So You want to become a real estate appraiser? Here’s some background you should know.
It used to be a common thing that people would choose a career path, get hired by a company and stay in the same industry, maybe even with the same company, for a long time, possibly even to retirement. With increased global competition, many industries that used to enjoy security and rising wages/benefits have been transformed rapidly. The result is that many companies and employers have had to adapt, by downsizing, or be swallowed up in seemingly endless mergers and consolidations. I sometimes think that, in the end, there will only be a handful of companies worldwide that control everything (probably 3 or 4 “hyphenated mega-corporations” like a Time-Warner-AOL-ABC-Capital Cities and a few others). It appears likely that the current work force will face the likelihood of having to change careers several times during their working years. My employment background has included 3 career-path changes and I don’t really feel like I am done yet. One of my careers has been in the residential real estate appraisal industry, in the state of California.
Becoming a licensed appraiser involves several steps. I will be describing how to do it in California, because it is what I have experience with, but it is roughly the same in most other states. The first thing to understand is that an appraiser is NOT a real estate agent or broker, although all 3 professions have licensing, educational requirements and utilize many similar skills. Appraisers cannot sell or derive commissions from the sale of real estate, unless, of course, they also possess a sales license. Similarly, agents and brokers cannot perform full certified appraisals, for lending purposes, unless they also have an appraisal license. Some people do cross-over and do both, but it is the exception rather than the norm. It should go without saying (but I’ll say it anyway) that someone involved in a property sale would be prohibited from also doing the appraisal for the financing of that sale. Definite conflict-of-interest.
Appraisers are responsible for determining the “fair market value” of real estate which is generally defined as “that which would likely occur in an open-market transaction, in which the property is given a standard market exposure (listing period, MLS or other advertising publicity etc.), and the seller and buyer, both acting in their own best interests and without undue influences arrive at a mutually agreed price. The corollary to this is that it is standard for it to be expressed in “cash or cash-equivalent terms”. The majority of appraisal work centers around procurement of financing (mortgage), either for the purchase of property or for obtaining a replacement loan (re-financing) for property already owned. There are many other purposes and functions which utilize appraisers; these include, but are not limited to:
1. Estate taxation, in which the appraisal is needed to determine the value of property as of the date of death of an individual-this usually requires an analysis involving data that can be anywhere from a month to a year (or more) in the past.
2. Divorce proceedings, bankruptcy, and other court-related purposes-this type of appraisal may require court testimony and typically carries a much higher fee. This type of appraisal assignment should NEVER be accepted without a written agreement covering the additional compensation due should the appraiser be required to testify in court.
3. Property tax reduction; though this is not prevalent at the present time (2005), changing market conditions may mean that very recent buyers (who buy at the height of values) may petition the county assessor for a property tax reduction if the market values begin to decline.
4. Change in value due to natural disaster such as the 1994 Northridge earthquake
5. Independent evaluation of property that is being sought in eminent domain-the government isn’t always correct or fair in their offers to owners of property they are looking to obtain for some type of public works project.
6. A prospective seller who may wish to have an independent appraisal done, in addition to the potential realtor’s “competitive market analysis”.
In these types of appraisals, it is normal for the property owner to choose the appraiser and to actually order it. In the case of purchases or refinances, the appraisal is ordered by the lending institution or the originator of the loan application (loan broker or loan agent).
Prior to the Savings and Loan crisis of the early 1990’s, there was no licensing of appraisers. Many appraisers studied and obtained credentials from a handful of professional societies; the highest of these was generally considered the M.A.I. designation. While that designation carried some weight, it alone would not provide any guarantee of employment. To perform appraisals for lending purposes you had to be on that particular lending institution’s Approved Appraiser List. This was a roster of people who the bank had determined had the competency to perform this valuation procedure. To get on a lender’s list, (assuming the lender in question was actively adding new appraisers, which was not always the case), you would submit some samples of your work. Naturally, this also assumed that you had already completed some assignments, so once you were added to your first list, the others became easier. Getting on the first list was a bit tricky though. Many got their start as staff appraisers at a bank or S& L, and, hence, their name was on a list (by default) and they would have sample reports to submit.
The other main alternative was training at an independent “fee-appraisal” shop. These were smaller companies, usually owned or operated by one, or a few appraisers who were on the lists at several institutions. They would sign all the reports, while a larger, supporting staff of “field appraisers” would actually do all the inspections, field work and preparation, for a split of the fee. These companies grew in relation to the increasing numbers of independent loan agents who, not employed by a bank with its own appraisal staff, had to order appraisals from other sources, so they could submit the reports with their completed loan applications. In the late 1980’s/early 1990’s, with brisk sales activity, rising prices and attractive mortgage rates fueling a booming refinance market, employment opportunities were abundant in independent fee-shops. I began in one of these companies in 1987. I offered my services for free (in the beginning), training with an experienced appraiser and studied to obtain my C.R.E.A designation. I left that company after about 9 months, for a better opportunity with another company. I pushed myself to do harder and more complex properties and higher-end estates and I became the top appraiser at the new company within about 18 months. Before I got to the point where I wanted to get my name on the Approved lists of lenders, the Savings and Loan crisis hit and the rules of the game changed.
Though the S & L debacle could hardly be blamed on appraisers, there was evidence that faulty or fraudulent appraisals were a contributing factor. This led to the requirement for all states to institute licensing for appraisers. (It is actually not as simple as black and white. Generally speaking, the law required the use of licensed appraisers for any federally related loan transaction. This requirement thus applies to all “Fannie-Mae” type loans (those sold to the Federal National Mortgage Association on the “secondary” market), but also to loans obtained through federally chartered institutions. Without getting too deep into all the complexities of what is and what is not a transaction requiring a licensed appraiser, it has become common for lenders to require it even if it is not technically a requirement. With regards to the other types of appraisals (listed above), holding of a license is not a requirement at all. However, in practice, chances are that a lawyer hiring an appraiser who is not a licensee and potentially may have to testify in court would certainly be leaving his opposition an easy chance to attack the appraiser’s testimony based upon the lack of a license. So, as a general rule, for anything except perhaps the types listed as #1 or #6, you should assume that being licensed is advisable, if not absolutely necessary.
Before I get into the actual steps towards licensure, I will first describe the different levels involved. There are 3 main types of licenses:
-Residential License – this level designation is permitted to perform “non-complex” appraisals on single family homes, condos and small income properties (defined as 1 to 4 units) up to a total transaction value of $1,000,000, “complex” residential appraisals up to a transaction amount of $250,000 and all non-residential properties up to $250,000.
-Certified Residential License – this level can perform appraisals of any residential property (up to 4 units) without regards to transaction value or complexity of assignment, and all non-residential properties up to $250,000.
-Certified General License – this is the highest designation and has no limitations. Can appraise all types of property.
There is a 4th level, called a Trainee License, which includes anyone who has passed the examination but lacks the experience requirements. This type of “licensee” must work under the supervision of a fully licensed appraiser. Since this level cannot independently sign their own reports, it is not a true license yet and I don’t include it in the 3 main levels. If you are wondering about the term “complex” or “non-complex” in those descriptions you are not alone. It is not something that can be fully explained in a short article. Like the definition of obscenity (hard to define but you know it when you see it), there is no easy to grasp definition of the concept. An example of a “complex” assignment might be a property with unusual zoning, or a non-conforming use that has been “grandfathered” in its current state but would not be allowed to be re-built if it was damaged extensively. It could also involve a property that has a potential “higher and better use”, which would require an involved analysis of those uses. If you would like to learn more about this, you can research the subject yourself, ask a working appraiser to give some insight or wait until you actually get started with your education and training where you will certainly be exposed to this concept.
Okay, so now that we know the types of licenses available, how do you go about getting one? In short, complete some educational courses, pass an exam and accrue a specified number of hours of actual appraising experience. The examination is given at one of six testing locations scattered across the state. The locations are: San Diego, Riverside, Glendale, Oakland, Sacramento and Bakersfield. Before you can take the exam, though, you must submit your application, and before that, you must meet certain educational requirements. The requirements currently in place have not changed substantially since the beginning of licensing in 1990. However, they are in the process of being revised and will undergo changes effective in January 2008. The basic requirement for submission of your application is 90 hours of course work from an accredited course provider, of which a minimum of 15 hours must be devoted to the USPAP (Uniform Standards of Professional Appraisal Practice). The main focus of USPAP is ethics and standards of conduct. The remaining 75 hours can be in courses with varying names but must cover the topics specified in table 2. With this 90 hours of course work, your submission for the exam will be processed. If you pass the exam, you will be issued a “trainee license” (if you have no experience hours), or a residential license (if you have acquired a minimum of 2,000 hours of experience which can be documented-more on that later). If you wish to obtain a higher designation, there are increased requirements. For the next level up, the Certified Residential License, the educational requirements are 120 hours (15 hrs on USPAP), and the experience requirements are 2,500 hours over a minimum period of 2 ½ years (no such time requirement, yet, for the first level). The highest level, the Certified General, requires 180 hours of course work (15 hrs on USPAP), 3,000 hours of experience over 2 ½ years, with at least 1,500 hours of it in non-residential work.
While it is possible to get a Certified General License without going through the lower levels first, it is extremely unlikely that it will happen without at least one intermediate level and a subsequent upgrade. The course work you will take will consist of a variety of subjects, including the various methods of legally identifying a property, types of ownership and the rights inherent in each type, housing styles, design and construction, neighborhood analysis, the factors that affect value and how to determine the market value of various factors and amenities, zoning/taxation etc. You may or may not like it but you also should prepare yourself for some math, with concepts such as capitalization, rate of return, gross rent multipliers and operating expense ratios covered. It’s not as bad as it sounds, though. With the aid of an HP-12C financial calculator and the learning of the correct sequence of keys, all these functions can be handled even by the math-phobics. The truth is, unless you are doing an inordinate amount of work involving income properties, most of these functions you will not really use except in rare instances. Of course, as you move up the licensing ladder, the math does become more of a factor and if you are doing commercial or industrial properties, the math is really the heart of the process. Appraisals for investing purposes rely heavily on reliable data which produce projected rates of return which can make or break a deal.
If you are reading this you are probably an outsider looking to break into the field and NOT a seasoned veteran looking to upgrade to a certified general license. So the remainder of this article is geared toward bringing all this material together, outlining the suggested steps you should take, and alerting you to some things you should beware of.
First, there is a backlog of applicants to take the exam. There has been an estimated 90-day waiting period to get an exam date for the past year and a half (the OREA has given over 25,000 exams and issued over 18,000 licenses, since 1990), so you should calculate that time into your projection to complete the whole process. Second, there are a variety of options for completing the courses and you should consult the official website for more details-they have a downloadable booklet with all the accredited course providers in .pdf format. The costs are not cheap; however, the expenses may soon drop, somewhat, due to the changing of certain requirements (namely, dropping the requirement for accreditation by ACE/CREDIT, which charged a school $10,000 per course, and allowing accreditation by another company which charges $700.00 for the same service-this should translate to some reduction to the end users). If you are serious, get started as soon as you can and make a commitment to it; the requirements become more stringent as of 1/1/2008. Ninety or 120 hours may not seem like a long time, and it isn’t if you are taking courses simultaneously, but if scheduling doesn’t work out for you, then you may find it takes longer than you thought. With the waiting list and other factors, it is estimated that you’ll need to have the application process started by August 2007 to still be tested under the existing regulations. Plus, the licensing fees are also due to be cut in half, temporarily, while there is a surplus in the agency fund (from all those eager applicants clogging up the waiting list!) and raised again when the surplus is gone. Of course, if you like greater challenges, or are a born procrastinator, then go ahead and take your time.
So step one should be to get the course provider booklet, check out your options and costs, and start the classes. After you get through part of it, then you may want to start looking at ways to accumulate some experience. Some course providers have the ability to also help with this-if they can provide some case work studies or mock assignments. They won’t be able to do it all for you, but it may give you a start. If you are a homeowner, and have access to an appraisal done on your home, maybe you can contact the company who did it and see if they have any opportunities for trainees. This is how I started and it worked for me quite well. Much of it has to do with timing. An appraisal company that has an abundance of work is very receptive to this approach. If the market does cool off, though, this may not yield much, as they want to keep the employees they already have supplied with work as best they can. Which brings up the downside of what may lie in the immediate future; downsizing and fierce competition which leads to lower wages. I have been through this cycle before. In the early 1990’s, prices were still rising, refinance activity was high and the field attracted a swarm of new people, attracted by the independence from rigid schedules, business suits and atmosphere etc. and what looked like good pay for fun work. When the market cooled off, there was less work with more licensed appraisers competing for it and the competition pushed fees and wages downwards. I fully expect this pattern to repeat itself, at some point, but that should not necessarily keep you from pursuing this. Why? Well, unlike realtors who only earn commissions with sales, an appraiser can get work from more than just sales. For instance, keep in mind that if foreclosures rise drastically, that banks will usually order at least one independent appraisal of the property before putting it on the market. Also, another “act of God” disaster may mean a new source of work. A slowing market may mean dropping values which may mean more property tax reduction orders. It is also possible that you may find a niche with a CPA or lawyer who handles a lot of estate work and can keep you busy. Lastly, these things run in cycles. Despite the fact that the masses tend to forget this truism, the unbelievably hot market of 2000-2005 is something that WILL correct itself. There are an amazing number of otherwise intelligent people that delude themselves into thinking this can go on and on. It can’t and it won’t. If you knew how much money you needed to earn to qualify for a loan to buy a median priced home of, say $600,000 (assuming you had the requisite 10-20% down payment of $60,000-120,000), and then saw how many homes were listed for well above that amount, and then realized how many homeowners have been able to maintain their position ONLY because of low interest rates and rising equity they could tap into at will but are truly only a small step away from real trouble if either situation changes, then you would be truly worried. BUT, even that dark scenario doesn’t last forever and it swings the other way again and you could be positioned to reap the rewards of another hot market, only this time as an experienced appraiser. Just keep in mind the economics of it all, temper your expectations and pay attention to the signals.
If you are still in this, then send in your application, along with a set of fingerprints (required for the exam). In the meantime, if you want to increase your chances of success, there are a number of things you can do. Learn more about construction techniques and the different types of materials used in various grades of houses. If you want to appraise luxury homes, you need to familiarize yourself with what is used in luxury homes- things like surfaces (varying grades of hardwood, granite, limestone, marble etc.), brands of windows or fixtures, door hardware (Andersen vs. Pella windows, Kohler vs. Moen fixtures etc.). Maybe go and tour some open houses and track their listings to see what they sell for. You’ll eventually need to measure and diagram buildings so practice on any that are available. You can start by drawing them by hand, maybe on a sheet of graph paper. If you have access to any sort of a CAD style drawing or sketch program, learning it can give you a significant advantage over other new trainees. My particular favorite is DC Sketch for windows but I have also used Apex sketch and Win sketch. I find DC the most intuitive, and Apex the least intuitive and most cumbersome to learn. If you go and visit an open house, try to inspect it, critically, and then maybe try to do a written description of it after you get home. You can also start to familiarize yourself with the standard appraisal forms like the Form-1004 for single family homes. You can find this form available for download on the internet (try “FNMA Form 1004” in a Google search). I am also going to try putting this form in this article. If that doesn’t work properly, I will also try to put it on one of my personal webpages and there is a link below.
The last item to discuss is the experience hours. The State Office of Real Estate Appraisers has a standard log form used to keep track of your hours and it can be downloaded from their site at this link:
http://www.orea.ca.gov/
The link to my webpage, where you can download a copy of the FNMA Form 1004 for Single Family Homes:
http://mysite.verizon.net/reso9ds7
