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Saturday, September 1, 2012

AIC Backlash Over Mike's "Home Appraisers" Column

This is one of several editorial letters printed within the last couple of weeks responding to Mike's newspaper column "No Set Standards For Home Appraisers" (see The Appraiser Needs Appraising for more information).  The author is a member of the AIC (Appraisal Institute of Canada) and sought to "clarify some misconceptions illustrated by Mike Holmes regarding the appraisal profession." Read the letter, and I'll put my two cents in at the end...



Become aware of how the appraisal profession operates

Re: No set standards for home appraisers, by Mike Holmes, Postmedia News, Aug. 22.

As a member of the Appraisal Institute of Canada, I must clarify some misconceptions illustrated by Mike Holmes regarding the appraisal profession.
As Mr. Holmes indicated, there are a few associations in the real estate valuation field. The Appraisal Institute of Canada was founded in 1938. There are 4,800 members across Canada and around the world.
New members of the Appraisal Institute of Canada are required to have a university degree.
That being said, the degree serves as an undergraduate degree, after which the graduate program offered by the University of British Columbia eventually leads to either a CRA (residential) or AACI (residential/commercial/industrial) designation from the Appraisal Institute of Canada.
The consumer can rest assured that every appraiser that has achieved either the CRA or AACI designation has been educated in basic construction of both residential dwellings and, on the commercial appraisal level, structures utilized for commercial, multi-residential, institutional and industrial properties.
The insinuation by Mr. Holmes that appraisers lack this knowledge is quite inaccurate.
Appraisers are not home inspectors. We inspect properties with construction knowledge above that of the typical homeowner. We know the warning signs of leaky roofs, poor ventilation, and leaky basements.
Professional practice dictates to our members to advise the client to have an expert inspect potential problematic issues with a property.
As for standards, our members are bound by the Canadian Uniform Standards of Professional Appraisal Practice. This publication is our governing set of principles, requiring all AIC members to maintain ethical and professional standards.
With respect to Mr. Holmes’s homeowners, appraisers are experts at analyzing market data to establish value. Most appraisal assignments ask the appraiser to determine market value, particularly for lending institutions.
The consumer needs to know that appraisers don’t make the market, nor do they manipulate it.
Appraisers research, analyze and interpret market data. Valuation tools such as paired sales analyses and capitalization techniques are utilized to ultimately establish the value for a property being appraised.
I recently appraised a property that was previously purchased new for $400,000. The current market value (and sale price) was less than $315,000. Why? This market is in an economic depression.
Could a builder construct that house for $315,000? No. Why? Because the builder would take a loss due to the high cost of materials (established outside of this marketplace). As for that $2 million house referred to by Mr. Holmes, expert advice should have been retained before building in that undesirable neighbourhood.
It is always disappointing for a homeowner whose house is appraised for lower than anticipated. And appraisers certainly can be proven wrong — I know I have been.
But to dismiss the lender’s due diligence of hiring an appraiser as overkill is somewhat nearsighted.
Banks hire appraisers because we are the experts and they want to protect their investment, regardless of the condition of the housing market.
Consumers should browse the AIC website to become more familiar with educational requirements, our standards, as well as information regarding returns on home renovation investment.
Mr. Holmes is an invaluable resource and a charismatic personality who has provided informative information in the home inspection/construction discipline. Unfortunately, he, and most homeowners, is unaware of how the appraisal profession operates. We are well-educated, well-regulated professionals who provide a necessary component of the lending practice in which so many Canadians are involved.
CHRISTINE E. FAY, Windsor chapter secretary, Appraisal Institute of Canada



First, before I say anything, I'd like to make the following clarifications. I don't speak for Mike - in fact, I don't know him at all! I'm not even Canadian, and I'm certainly not a contractor. That said, my only goal is to compare the above editorial with the column that Mike wrote.

Again, the column in question written by Mike Holmes can be found here.

Mike's article starts off with a story about an email he received from some distraught homeowners caught in a really bad situation. They wanted to fix some bad "improvements" done by the previous homeowners, but couldn't secure a loan because the home appraiser the bank hired said that the home's value was not enough to support the loan. Mike states,

Was the appraiser wrong? Was their home that bad? I don’t know. I haven’t seen the house. But the homeowners didn’t think so. That’s why they emailed me. They thought the appraiser didn’t have the right skills to evaluate their home. And I’ve got to wonder.
 
As inflammatory as that statement might seem, there's really nothing wrong or incorrect about it. Mike is merely setting up the rest of the column to be an opinion piece, one in which he gives his own unique perspective on an issue. Phrases like "I don't know," and "I've got to wonder," and "they thought" should be red flags to anyone that Mike is about to tell you what he thinks about something. Some columns Mike has written are pretty inoffensively factual, like an article about roofing shingles or radon gas. In this article, though, Mike is making it perfectly clear from go that this column is going to be different, and he will be making statements about life according to Mike Holmes.

Mike's bone of contention with with appraisal industry? Well, he states several. First,

There isn’t a single set of standards. The skills required to be an appraiser depend on the association an appraiser belongs to.
 
His second bone of contention, which ties into the first,

Some associations require a university degree as a first step. Others a business degree. And some don’t require a degree at all...one association requires its members to have a university degree — in anything. Could be sociology or art, it doesn’t matter. Then they have to complete a university-level education program specific to appraising.
 
It's at this point where I believe the AIC and the author of this editorial letter took exception. Although what Mike said is essentially true, the author representing AIC disagreed with Mike's insinuation that there was something wrong or unprofessional with this model. They countered with

New members of the Appraisal Institute of Canada are required to have a university degree. That being said, the degree serves as an undergraduate degree, after which the graduate program offered by the University of British Columbia eventually leads to either a CRA (residential) or AACI (residential/commercial/industrial) designation from the Appraisal Institute of Canada.
 
I actually see the AIC's point. After all, this is how many legitimate professions operate. They require an unspecific undergraduate degree, assuming that an accredited degree in anything insures a better, well-rounded, and generally educated candidate for employment. The degree requirement is used to "weed out" candidates just as much as it is used to hire them. The candidate is then required to take training courses specific to his or her profession, assuming that these training courses will build off of the foundation of the candidate's general education.

However, Mike states that the specific training that many appraisers receive deals with real estate and business, but not with building.

Most of the courses in the program deal with real estate and business. But what about building skills? Understanding the structure of a house? A basic understanding of construction? Knowing how one part of a home affects another? Aren’t these skills important when you’re evaluating a home?
 
Again, the author representing AIC took exception, stating that what Mike said is not true, and that all AIC home appraisers are given a basic knowledge of construction, both in residential and commercial structures.

The consumer can rest assured that every appraiser that has achieved either the CRA or AACI designation has been educated in basic construction of both residential dwellings and, on the commercial appraisal level, structures utilized for commercial, multi-residential, institutional and industrial properties. The insinuation by Mr. Holmes that appraisers lack this knowledge is quite inaccurate.
 
But is Mike really insinuating that all home appraisers have little or no knowledge of construction? Not really. In fact, he states very clearly that some associations do value knowledge of construction, but some don't. Mike's problem is not with all home appraiser associations, but with the associations that have lower standards for building knowledge, and emphasize the real estate and business aspect of home appraising over the building and construction aspect. Contrary to what the author insinuates, Mike states clearly that business skills are "absolutely" important for appraisers to have, but it is his opinion that building knowledge is equally, if not more important.

The author of the editorial letter went on to state:

With respect to Mr. Holmes’s homeowners, appraisers are experts at analyzing market data to establish value. Most appraisal assignments ask the appraiser to determine market value, particularly for lending institutions. The consumer needs to know that appraisers don’t make the market, nor do they manipulate it.
 
With respect to the AIC, I don't believe that Mike would disagree with this statement at all. (He might disagree with the assertion that all appraisers follow the same set of high standards though.) In fact, in his column, he states quite clearly that a $2 million house could be appraised for sale at a much lower value. He asks the question, "Is this fair?" and then goes on to explain that yes, it IS fair. He explains that a home that cost $2 million to build could be valued at far less because of the neighborhood, the land, the market, and the volatile financial climate. Mike touches briefly on mortgages, and how banks operate when it comes to getting their money back.
When it comes to mortgages, banks care about a home’s selling price. Why? Because if a homeowner can’t pay their mortgage the bank will have to sell their house. Banks want their money back. They want to know how much they can sell a house for. And sometimes a home’s construction has very little to do with that.

Mike is simply stating a cold hard fact. His audience is composed not of industry professionals, but of homeowners. He's essentially saying, this is the way it works. It doesn't seem very fair, but hey, what can you do? I hardly perceive this as being critical, though. More like sympathetic.

But if an appraiser’s job is to know how much a house is worth, they should know about construction. That’s basic. You should know how a home works, signs that tell you if there are any huge costs, the difference in finishes, how different improvements affect the value of a home and how different climates affect materials...Having a basic understanding of a home’s structure, materials and mechanics — and knowing how each affects value — is logical. It’s essential.
 
This is Mike's argument in a nutshell and the take-away point of the entire column. It is Mike's honest and informed opinion, which he has formulated over 30 years in the industry. Mike also states that he knows of some homeowners who have had to point things out to their home appraiser which affect their home's value. In the editorial letter, the author states quiet candidly, and honestly,

...appraisers certainly can be proven wrong — I know I have been.
 
I think this author should be commended for her candor. In a way, though, this single statement validates Mike's opinion, at least in part.

The last thing I'd like to point out is that Mike purposely leaves the names of specific companies out when he writes or speaks publicly on an issue. Good guys, bad guys, and everyone in between, typically he doesn't name names. Was Mike specifically referring to AIC in his article? Perhaps. For sure, he was speaking generally about the industry as a whole, as he sees it. This editorial was informative, well written, and certainly gave a different perspective, but it didn't invalidate the points Mike made.

Mike Holmes certainly has a talent of viewing things through the eyes of the homeowner. He speaks honestly, plainly, and he tells it like it is, but he is definitely an advocate of the consumer. It's the reason why people love him, and I think columns like this one will continue coming from Mike, raising the eyebrows of industry professionals everywhere. Whether that's a good thing or a bad thing is not for me to decide.

 

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