A look at the valuers role and its difficulties
Are valuers being undervalued? Walk a mile in their shoes and you soon realise they're walking a tightrope between lenders' expectations and brokers' wants. Andrea Lavigne reports on the difficulty of being independent
A necessary evil, overly conservative, painfully slow - valuers take a lot of criticism.
"Valuers are often made the scapegoat when deals don't stack up. Brokers often forget that we're simply the messenger," says Greville Pabst, director of valuation and consultancy firm WBP Property Group.
Love 'em or hate 'em, the independent assessment that valuers provide is integral to the loan application process. But does the relationship between mortgage brokers and valuers have to be non-existent at best and antagonistic at worst?
Members of the valuation industry think not.
The valuation firm LMW Residential says the relationship between brokers and valuers would be much improved by a little education. "Unfortunately many brokers do not understand how a valuer arrives at a figure. It is a very thorough process and increased knowledge of that process would help," the company says.
A better understanding of the valuation industry can actually make life easier for brokers by facilitating faster turnarounds and more accurate reports.
"A lot of people out there - Joe Public, the broker, the real estate agents - think that they're experts, and yes they're entitled to have an opinion to what their property is worth. But the valuer still has to value that property according to longstanding professional standards and protocols. They can't just make up the number or put on the highest price possible," says Charles Guthleben, national valuation manager of Megaw & Hogg National Valuers.
Certified practicing valuers (CPVs) are highly educated professionals who must complete a bachelor degree in property and valuations, followed by two years of supervised work experience under the eye of a licensed valuer.
After completing their education and work experience, they're eligible to sit for an interview by an examination panel for membership to the Australian Property Institute, which approves valuers at different levels.
"Certainly it's a lot more complex than a lot of people understand," explains Ken Raynor, Raine & Horne Valuations. "If a valuer doesn't achieve a certain level of membership they may not be accepted by a certain lending institution."
In addition, valuers are required to undertake continual professional development to maintain their CPV status and take a risk management course every three years.
In NSW, valuers are also required to be registered by the Office of Fair Trading in order to practise.
Aside from education and experience, Geoff Roper, director of Australia Pacific PCS, says, "A valuer needs analytical skills to assess and examine the various implications of sales evidence; detecting skills to ascertain the circumstances and details behind the sales evidence; people skills to assist in the detecting process; communication skills to effectively transport his reasoning and conclusions to his client; and numeracy skills to prepare complex cash flows for development or investment."
Picking a number
As the industry's emphasis on education and experience suggests, determining a property's value isn't simply ticking the boxes.
"Valuation is not an exact science, it's an art," Pabst says.
Despite having precise criteria on which to judge a property, there can be variation between valuations. Australian courts have accepted variations of up to 10% in valuation amounts between valuers.
In an article prepared for mortgage brokers, Pabst says valuations are "professional opinions based on available evidence".
To establish the value of a property, the valuer makes a physical inspection of the property taking measurements, counting rooms, examining fixtures and fittings and making note of any improvements. To come up with a value range, they also look at the property through three lenses: direct comparison, summation and capitalisation of net income.
To make a direct comparison, valuers research recent sales of similar properties in the area, taking into account any minor differences between properties to ensure the comparison is appropriate.
In making a summation, valuers examine the land value plus the depreciated value of the improvements such as garages or swimming pools. Land value includes location, amenities, topography, slope, and size and shape of the house. The value of improvements is measured by looking at the style of improvements, age and overall appearance, among other things.
Finally, valuers consider potential risks to the property before coming up with a valuation range.
"There is a buyer and seller element to market value," Guthleben explains. "Market value is not necessarily the highest price a property could possibly achieve; market value is not necessarily what an interstate investor who has never seen the property is willing to pay through a marketing scheme; market value is actually what the local known market acting rationally will pay."
API defines market value as the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm's-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.
Building a relationship
Valuers are sandwiched between lenders and brokers. And while they're integral to the process, they're not always appreciated by either party.
"Valuers sit in the middle. We have on one side the broker who is essentially sales driven and quite often is aggressive in trying to influence a valuer. But our principal duty is to protect the lender and the mortgage insurer, because if it goes belly up, the broker is not going to hand back his commission, but the mortgage insurer or lender - if they've lost money - is going to come after us. So we have to remain independent in the process," Pabst says.
While lenders dictate whether instruction for valuation can be made through a broker, often they prefer that brokers aren't part of the process. Some lenders even instruct valuation firms to inform them if a broker has contacted the company regarding a certain valuation.
"Our dialogue with most brokers is more of a courtesy, keeping them right up to date as to where it is in the process, but that's probably as far as it goes. To be honest, I think it's better to be totally independent. Most of the financial institutions would rather have it that way," says Mark Ruttner, director of FVG Property Consultants & Valuers.
Of course, not all interaction between brokers and valuers is forbidden and negative.
Pabst says there are dozens of good relationships between brokers and valuers and most often these are based on brokers' respect for the perimeters valuers must work in.
"No professional wants to be influenced or told how to do their job," he says. "There are not many, but some of them will say things like it's a 40-square house and you get out there and it's a 20-square house. They don't realise that we actually measure the house."
Pabst tells brokers and valuers that the mortgage industry is very small in terms of who knows who and the speed at which news can travel. A valuer who works hard to provide a great service and maintain strong relationships with brokers and broker groups will benefit from positive word of mouth in the industry and vice versa.
For brokers who do instruct valuers directly, they can foster a positive relationship by providing valuers with accurate information about the property and giving them 24 to 48 hours notice of a job. If a request is urgent, brokers should follow up telephone requests by fax or e-mail.
Guthleben says Megaw & Hogg National Valuers has a very clear and defined query process for brokers who believe a valuation is too conservative.
"The best way for brokers to assist this process is to provide quality information and additional comparable sales that justify why they think it's worth more," he says. "Sometimes they simply want, or hope for the valuation to be higher because their client needs an extra $5,000 to avoid mortgage insurance or the customer wants to borrow more money than the security property can substantiate."
Guthleben adds, "The value of the house is not determined by what the customer wants to borrow or what the bank wants to lend or when mortgage insurance kicks in. The value of a property is actually what someone is willing to pay for it on the open market."
Pabst agrees. If brokers want valuers to take a second look at the valuation they need to have a good reason.
"If you're going to have an argument, back it up with some evidence," he says. "Show me the sales that can support us putting the valuation up high. If they produce that evidence we're more than happy to review." #pb#
While traditional valuations continue to play a large role in the loan application process, the valuation industry is undergoing some very significant technological changes that make the valuation process faster, much to the benefit of both brokers and borrowers.
Three big changes have altered the valuation landscape in the last few years: the establishment of LIXI standards, the introduction of exchanges and the growing acceptance of automatic valuation models (AVMs).
The introduction of web services technology that will enable lenders and valuers to exchange information in XML format has slowly been making inroads into the industry.
LIXI, the Lending Industry XML Initiative, has been actively promoting this method of communication. While valuation organisations seem keen to implement the standard, lenders have been slow to come on board, says Andrew Duerden, national sales and business manager at LoanWorks Technologies.
"There seems to be a bit of pull and push at the moment," he says, adding that legacy issues for lenders may be impeding their participation.
"They're running systems that are 10 if not 20 years old and to change this stuff to support new standards that are based on new technology is probably not a small task for them."
The second big change sweeping through the valuation industry is the establishment of valuation aggregators or exchanges.
Exchanges house a number of smaller valuation firms that have a broad geographical reach. Exchanges are advantageous to lenders in that they allow them to deal with one entity using the same automatic process.
The Valuation Exchange, which was formed in 2005, grew out of Megaw & Hogg National Valuers.
"We saw in Megaw & Hogg the need to change the way that valuations were being delivered to mortgage lenders, because mortgage lenders were looking for a much more streamlined approach," says Andrew Robertson, Valuation Exchange CEO. "So we saw [this] as an opportunity to provide valuations back to the lenders still from a wide variety of different valuation firms but on a consistent streamlined technology platform that would be much closer to the goal of straight through processing."
Individual valuation firms, particularly the larger, national companies such as WBP and Megaw & Hogg have spent considerable amounts of money on IT to speed up processing.
"We have to as an industry," says Megaw & Hogg's Guthleben. "We have to stay in touch with our client's requirements and change with them otherwise we become irrelevant to our client. So you need to adapt and continue to invest in IT and stay absolutely focused on quality and compliance - that's where my money's been going."
Keeping pace with the changing needs of the market will be particularly crucial for traditional valuation firms that want to stay alive once Australian lenders start relying more heavily on AVMs.
AVMs, which are widely used in North America and the UK, rely on statistical models that make a calculation based on set data.
Last year, RP Data launched Australia's first 'hedonic' AVM process that measures "price changes through time by controlling for a property's location, land size, construction type and specific characteristics, such as number of bedrooms, bathrooms, etc."
RP Data says the "AVM platform automatically values more than 7m residential properties of the 12m properties on RP Data's database across Australia every week and then matches that against the actual sales of property to create comprehensive and accurate valuation reports on the residential real estate market. The number of properties covered by the platform will increase in line with future property sales activity."
The AVM space is being shared by a British internet-based automated valuations service. Hometrack Australia, a joint venture between Hometrack and Australian research firm Residex, is talking with four of the major banks about implementing wider use of AVMs.
"I think the timing of this is quite good," says Brendan Darcy, CEO of Hometrack Australia. "I think the market is starting to look at this, looking at valuation costs, looking at the risks, looking at ways to optimise the business and minimise turnaround times."
Hometrack has a successful history in the UK, where their AVMs are used by 90% of British lenders.
The key to wider use of AVMs in Australia is confidence. In cases where the LVR is low, most in the industry expect to see increasing reliance on AVMs. But Hometrack director Graeme Winser says, "There's nothing to stop a lender using an AVM at higher LVRs when the confidence is good."
Hometrack AVMs give an estimate and a confidence score that lets lenders know how accurate it is. "And that allows lenders to choose when to use it," Darcy says.
Duerden predicts that acceptance of AVMs won't happen overnight.
"I think it's probably going to be a time thing. The risk departments of the lenders have to trust the data and that will probably come from doing things like bulk reassessments, where you are using an AVM model to do a bulk reassessment of a portfolio of loans. Once they start to analyse the risk then over time they'll get more trust in the quality of AVM and the potential to use that model for other things," he says.
"I don't think you're going to see anything in 12 months or probably even two years and this risk climate that we're in now makes it harder for everybody."
For faster, more accurate reports brokers and lenders should provide valuers with:
- Date of request and date report is required
- Contact information for property owners
- Lender contact details
- Borrower contact details
- Loan amount
- Property address and type of property (unit, house, farm)
- Contract price (if current sale involved) together with an executed copy of the contract of sale, or price and date if recent sale
- Additional extracts from copy of contract such as any special conditions, certificates, etc
- Other information such as zoning certificate, development approval or pest reports
- If tenanted, provide managing agent's contact details, tenant's name, rent paid, lease expiry date
- Tender details if there's a proposed dwelling, extension or renovation
- Copy of building contract, latest tender or quote with price schedule of fittings/PC items
- Approved copy of plans and specifications
Source: Greville Pabst, CEO & director, WBP Property Group
Mortgage mess forces clean-up of valuers
Brendon Hulcombe, CEO of Herron Todd White, looks at the latest developments in property valuation in the US and considers the implications for Australia
The US sub-prime mortgage meltdown has exposed alarming practices within the finance sector that have led to the spiralling crisis with which worldwide financial markets are continuing to wrestle. Among these practices is an undercurrent of lenders pressuring property valuers to inflate valuations in order to secure higher loans. These and other vulnerabilities in many banks' risk management strategies have led to countless foreclosures across the US and the resultant worldwide credit crunch.
In March, several of the largest home lenders in the US entered into a settlement agreement, brokered by New York State Attorney General Andrew Cuomo, with the Office of Federal Housing Enterprise Oversight. The agreement will result in greater transparency and a clear delineation of lenders' interests and the property valuations that underpin mortgage securities. Further, the agreement forbids valuer coercion, prohibits mortgage broker-requested valuations and minimises valuations undertaken by in-house valuers.
At a news conference in the US last year, Cuomo called valuations the "foundation of the entire housing system". Cuomo investigated the causes of inflated home valuations for close to a year, issuing subpoenas to US lending institutions to determine how widespread the practice was.
During the investigation, Cuomo sued a division of real estate giant First American, alleging that under pressure from Washington Mutual, the company routinely over-valued properties to smooth loan approval. The First American case was proven to mirror common industry practice, and Cuomo's settlement agreement strictly forbids any lenders' influence on valuations through coercion, compensation or bribery.
Further, a standalone Independent Valuation Protection Institute will be established (funded by lenders), which will include a complaints process for valuers to report pressure by lenders, and mediation of appraisal disputes and mortgage fraud reporting. The accord also ends the practice of lenders using in-house valuation staff for residential valuations and restricts the use of valuation-management companies partially owned by lenders.
Only in America?
"Similar scenarios exist in Australia, and more rigour around lending practices is required to ensure lending institutions systematically prohibit individual lenders from pressuring valuers," says Peter Degotardi, chairman of Herron Todd White. "We're not saying that the issue is rampant as it clearly was in the US, but let's not kid ourselves that it isn't happening here."
When advancing funds through a mortgage, lending institutions generally require that the security property be valued by a qualified property valuer (a certified practising valuer, or CPV). However, it has been revealed that in many cases there have been systemic breaches of the underlying independence required for valuers to value properties at market value without external influence.
Individual lenders whose bonuses are based on getting more loans approved push valuers to write valuations above true market value. Valuers who succumb to this pressure are rewarded with more business from those lenders. Valuers who do not comply face the risk of seeing their volume of work decrease from some lenders and can be driven out of business.
The perils of being a valuer
"There should be a policy framework in place to ensure certified practising valuers carry out their duties with true independence. A valuer should be able to call it as they see it without fear or favour and to do what they need in an environment where there is no influence from individual lenders wanting to reach their bonus targets," Degotardi says.
"At the moment, many lenders appoint five or six valuation firms to a panel, and then allow their front line sales staff to choose the valuer for a particular job. If the lender wants to reach their bonus targets they tend to gravitate towards using the valuers that write higher valuations.
"Put simply, if the valuer does not comply, their work can simply 'dry up', and in the worst case they risk going out of business. If, on the other hand, they do comply with providing inflated valuations, they are rewarded with more work."
In Australia, property valuation firms are typically small to medium-sized companies that depend on high-volume, low-margin mortgage valuation work to sustain their business. They are dwarfed by the dominant market power their bank/lending institution clients have over them.
"They pay lip service to wanting quality valuations, and then send in their procurement departments to cut fees to the point that many valuation firms are finding it impossible to deliver quality," says Paul Grennan, a certified practising valuer who recently left private practice.
"My experience over recent years is that many lenders just want the cheapest, fastest valuation they can get so they can tick that box. The banks' credit departments want good quality, but the banks' procurement departments don't want to pay for it. They are paying less for a valuation today than they did 10 and 15 years ago."
In the face of dwindling profit margins, valuation firms in some states have turned to using unqualified employees to increase their return. An unqualified person inspects the property, compares property data and prepares the report for a certified practising valuer to sign off as their work. This practice is illegal in most states and threatens the integrity of the valuation industry.
"For years many lenders have turned a blind eye to allowing unqualified university students to undertake property inspections. This practice is in conflict with the Australian Property Institute's standards for a certified practising valuer," Degotardi says.
Greg Preston, president of the Australian Property Institute - the professional body for certified practising valuers - states in a letter to members that "the practice of students being engaged to undertake valuations undermines the professional standards adopted by the Institute".
A fairer system
Some lending institutions in Australia have eliminated the potential to influence valuers by implementing systems and procedures whereby the allocation of valuation requests is divided randomly between valuation firms on a postcode basis. These systems are controlled by the credit function of the bank rather than the sales channel. Three of the big four banks and limited others have invested in credit-controlled systems that allocate valuation requests to approved panel valuation firms and more effectively manage lending risk.
These are the sorts of measures required in Australia by all lenders serious about the quality of their loan book and wanting to avoid the 'toxic shock' malaise of the US system.
The property valuation industry in Australia is estimated to be worth $500m.
Brendon Hulcombe is a Fellow of the Australian Institute of Management, a Member of the Australian Institute of Company Directors, an AFR Boss magazine 2007 Young Executive of the Year and holds a Master of Management from Macquarie Graduate School of Management. Herron Todd White is Australia's largest employer of valuers and a BRW Client Choice 2008 award winner. E-mail [email protected]