The Ross Rant

About the Author

Joel Ross

Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf.  

In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. 

Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.

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With respect to the question of "which investors, past or present" that answer is simple: when the definition of "Market Value is being used in an appraisal it's the actions of the current buyers and sellers in the market, as evidenced by the recent transactions. If you want to know what the value is to the investors who were acting in 2007 then you should probably ask for the value as of 2007.

Appraisers generally don't try to answer questions they aren't asked. If you want an answer to a specific question then perhaps it behooves you to include that question in with your engagement.

As for unreliability in appraisals, that speaks to the ethics of the client as much as it does to the ethics of the appraisers. A crooked (aka aggressive) client will invariably seek out crooked appraisers and avoid appraisers who don't share that perspective. It is ironic that honest appraisers generally make more money when times are tough than when times are booming. That's because the only time anyone reads an appraisal report for content is when times are bad and the risk of loss is high.

I wish I could say that the population of appraisers as a whole is completely above such influence but unfortunately that's not how it is in the real world. What I will say is that if an outside investor wants an honest no-BS appraisal they can always get one simply by ordering it from an appraiser and refraining from trying to steer the results. Taking in appraisals engaged by loan originators is like take lung cancer screenings from the tobacco companies. You might get an honest answer but you would have no way of simply assuming that any individual appraiser is any more honest than any individual CPA or lawyer or policeman.
Posted by comment_user_451383 | Tuesday, April 27 2010 at 4:58PM ET
you missed the whole point. It is the methodology and metrics that are at the root of the probelm. Dishonest appraisers are rampant and I have that list in my desk drawer. Appraisers are not objectvie and their method id nonsense and therefore open to abuse. It is all made up projections to fit the preset answer.
Posted by comment_user_451357 | Wednesday, April 28 2010 at 9:37PM ET
I don't doubt that you have bad appraisals in hand and I'm truly sorry about that. But the problem has more to do with honesty than incompetence.

I have reviewed a lot of appraisals over the years and I can tell you - as would any reviewer - that in 95% or more of the bad appraisals the problem can be attributed to one or more significant untruths being told by the appraiser about the dominant attributes of the subject property and or about the comparable data and how they actually relate to the subject property. Less than 5% of bad appraisals can be attributed to faulty or methodology or technical incompetence.

Appraisers don't initiate this sort of dishonesty of their own accord. With the exception of criminal conspiracies wherein the appraiser is one of the partners and is pocketing a piece of the action there is no such thing as an appraiser-initiated fraud. Appraisers don't actively look for opportunities to lie; their sin is in enabling and perpetuating the lies that are already in progress.

The only reason a dishonest appraisal can exist is when the appraiser's client solicits the lie from the appraiser and the appraiser agrees to comply. The client solicits the lie for the express purpose of cheating their trading partner and tricking them into making a decision that they presumably wouldn't otherwise make if they knew the truth. The dishonest appraiser then validates that lie and makes it look good.

It really does come down to the point of origin for the engagement of the appraiser. That's why the mortgage lenders and the investors who have the strongest portfolios are those that control their own appraisals, either by direct engagement and/or by rigorous reviews. It is the lenders and investors who blindly accept appraisals from loan originators without checking them who have exposed themselves to dishonest appraisals.

Even those most dishonest appraisers I've known have also turned in honest work when left alone to do so. They only cross the line when working for a client that asks them to do it. Water seeks its own level on that, just as occurs in most other businesses. Make no mistake - I'm not making excuses for dishonest appraisers. They're a menace to society. However, by numbers they're also a relatively small minority.

As far as I'm concerned anyone who lies on an appraisal should be prosecuted to the fullest extent of the law. Making a decision based on a dishonest appraisal is worse than making a decision with no appraisal at all. But the bottom line is that the manner and mode of engagement of appraisal work has a profound effect on the results. Besides the appraisal profession's responsibility to crack down on their outlaws, there's still a lot of room for improvement among the users of appraisals to learn how to be better consumers.
Posted by comment_user_451383 | Saturday, May 01 2010 at 2:02PM ET
Very good post! I know a CCIM/MAI appraiser that has been doing appraisal for 20+ years. When I asked him about these issues last year, he responded that, in 2-3 years, he would look back on his appraisals and be dead wrong on AT LEAST 50% of them. I asked how this could happen in light of his 20+ years of experience.

He responded that the banks are adding level upon level of absurd projections to their prior absurd projections that make a true, independent opinion of value virtually impossible.

He then quickly noted that he is quadrupling his E&O insurance to protect his firm from the inevitable fallout. So, fake it till you make it is alive and well. And his insurance guy probably got a great year end bonus by ramping up his E&O.

Without a true, independent standard, we just keep kicking the problem down the alley....
Posted by comment_user_451384 | Tuesday, April 20 2010 at 10:14PM ET