiple listing service).

I can understand residential appraisers’ preoccupation with geographic competency when out-of-town appraisers invade their turf and don’t even know that the next block from the house being appraised is in a better or worse school district.

As for Fiji, my client already knew I had never been there, saying “We know, and we trust you to ask the right questions,” whereupon I made the efforts to learn the market for this entitled leasehold development land in Fiji. [I have been there three times since.] This included a visit to the relevant government office to discuss planning approvals and Fijian law relating to leasehold interests, and interviews with two appraisers with local knowledge, including the always-helpful Professor Matt Myers, MAI from the University of the South Pacific in Fiji. It also involved reading countless news articles and blogs about other large-scale, beach-oriented tourist developments and their progress.

A locally done appraisal had already been provided by the borrower. It used small lots as comps for this one-square-mile parcel and failed to disclose that one of the two ground leases was expiring in one year. How much value can be assigned to an expiring ground lease with no assurance of renewal? This Fijian property was later foreclosed on. The local appraiser has since lost his appraisal license.

Another time, I was sent to review an appraisal report in Canada. The question from the client was “Does this appraisal meet USPAP standards?” Discussing this on an on-line appraisers forum, one appraiser became indignant. “What about the Competency Rule?”

My response was that I saw myself as more of an authority on USPAP than Canadian appraisers, some who say they comply with USPAP, but really don’t. In this particular case, the Canadian appraiser violated USPAP by failing to properly disclose “extraordinary assumptions”. In this instance, his report assumed the land had been legally subdivided, but it hadn’t been.

Commercial appraisers don’t criticize me about the geographic scope of my work, probably because there is no guarantee that a local appraiser is competent in the property type being appraised. Most local commercial appraisers do not know how to appraise gas stations or golf courses or hospitals, for instance. Sometimes a specialist needs to be called in from out-of-town, particularly when the only comparable sales available are likely to be in other states, as for ski resorts, for instance.

But there are sometimes other reasons making it preferable to bring in an outside appraiser, such as:

1. Independence from local powerbrokers. I once appraised a proposed lakeside development in a relatively unpopulated county, and the developer, who insisted that his property was worth $5 million, also insisted that a local “MAI” (member of the Appraisal Institute) be used instead. I searched for my client and found only one MAI in the entire county. He told me that he had already been contacted by the developer and refused the assignment. He said that the property couldn’t possibly be worth $5 million and that if he gave his honest opinion, which would probably be around $1 million, he might not be able to get any more work in that county, a common problem for any appraiser in a small market, as was described by Appraisal Institute President Richard Powers at the Appraisal Foundation's Fraud Symposium in 2006. Once you've upset Boss Hogg (The Dukes of Hazzard), he’ll make sure you never appraise in Hazzard County again.

2. Objectivity. Some appraisers think as boosters for their local community, even saying with a straight face that the laws of economics (such as the law of supply and demand) do not apply to their own community. Some are also hamstrung by old data and don’t stay alert to recent new trends. I started my career in Texas in the mid-1980s and saw it then, and then encountered it again when I moved to California in the late 1980s. As vacancies escalated, some local appraisers refused to believe that commercial property values were decreasing. It had never happened before in their states.

3. Having a broader perspective. One of my specialties is super-regional malls, and I often have to gather data from several states. It brings a smile to my face when a local residential appraiser suggests that I can't appraise the local regional mall because I don't have access to the local MLS (listing service for residential properties.)

4. Level of training. There are many countries that do not set any minimum level of training or credentialing for persons advertising themselves as appraisers or valuers. And even if they did have proper training, there is often no local enforcement of ethics.

5. Lack of sanctions against dishonest appraisers.  Unfortunately, in most countries, an appraiser or valuer is no more than the paid advocate of the one who hired him.  I recently worked in a Caribbean nation, for instance, where the "most respected" local appraiser valued the subject property at more than twice the price the property had been listed for sale for the last 4 years. 

6. Lower level of due diligence.  My number one client does not allow me to delegate valuation work.  I'm allowed to hire a local appraiser to accompany or advise me, but this client expects more research than the typical valuer/appraiser is prepared to do, such as background checking, studying listings, and exhaustive verification of the property owner's representations.

Some larger properties may need a larger perspective, too.  Consultant Stephen Roulac, for instance, states:

The local expert may know the local scene, but may lack knowledge of how the local scene fits into the larger context...The local expert may have no real idea whether out-of-town capital would be interested or not interested in that market.  The local expert may be clueless as to whether people residing in other places would want to live in that market, locate a retail store in that market, or put an office in that market. Relying too heavily on the local expert may be a big mistake.”[1]

[1] Stephen Roulac, 255 Real Estate Investing Mistakes, Property Press: San Rafael, CA, 2004, p. 239.

The USPAP Competency Rule is actually a good rule. I do my best to comply with it, and I don’t see the Rule as automatically prohibiting me from getting on an airplane to go value a property, as long as I discuss the matter with my client beforehand, the client trusts me enough to continue with the assignment, and I perform the necessary inquiries and market research to become familiar with the distant market.
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