AMC update - Customary and Reasonable fees

17 Pages·2011·0.08 MB·English

VOLUME 19 • ISSUE 12 • December2011
www.appraisaltoday.com
AMC update - Customary and Reasonable fees -
the perfect storm?
Although many appraisers don't conference said that staff appraisers ing about AMCs and low fees, has
like to work for AMCs, were being hired because the AMCs been heard by the regulators.
LENDERS TELLTHE AMCS are worried that the CFPB will The Consumer Finance Protection
WHATTO DO. Lenders are respon- require C/R fees. Of course, staff Agency (CFPB) is working on revis-
sible for what the AMCs do - regula- appraisers offer more consistency ing consumer disclosure for mortgage
tory requirements. The lenders decide and reliability, a good selling point loans. This may require that both the
what they will pay, what extra for AMCs when marketing to total appraisal fee paid to the AMC
data/analysis they want, etc. lenders. and the fee paid to the fee appraiser
Any changes will have to come Another factor, of course, is that be disclosed.
from the lenders and their regulators. they can pay staff appraisers whatev- Below is much more information
No one knows what will happen, if er they want and have much more on these issues.
anything, but it is a big issue. control and more consistent
Unfortunately, almost everyone appraisals(see below). This article $10,000 fine peroccurrence
says that Customary and Reasonable discusses that issue and others that Another factor for AMCs is the
fees did not do what they wanted, AMCs are worried about. possibility of lenders paying
including AMCs, appraisers, lenders, See below for more information. $10,000 fine for each occurrence of
etc. an appraisal independence violation
I spoke with AMCs at the recent The perfect storm - C/R fees? of the Dodd-Frank Act's TILA(Truth
Valuation Expo in Las Vegas and got Banks are worried that their regula- in lending) provisions. The Act estab-
lots of ideas for this article. tors will start looking at how their lishes civil penalties of up to
appraisals are ordered from AMCs. $10,000 per day for first violations
Why are AMCs hiring appraisers? The Interagency guidelines require and $20,000 for subsequent viola-
I have been getting many of that lenders be responsible for many tions. This applies to other areas as
employment ads in my email aspects of appraisals, including well..
newsletters. At the recent Valuation ordered through AMCs.
Expo, my question was "Why are Months of complaints from
you hiring staff appraisers." I had appraisers, consumers, etc. complain-
been hearing rumors that they were
afraid Customary and Reasonable INTHISISSUE
fees will be required by the new
Consumer Financial Protection Local and regional AMCs - a good business opportunity . . . . . . . . . . . . . . . . . . . . . . . . .Page 5
Bureau. UAD - AMC/lendererrorcheckers gone wild? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Page 7
Appraisals fortrusts and estates - an excellent diversificatin opportunity! . . . . . . . . . .Page 9
The first person I spoke with at the
December 2011–©Appraisal Today–PAGE 1
Lenders worried about AMCs State AMC regulations vary widely AMC surety bonds
Lenders are responsible for how This is a big issue/problem for all 29 states require surety bonds,
their AMCs order and manage AMCs, and is expensive. another cost for AMCs. Amounts can
appraisals. AMCs are not federally For all the states cost issues are: vary from $50,000 to $500,000 with
regulated, but lenders are regulated. • payment of a fee for every appraiser fees to be paid to bond insurance
See the list of appraisal requirements in their state on the AMC appraiser companies. Some require money to
below from the Interagency list be deposited in a trust account, not
Appraisal and Evaluation Guidelines. • registration fee just a bond.
Some regulators are saying that a Some states also require: Some require personal guarantees
2-day turnaround is unreasonable. • Surety bonds from the owners of the AMCs.
There have been few audits, but Every state is different and the regs
lenders are afraid they will increase. change over time. Keeping track of AMC cash flow problems
Just like fee appraisers, if an AMC
the requirements is a full time job for
Big AMCs subcontracting to small loses a key client, they have prob-
an AMC employee.
AMCs - lowerappraisal fees lems.
To see a current list of AMC state
LSI gets a big contract with Big The smaller AMC can have diffi-
regs, go to http://www.appraisalinsti-
Bank, but they don't want to handle culties paying appraisers until they
tute.org/newsadvocacy/stateissues.
all the orders. are paid by the lender, especially if
aspx.
They contract with smaller AMCs they are expanding quickly. Some fee
to handle their overflow. appraisers don't pay their appraisers
What is an AMC?
The result is often lower appraisal until they are paid by the client.
This varies widely among the
fees, as both AMCs need to get paid Big AMCs such as LSI, rels, etc.
states, usually based on the number
for their services. have cash reserves available. The
of appraisers. In some states, relative-
smaller AMCs may not.
ly small appraisal firms are classified
Why do AMCs have long lists of
as AMCs.
appraisal requirements? Managing quality is easierwith staff
Remember, lenders give the AMCs appraisers
How many states have AMC regula-
their requirements. AMCs want to compete on quality.
tions?
If they work for multiple clients, With staff appraisers, the AMC has
Currently 24 states have enacted
sometimes it is easier to combine all control over the appraisals complet-
regulations. Approximately 15 have
their lenders' requirements into one ed. Also, reviewing is much easier
pending regs. and some states are
list. because the appraisals are standard-
changing their regs.
ized. For example, all the pages of
AMC pricing variations As more states enact AMC regula- the reports are in the same order.
Some AMCs price by wide geo- tions, costs will increase for AMCs. However,, this does require a com-
graphic areas, such as a state. This is mitment to training.
okay for easy to appraise properties, Just like fee appraisal companies,
but not for non-tract properties. the AMCs can train their staff
Many AMCs compete on price and appraisers in how they want
turnaround. That's why they want 24- appraisals done.
48 hour turn times. This is what they Few, if any, larger AMCs can do all
told their lender client. Competing on the appraisals without fee appraisers.
price alone is a death race to the bot-
Large national AMCs typically
tom for most appraisers. Some
have staff appraisers in high volume
lenders go for the lowest fee. Turn
areas.
times are not typically a factor as
many AMCs agree to 24-48 hour turn
times.
PAGE 2–©Appraisal Today–December 2011
Staff vs. fee appraisers - a long • If there is no work, don't have to How the CFPB may affect AMC
standing issue pay anything appraisal fees
Staff vs. fee is a long standing • No employee management prob- One of the first issues to be
problem for lenders. Lenders have lems. addressed is: "Beginning the process
been hiring and firing appraisers for of combining two federally required
• No mandated employee regulations,
many years, when loan volumes go mortgage disclosures (Truth in
federal and state (½ of Social
up and down. Lending Disclosure and the HUD-1
Security, workers compensation, etc.)
I knew a local appraiser, retired No employee benefits. Settlement Statement) into one, as
now, who had done residential required by the Dodd-Frank Act. The
Fee appraiser negative factors:
appraisals for lenders since the CFPB created an effort called Know
• Hard to control.
1970s. He was periodically hired and Before You Owe to include consumer
• Have other clients with competing
fired. and industry input through this
demands.
Overall, the primary factor is con- process."
• Maintaining your own fee appraiser
trol. Good control for staff. Little The CFPB may require disclosure
panel is a hassle, particularly with
control for fee appraisers. Appraiser of both the appraisal and AMC por-
lender consolidations, etc.
consistency is also a factor. tions of their mortgage appraisal fee
The range is from all staff to all What is the ConsumerFinancial as part of regulating consumer disclo-
fee. In the past 15 years, when mort- Protection Bureau? sures.
gage brokers handled many From the CFPB web site: No one knows what will happen.
appraisals, staff appraisers were not Title X of the Dodd Frank Wall
needed. Many lenders had few staff Street Reform and Consumer AMCs and SR-10, Interagency
Appraisal and Evaluation
appraisers. Protection Act calls for the establish-
Guidelines effective 12/10/10 -
In the "old days" most appraisers ment of the Consumer Financial
anotherreason forusing staff
were staff appraisers at lenders, typi- Protection Bureau, which for the first
appraisers
cally trained by lenders. Staff was time will provide a central regulator
This is a major concern for AMCs.
also used for the "rush" appraisals for a plethora of consumer protection
So far, I haven't heard of many lender
and for high-end bank customers. Fee statutes formally enforced by various
audits of the use of AMCs, but the
appraisers were used for overflow federal agencies including the
AMCs and the lenders that use them
work. Federal Reserve, HUD and the FTC.
are worried about this. AMCs using
On July 18, 2011, President Obama
staff appraisers can help them com-
Staff vs. fee, positive and negative nominated Richard Cordray, the head
ply.
factors
of the Bureau's Enforcement
This is what lenders use to see if
Many lenders and AMCs consider
Division, to be the first Director of
they are following regulations. Many
staff appraisers to be more reliable
the CFPB. This nomination is cur-
lenders have outsourced the appraisal
and consistent.
rently pending before the Senate. The
regulations to AMCs, such as select-
Staff appraiser positive factors:
CFPB is hiring and issuing guide-
ing appraisers, etc.
• For AMCs, a higher level of service
lines.
Below are quotes from the docu-
they can promote to their clients
New rules will be issued in large
ment referring to third parties.
• Reliable
quantities and quickly. Plans are
"An institution that engages a third
• Typically pay on base plus commis- already underway, for instance, to
party to perform certain collateral
sion, so appraiser income depends on create uniform disclosures for TILA
valuation functions (i.e., AMC) on its
volume. and RESPA, one of the clear man-
behalf is responsible for understand-
Staff appraiser negative factors: dates of the new CFPB.
ing and managing the risks associated
• Employees, with all the hassle of
with the arrangement. An institution
having employees.
should use caution if it engages a
• Can be hard to fire when business
third party to administer any part of
is down.
its appraisal and evaluation function,
• Most pay a base fee, even if there is
including the ordering or reviewing
little work. Must pay minimum
of appraisals and evaluations, select-
wage.
ing an appraiser or person to perform
Fee appraiser positive factors:
evaluations, or providing access to
analytical methods or technological
December 2011–©Appraisal Today–PAGE 3
tools." periodically assess the collateral val-
What's the future?
"An institution is accountable for uation functions performed by a third
No one knows, but there is consid-
ensuring that any services performed party."
erable rumbling about AMC changes
by a third party, both affiliated and "An institution also is responsible
and many AMCs are worried.
unaffiliated entities, comply with for ensuring that a third party selects
applicable laws and regulations and an appraiser or a person to perform What you can do now
are consistent with supervisory guid- an evaluation who is competent and Where to send your complaints to
ance." independent, has the requisite experi- the CFPB:
"Therefore, an institution should ence and training for the assignment, http://www.consumerfinance.gov/con-
have the resources and and thorough knowledge of the sub- tact-us/ Or, google CFPB to get to the
expertise necessary for performing ject property's market. Appraisers home page.
ongoing oversight of third party must be appropriately certified or
arrangements." licensed, but this minimum creden-
"An institution should have inter- tialing requirement, although neces-
nal controls for identifying, monitor- sary, is not sufficient to determine
ing, and managing the risks associat- that an appraiser is competent to per-
ed with using a third party arrange- form an assignment for a particular
ment for valuation services, including property or geographic market."
compliance, legal, reputational, and “An institution should document
operational risks. with supervisory the results of ongoing monitoring
guidance." efforts and periodic assessments of
"Prior to entering into any arrange- the arrangement(s) with a third party
ment with a third party for valuation for compliance with applicable regu-
services, an institution should com- lations and consistency with supervi-
pare the risks, costs, and benefits of sory guidance and its performance
the proposed relationship to those standards. If deficiencies are discov-
associated with using another vendor ered, an institution should take reme-
or conducting the activity in-house. dial action in a timely manner."
The decision to outsource any part of "Deficiencies in an institution's
the collateral valuation function appraisal and evaluation program that
should not be unduly influenced by result in violations of the Agencies'
any short-term cost savings. An insti- appraisal regulations or contraven-
tution should take into account all tions of the Agencies' supervisory
aspects of the long-term effect of the guidance reflect negatively on man-
relationship, including the managerial agement. An institution's appraisal
expertise and associated costs for and evaluation policies should estab-
effectively monitoring the arrange- lish internal controls to promote an
ment on an ongoing basis." effective appraisal and evaluation
"If an institution outsources any program."
part of the collateral valuation func-
tion, it should exercise appropriate
due diligence in the selection of a
third party. This process should
include sufficient analysis by the
institution to assess whether the third
party provider can perform the ser-
vices consistent with the institution's
performance standards and regulatory
requirements. An institution should
be able to demonstrate that its poli-
cies and procedures establish effec-
tive internal controls to monitor and
PAGE 4–©Appraisal Today–December 2011
Local and regional AMCs -
a good business opportunity
Local and regional AMCs work Rels, corelogic, LSI, etc. are not mbers on the left side.
for a much smaller list of clients, likely to go out of business and not
so you don't have a long list of pay their appraisers. Internet search tips
requirements, compiled from all their Use "Appraisal management com-
clients. How to find contact info forlocal panies" to get AMC web sites, lists of
They vary widely, depending on and regional AMC AMCs and links to AMC directories.
the volume of appraisals and clients, You need to do some research to When you decide on your target
from one-appraiser AMCs servicing locate them by finding out how the AMC, research them on the Internet.
one or a few lenders to regional lenders are getting appraisals. Appraiser referrals
AMCs with clients in several states. Here are some ideas: Ask non-competing appraisers
Marketing: • Ask real estate agents who they rec- which smaller AMCs they like.
1. Find out which AMCs you want to ommend for loans. Go to local meet- Appraisers are often the best source of
contact. Do your research. ings of your association of Realtors. information.
2. Contact the AMCs with a sales Every time you contact a real estate Look at postings on appraiser
call. Follow up if needed. agent, ask who they use or know forums and email groups for names of
about. appraisers working nearby, but not in
AMC services to lenders - what • Go to local lenders and credit unions your area, and contact them. Look for
they offer and ask what AMCs they use. Maybe negative comments and maybe a few
Small AMCs often only do they order their own appraisals. postive comments.
appraisal ordering and tracking. • Use your local paper phone book
These are good because you don't and the Internet to find names. Check the Internet before you call
have any stips and hassles. AMCs
AMCs can offer many additional Don't forget to contact mortgage Their web sites are for attracting
services, such as: companies and formermortgage clients, but there will be useful infor-
brokerclients mation for you there.
• Reports on their activities
These companies contract with
Look for:
• Reviews, administrative and techni-
AMCs or order their appraisals in-
cal • Contact info
house.
• Tracking appraiser "performance" • Fees
Contact your former mortgage bro-
This is the basis of the "cost plus" • Turnaround
ker clients and see who they are
model. Appraisal fee plus specific • Size of company
working for and who does their
itemized AMC services. • Volume of orders
appraisals. Many of them are working
• Geographic area
for mortgage companies.
Pluses of small and regional AMCs Google the AMCs names to get lots
• Typically pay better than large of info, including appraiser com-
AMC directories
AMCs plaints, press releases, etc.
They are a good source of contact
• Easy to work with - fewer employ-
info if they have the geographic areas
ees Cold calling to pre-screen
the AMCs cover.
• Work for fewer lenders, so no big After checking them out on the
Check your state regulator to get a
lists of requirements. Internet, if you can't find much about
list of AMCs licensed in your state.
a specific AMC, try a quick screening
Go to www.tavma.org and click on
The minus of small AMCs - call to the AMCs and ask simple ques-
collection tions such as geographic area. You are
For smaller AMCs, the risk of not not selling your services, just collect-
getting paid is much larger. Keep
very, very close watch on your
accounts receivable.
December 2011–©Appraisal Today–PAGE 5
ing information. Followup, followup, followup!!!
Ask questions a customer would Keep a list of the AMCs, the date
ask, such as costs. Don't ask apprais- you called or contacted them, and the
er questions, such as if they pay C/R results. Decide on a followup date -
fees. email, call, personal visit.
This is KEYto getting the AMCs
Questions to ask afteryou get AMC you want.
name and contact person
Technical
• Are you looking for new apprais-
ers? If not, ask when you can check
back. Offer to do their rush jobs for
no extra fee.
• What are they looking for:
Certified, licensed, 5 years minimum
experience, etc.
• How to get on their list. What you
need to do.
Marketing
• I'm an appraiser. I spoke with XYZ
Credit Union (person's name if possi-
ble) who said they really like to work
with you.
• I have XX years and XX certifica-
tion. I want to work with AMCs that
are not national and bureaucratic so I
can contact you if there is a problem.
• I always respond to request for cor-
rections as quickly as possible, and
notify you ASAPif there are any
problems.
• I know your lender clients want
appraisals completed quickly so they
can close their loans.
Final remarks
• What is your typical range of fees.
Do you send broadcast orders.
Don't waste your time for an AMC
you don't want to work for.
PAGE 6–©Appraisal Today–December 2011
UAD - AMC/lender UAD error checkers
gone wild?
Many appraisers have been sub- problem with the data the appraiser value for Fannie Mae loans. As more
mitting UAD reports to entered. The information is correct, data is available, this will become
lenders. But there are very few stips but does not conform to the data clearer.
or questions from reviewers or standard. It could take a year or more to get
underwriters on UAD appraisal Underwriters can do a "manual finite analytics.
reports now. Many of the stips are override" to let the appraisal data go
because whomever wrote the through their system. Required fields
AMC/lender UAD checking software Examples are: In the UAD, 91 fields are required
is not correctly identifying UAD • Condominium unit number and 118 are conditionally required.
requirements. • Physical address (i.e., physically There are other fields that are not
When I asked my 14,000 email located in one city and postal address required. See the UAD Specification
subscribers for UAD stips, I didn't in another city, title report address document - link at the bottom of this
get many replies, probably because different than USPS address) USPS newsletter. I have book marked this
not much reviewing is done. But addresses work about 90% of the on my web browser toolbar.
their UAD checkers software are time. • Required: The data point must be
having big problems. See below. • Appraiser license numbers. Some included in the appraisal XMLfile.
Why? Because lenders are working states, such as Florida, has appraiser • Conditionally Required: The data
on a much bigger project - getting all license numbers that don't conform point must be included in the
the loan documents into XMLwith to Fannie UAD requirements (Fannie appraisal XMLfile when a defined
standardized data input. wants a number to be first, not a let- business condition exists.
Here are the lender deadlines: ter). These are the only fields required
• 9/1/11 - UAD required for by Fannie and have specific date
appraisals with an effective date Fannie wants lots of comments requirements. As seen below, in the
(usually inspection date) of 9/1/11 or Not all homes are in recently built stips section, lenders stips on these
later. tracts. The UAD tries to homogenize required fields do not always match
• 12/1/11 - lenders must start deliver- all homes in the U.S. Many times, the Fannie requirements. They may
ing appraisals to the GSEs using only comments can explain the dif- require specific entries that are not
UAD formatting. They may start ference. required by Fannie, making it very
reviewing at that date. Fannie will difficult for the appraiser to comply
have a better indication of which data Why did Fannie set up the UAD? with the Fannie UAD guidelines and
fields are the most important. In the past, Fannie only received keep track of what each lender wants.
two data elements: address and
• 3/19/11 - Uniform Collateral Data
value. Obviously, they couldn't do Link to the official Fannie document
Portal (UCDP) required. All the
any pre-funding reviews. - use this to see what the actual UAD
required lending documents must be
requirements are.
With the UAD, Fannie will have
delivered with UAD standardization.
This is your resource for UAD Stips
much more data.
THIS IS THE LENDERS' DEAD-
and questions
LINE.
Fannie's research on early UAD To see the entire dataset description
This is a huge change for lenders.
submissions go to
Appraisals are at the bottom of the
Fannie tested about 60,000 UAD https://www.efanniemae.com/sf/lqi/u
pile.
submissions from 180 lenders, look- mdp/pdf/uadreqsforlenders.pdf pub-
UAD stips may start picking up,
ing specifically at two critical data lished 8/11/11. Or google "Uniform
but I suspect that most lenders will
fields: subject address and appraiser Appraisal Dataset Specification". The
focus on delivering their loan docu-
license number. FAQs are also useful Google UAD
ments.
FAQs to find it.
What is Fannie planning forthe It is easy to understand. Just search
Manual over-rides
future on UAD fields?
for what you need and bookmark the
Some of the data field entries cause
No one knows for sure which data
link.
error messages because there is a
fields will be the best predictors of
December 2011–©Appraisal Today–PAGE 7
What about lots of "errors" when Fannie/Freddie lists of UAD and not make an adjustment. I told them
running UAD check in forms non-UAD forms and, almost a week the subject and comp were not
software? later, they removed that require- enough to change the C rating, but
Typically, when you are filling out
ment." there was a difference between the
the UAD, forms vendors focus on
"I have one AMC who has just two.
critical data such as Q1 etc. and alerts
instituted an "automated UAD rule I am sure more stips are coming, as
you when you fill it out.
checker" program in their submission are more changes."
However, the error checker finds
website that has been driving me My comment: The reviewer is
many other less important UAD dis-
nuts with the neighborhood bound- wrong on distance. The distance
crepancies in your reports. Getting
aries section. The rule checker requirement is: Reporting Format:
20-50 errors is not unusual for the
requires there be nothing in the field Proximity to Subject – Numeric to 2
first few times. Your errors will
except the 4 boundaries, with the decimal places + ‘miles' +
decline as you learn how to fill out
fully spelled out words North, South, Directional. Example: 1.75 miles
the data without prompts.
East and West coming AFTER each NW. The reviewer is wrong on the
Learn how to get no errors. boundary. No abbreviations, no other C4 adjustment. This error can signif-
If you think your vendor is not cor- words allowed in this section, AND icantly affect the value.
rect about the UAD requirements, it must be in the order N, S, E, W, N, "Very few stips so far. Biggest
contact your forms vendor. E, S, W(like I had always done, as if request are to explain why different
drawing a diagram around a neigh- Quality of Construction does not
AMC/lenderUAD checkers gone
borhood) is NOTacceptable to the automatically mean a adjustment and
wild!!
rule checker. I do not believe that issues with UAD provided addresses.
This definitely needs to be straight-
this is what UAD says." My com- When the UAD address conflicts
ened out, unless each lender/AMC
ment: the UAD specs don't say this. with title or deed work bank wants to
adds requirements that are not in the
The specs say: "The appraiser should match to their documents not the
UAD specs, and may conflict with
provide an outline of the neighbor- USPS address." My comment: See
the specs.
hood boundaries, which should be the previous stips. Address conflicts
Some appraisers are getting lots of
clearly delineated using ‘North', are a problem. The underwriter can
stips and others get very little,
‘South', ‘East', and ‘West'..." No do a manual override.
depending on the AMCs' lender
order or abbreviations are included.
clients.
"Another AMC's reviewers require What if Freddie and Fannie are
Some of them are on required that, if I am inspecting a house with, dissolved?
fields, other are on the non-required say, a 2 car garage, that I enter a zero According the Alfred Pollard,
fields. Some conflict with the UAD in the carport line (even though I haead of FHFA, the GSEs’regulator,
requirements. don't check the box). This AMC has many politicians don't understand all
They are running the appraisal no issues with other fields left blank, the tasks Fannie performs. Who will
report data through an automated but for some reason thinks this one do them all is very murky.
checker, often set up by the lender,
must have a zero in it." My com-
which may not be correct. Where to get more information
ment: The reviewer is correct. here is
Appraisers are receiving stips that the specification: "If the subject Send your UAD questions to:
are not required by Fannie's UAD. I property has a driveway, garage, [email protected]
hope some of these issues are and/or carport, the appraiser must Check out the previous articles
resolved before everyone is checking enter the number of spaces for each published in Appraisal Today at the
UAD fields 3/19/11. What a mess!! type of car storage; if none, enter the special paid subscriber Web page.
Go to www.efanniemae.com
numeral zero (0).
Here are a few stips from Appraisers are listed under Industry
"So far the only stip I have gotten
appraisers: Specialists
from an AMC is that the distance
"My favorite recent UAD stip was
from subject to comps must be in
for an appraisal rejected by one of
"miles"(lowercase) and not MILES
our secondary market buyers as non-
(UPPERCASE). I asked ACI and
UAD compliant. They insisted the
they said no that was not a field that
report be resubmitted in UAD format.
is case sensitive. I did have one
It was a duplex on the FNMA1025
underwriter tell me that if I called the
form. Instead we forwarded the
subject C4 and the comp C4 I should
PAGE 8–©Appraisal Today–December 2011
Appraisals for trusts and estates - an excellent
diversification opportunity!
Most of my current appraisal around pressure, value pressure,or gains tax
work is for estates and trusts. payment problems. 9. Family limited partnerships and
Many are multiple appraisal assign- other types of trusts/partnerships
ments. I am currently working on a What forms to use?
19 property assignment in my city DO NOTuse ANYof the current What if you only do residential or
with a $15,000 fee. What types of Fannie forms for ANYnon-lender commercial appraisals, not both?
properties did I appraise? 17 were work. I use the old Fannie form and You can hire another appraiser to
residential rentals, homes, 2-4 units, others use a generic form. do the appraisal types you cannot do,
and apartment buildings. Two were I regularly hear about appraisers or appraisals in a geographic area
small commercial. using the new forms for divorce and where you don't work. Or, you can
If you want to diversify from getting into trouble in court. refer the executor or attorney to
another appraiser. I have done both. I
lender/AMC work, I strongly recom-
Why do we have an estate tax in usually give them another appraiser's
mend estate appraisals. Any appraiser
this country? name as I don't want to manage their
can do them. The only tricky part is
It was started to make sure we did- appraisals.
going into the past, which is not that
n't have the inherited aristocracy of
difficult. Very seldom have court tes-
Europe, which controlled much of What if the estate ("death") tax is
timony, paid full fees in advance (or
the wealth there in the past. repealed?
50% up front). The effective date of
Now, with the reduction in the tax Estate taxes seem to change regu-
the appraisal is almost always in the
limit and lots of ways to avoid it, it larly, depending on politics, mostly.
past.
is a factor in income disparities in Repeal of all estate taxes is unlikely
Many appraisers are worried about
this country. Many states have due to the loss in income for the
their futures - will appraisers be
eliminated estate taxes as they are Federal Budget.
needed 5, 10, or 20 years in the
very unpopular. The federal govern- The Internal Revenue Code gives
future? Most appraisals are done for
ment keeps changing the limits, but each U.S. citizen a "coupon" that can
lending purposes. Lending has been
it is a large sum of money to lose. be applied against their estate tax bill.
changing to placing much more
In 2009 the "coupon" was
emphasis on the credit worthiness of
When are appraisals needed? $3,500,000, and for the 2010, 2011
the borrower than the value of the
Although we usually think of and 2012 tax years the "coupon" is
collateral.
appraisals for estate taxes when $5,000,000.
Even if there are problems requir-
someone dies, actually many Under the provisions of the Tax
ing appraisals in the future, lending is
appraisals are needed for other pur- Relief, Unemployment Insurance
a notoriously cyclical business.
poses. As an overview, a non-exhaus- Reauthorization, and Job Creation
Why not try working for other
tive list of when an appraisal could Act of 2010, the $5,000,000 estate
types of clients who provide a more
be needed is: tax exemption and 35% estate tax
stable source of income? An excellent
1. Sale to a relative rate are only scheduled to be in effect
option for both commercial and resi-
2. Partitioning an estate among the until December 31, 2012, at which
dential appraisers is appraisals for
heirs or beneficiaries time the federal estate tax laws will
estate, trust, and gift purposes.
3. Sale to a non-relative revert back to the laws that were in
With the recent popularity of living
4. Prior to listing the home for sale effect in 2001/2002. This means that
trusts, and sophisticated tax avoid-
5. Partial interests on January 1, 2013, the federal estate
ance methods such as family limited
6. Alternate valuation date - estate tax exemption will drop all the way
partnerships, appraisals are needed
tax purposes (if the property value down to $1,000,000 and the estate tax
both for tax planning purposes prior
declines 6 months after the date of rate will jump up to 55%.
to a property owner's death and for
death) What will happen in 2012? No one
settling an estate after death.
7. Gifts and gift trusts (to charities or knows but repeal of the federal estate
Why do I like estate and trust
children, typically) tax is very unlikely.
appraisals? I very rarely have turn-
8. Determining the basis for capital
December 2011–©Appraisal Today–PAGE 9
Who pays the estate tax? spouse and no taxes are due at that to purchase the property from the
In 2011, estate tax liability will total time. estate, the executor will likely want
an estimated $10.6 billion in 2011. When the second spouse sells a an appraisal as part of his or her fidu-
The top ten percent of income earners property or dies, capital gains taxes ciary duty.
will pay 98 percent of this total. The are due, but only for an increase over
richest will pay $5.4 billion or 51 per- the basis established when the first Who can do the valuations?
cent of the total. spouse dies. The IRS does not specify that a
licensed appraiser has to do the
Total estate tax returns for 2011 are When my husband died 7 years
appraisals. The owner can provide a
estimated at 8,600 with 3,240 of the ago, I had our properties appraised.
value, a real estate agent, or just about
returns as taxable. Our home had almost tripled in value
anyone, except for gift returns (see
The estate tax is highly progressive. ($385,000 to $900,000) since our pur-
below).
The top ten percent of income earners chase in 1985. When I sold it 4 years
pays virtually all of the tax; over half later, I paid no capital gains tax. For larger estates, a licensed
appraiser is preferred. If the return is
is paid by the richest 1 in 1,000.
Much of the political debate about the Who orders the appraisals? challenged, the IRS will bring out
estate tax centers around its impact on For residential appraisals (up to a their very qualified experts to refute
family farms and small businesses. In few homes or small income proper- the estate's valuation.
fact, very few farms or businesses ties) I am often called by the execu- An appraiser with superior creden-
actually pay the tax. Small farms and tor, who gets my name from a real tials and methodology and local expe-
businesses will pay under $10 million estate agent or out of the Yellow rience is preferred as the tax court and
in estate tax in 2011 (estimated), less Pages. Usually the attorney or circuit courts often look to the best
than one tenth of 1 percent point of accountant asks the executor to obtain appraisal done by the most competent
the total revenue the tax will collect. an appraisal. appraiser rather than "splitting the dif-
Estate tax liability will total an esti- For larger estates, the appraisals are ference."
mated $10.6 billion in 2011. The top typically handled If there is no estate tax liability, for
ten percent of income earners will pay by: example, because of the marital
98 percent of this total. The richest 1 1.Attorneys (estate distribution, tax deduction, sometimes a letter from a
in 1,000 will pay $5.4 billion or 51 issues) real estate agent is used. However,
percent of the total. 2.Accountants and enrolled agents this "appraisal" will be used for estab-
If there is no federal estate tax, (tax returns) lishing the basis for future taxes, and
obviously the income will be lost for 3.Beneficiaries of gift trusts can be challenged by the IRS.
the federal government. It seems 4.Executors and administrators I always mention the possibility of
unlikely it will be discontinued. 5.Trustees an IRS challenge when the caller is
reluctant to order an appraisal or is
Some "little people" are affected. I
regularly appraise larger estates with Appraisals fornon-tax purposes shopping for a low fee.
multiple properties where some of the I regularly do estate-related
properties will have to be sold to pay appraisals for non-tax purposes. The Appraisals forgifts
IRS rules for appraisals on gifts is
estate taxes. executor sometimes needs values to
stricter than for estates, primarily due
partition an estate. For example, the
to issues with personal property valu-
Appraisal forstepped up basis decedent has two children, one gets
ation, such as paintings.
No one knows the future of federal the house and the other gets the
estate taxes or when property will be stocks, but the estate is to be divided IRS Form 8283, Noncash
sold. I always strongly recommend equally between them. Or, two or Charitable Contributions (over $500)
getting an appraisal as of the date of three properties are left to the chil- requires that the appraiser sign a dec-
the first spouse's death to set the basis dren, but the will doesn't specify how laration, including "I declare that I
for capital gains. they are to be divided. hold myself out to the public as an
appraiser or perform appraisals on a
Most of my estate work is to estab- Sometimes the beneficiaries can't
regular basis ... I understand that any
lish a new capital gains basis as of the agree on "how much they can get"
false or fraudulent overstatement of
date of death for the "marital exemp- from the property. One of them may
the property value ... may subject me
tion". not trust real estate agents and think
to the penalty under section 6701(a)."
This is particularly important when they 'will try to list it low.' The execu-
the first spouse dies, as the real estate tor gets an appraisal.
is a "pass through" to the surviving If a relative or a private party wants
PAGE 10–©Appraisal Today–December 2011