CW 359: Property Appraisals with Ken Wilson of The Appraisal Institute & Meet the Masters of Income Property Investing Seminar Debriefing

Welcome to Creating wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven't thought of before. And a new slant on investing. Fresh new approaches to America's best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine, self made multimillionaire who not only talks the talk, but walks the walk. He's been a successful investor for 20 years and currently owns properties in 11 states and South 17 cities. This program will help you follow in Jason's footsteps on the road to financial freedom. You really can do it. And now here's your host, Jason Hartman with the complete solution for real estate investors.

Welcome to the Creating wealth show. This is your host, Jason Hartman. This is episode number 359 and if you're all still listening after my last two shows, well, three shows, it's like the odd, odd grouping of people on all sides of the socio economic and political spectrum. We had John Stossel, Noam Chomsky, and Bill Ayers, the man who made Obama, many people call him. So it's been quite an odd thing. And I've got one of our great investment counselors here with me today, and that is Sarah. How you doing, Sarah?

Good, thanks for having me.

Well, good. I'm in San Diego. We just came off our Meet the Masters eventually and you are in Orange county. So we're both California this time. I'm not Phoenix and enjoying it down here, but wow, I was tired after Meet the Masters. Were you as tired as I was?

Well, maybe you can tell by my voice. I've kind of lost my voice over the last couple days. Lots of great conversation, you know, hours and hours full of great content. Yeah, I'm feeling a little winded.

But it's like when you have a really good workout, you know, you're tired, but it's like a good tired, you know, feel good being just a little bit worn out, you know, it's like, it's not like, it's not like worn out in a bad way. It's worn out in a good way. But yeah, that was, yeah, that was an awesome Masters event. I think that was our 13th event. And, and you know why? It's a little hard to count, of course, because we used to do them twice a year, every spring and every fall and now, now we're just doing them once a year in January. So. But I, I think that was number 13 if I'm not mistaken. You know, we got to go back and figure out the count. So. But we can call it Masters.

That's the name of it. So, you know, we talked about some great stuff, had a whole bunch of speakers. I'd say that with everybody. We had about a hundred people in the room there. And what were your impressions on the event?

Yeah, it was a great event. I was really excited to meet our new investors all the way from Japan. That was pretty exciting. Great conversation with them. And we had some visitors from the east coast and of course, our market specialists and experts from all across the country, you know, provided some great content for us. And, you know, I had a lot of clients asking if, when we're going to do it again and why we don't do it twice a year anymore.

Because it's a lot of work to put that on. You know, we'll just keep it at once a year. But. But I will tell you, Sarah, and you know, maybe our listeners can give us a little bit of feedback. I'm. I think I mentioned this to you maybe a month or two ago. I'm thinking of another type of event, which is like a weekend event where we. We hosted in, you know, we'll rent a man or something like that and have like a really cool, intimate event. So we're kind of thinking about something like that. It'd be a little more expensive, and so some people will like that, a more exclusive thing. Some people, you know, they won't want to come. They want to come to the less expensive things.

Yeah. It's funny you mentioned that. It's like after this long weekend meeting with all of our clients that I've known for years, some of them, but never met face to face, you leave wishing you had like a night at movies or, you know, just a night out at dinner to hang out because you make friends with so many people. So, yeah, it was great from that perspective as well.

Yeah. One of the things that I think at every Masters event, there is always new content, new ideas. And we started off recapping 2013, where we talked about bitcoin, which is a big deal. One of the evaluations said, you know, I found that to be like an interesting discussion, but I didn't know exactly what to do with that, that whole discussion about Bitco. And, you know, I mean, think of how amazing it is, everybody, that we now have a major currency that is not attached to any one country. And last year was really the year these cryptocurrencies or cyber currencies, bitcoin being the most popular, but there are many others kind of came into their own. And I think they may well be squashed. I'm not saying invest in them at all, but it's just interesting that so many people around the planet want an option to get out of the central bankers fiat money scam. They want their currency really to be independent of their country and independent of bankers who keep inflating away the value of their currency. So that was interesting. We talked a lot about the JOBS act, which is, I think going to have very significant impact, you know, and we talked about crowdfunding and crowdfunding of real estate. You know, we had kind of the usual core topics, self directed IRAs and 401ks and so forth, asset protection, tax planning, things like that. But one of the things I definitely want to talk about with you, Sarah, is how we talked about separating the, the price of real estate from the utility intrinsic value, which we believe is monthly rent or income. But gosh, what else did we talk about? And we had so many market presentations. What did you think of all those?

We did. We had a lot of great market presentations. It was nice to have some fresh new faces and new markets to announce during the weekend. And you really do learn a lot from each provider because they just have a different input for property management and just acquiring your portfolio. It's all good stuff. One of the things that I know our investors really enjoyed was just the Q and A panels we did. We had a panel with all of our market specialists and investment counselors and we really let the clients just kind of have a go at us and put us on the spot and ask us those tough questions. And, and boy, did they.

Yeah, right, right, they did. We had more panels this time, I think, than any other Meet the Masters event. We had a lender panel and you know, we started that a year ago and that was, that was really good. People always want to ask, you know, financing questions. And the great thing that I think we did with that panel when we, we started doing it as a panel discussion last year is we put three lenders up there. They're sitting on the stage, they're, they're sitting in stools, and people can just attack them with questions, questions, questions. But the great thing is the, the three of the lenders really hold each other accountable so that, you know, none of them can get away with making a bunch of big fancy promises that they can't deliver on because the, the lender next to them, she'll say, hey, you can't do that. I know you can't do that. You know.

Well, and it's so funny. It's. It's almost like they're. They're trying to one up each other. And because it was the same three lenders we had last year, they were really like on their A game this time. I mean, Aaron with his bag of tricks. I don't know, we can mention on the podcast.

That was hilarious. That was so funny. One of the lenders was talking about how, you know, some of these underwriters, when underwriting alone, they just get. Get kind of nutty and bureaucratic and all caught up in technicalities and, And. And then others just. They basically don't know what they're doing. They don't know how to underwrite alone properly. And so Aaron is such a funny guy.

He.

He says, I have a kit for this. And he comes up on stage with a brown paper, a big brown paper bag. And Sarah, what was he pulling out of that bag? It was so funny.

I'm not gonna say.

It'S totally X rated.

No, no, no, no. Only one thing was X rated. The rest was okay. But.

Well, he brought out like a bottle of Jim Bean and.

I don't know, handcuffs.

No, no, no, he didn't have handcuffs. He had. He had a duct tape and like a, like an exacto knife, and then he had a bottle of Jim Beam. So he had the whiskey. Right.

Underwriting Guidelines Manual. The book, which was this big, thick book, you know, with a bunch of. Bunch of guidelines for underwriting mortgages. And he had a few other things. There was one thing in there that was kind of X rated and. And he lays it all out on the desk of the underwriter and he says, look, we're going to use one of these things to get this loan through and get the job done. So funny. We're.

Probably the funniest part about the story was that. Yeah, the funniest thing about the story was that it was a true story. And the client that he did that for to close his loan was there for Meet the Masters, so made it even. All the better.

Oh, funny stuff, funny stuff. But, you know, in terms of the other panels, we had an investment counselor panel where we put all of you up there and you guys were on the hot seat and you got grilled all together. And it was interesting to see the way you disagreed with each other. That actually kind of surprised me a bit.

Yeah, well, you know, I actually got an email from a client this week that, you know, said they really liked that we didn't all say the same thing and agree with each Other we all actually had an opinion and had some different experience to back up our opinion. So, you know, that's the beauty of it. We really were, you know, put on the spot. There was no script. Kind of like this podcast that you put me on the spot all the time. But, you know, it was, it was just good, raw, you know, discussion.

And then we had, we had a local market specialist panel where we had all of the local market specialists up there. And gosh, there must have been, I don't know, 15 people on the stage at that point who were sort of giving advice and, and you know, I kind of led off with what are some of the self, self sabotaging behaviors that you see investors engage in? And you know, as you say, Sarah, when people shoot themselves in the shoe, right?

Oh boy, yes. Shoot yourself in the shoe, folks.

Just, just so you don't get that inside joke. On a prior podcast where, where I had Sarah on, she said, sometimes I see investors shoot themselves in the shoe. And I said, Sarah, it's shoot themselves in the foot. That's the way the expression goes.

Right, right. I think that's why I haven't been on the podcast in a little while.

Yeah, I called you out on that one, huh?

Oh, yeah, well, yeah, I mean that, that was a great panel as well. You know, we took a lot of Q and A. And I think that the funny thing is, is that, you know, we were supposed to go till about 9 o' clock and you would think by 9 o' clock people would be just done. But people, I mean, we were there till almost 10 o' clock just because everybody was really enjoying the discussion.

So we started at 9. This was on Saturday, everybody. And we started at 9am and we said we would end at 9pm of course, you know, we had lunch and dinner breaks and we went till 9:50pm and, and, and, and, and the vast majority of people were in the room at about 9:20. I said, I understand we're overtime. If, if you, if you want to go and get to bed or go, go to the bar, feel free to leave. And you know, a couple people got up and left and you know, said, we'll see you tomorrow morning at 9am but, but most people stayed and the discussion was, was.

But one of the things I really want to. And oh, before we get to that, markets. We presented, I think more markets at this Meet the Masters event than any prior Meet the Masters. You know, I can't think offhand how many there were, but there had to be about eight, eight Markets, maybe. Did we present something like that?

Well, I can name them for you.

Oh, okay, go ahead. You're, you're more organized than I am. I'm still recovering, but yeah, name them.

Well, off the top of my head. So we had a couple providers from Memphis, two from Indy, we had Birmingham, St. Robert, Kansas City, Atlanta, Ohio.

But yeah, you know, it wasn't that we had. And we had Little Rock and Little Rock. What did that cover them all? It wasn't that we had as many markets but we had a lot of different local market specialists there. For example, we had two from Indianapolis, we had two from Memphis. And so there were a lot of presenters presenting a lot of different ideas, a lot of different investment property, inventory and good stuff, really good stuff.

I think the real beauty of this event learns take something new home with them. So just a great weekend where we're all learning and sharing ideas.

Well, one of the things I want to talk about specific content wise before we get to today's guest is one of the concepts that we really teased out among so many others this weekend is the concept of these cyclical markets where prices fluctuate dramatically. The bubble markets, the markets that the gamblers rather than the investors are attracted to. And those are markets like pretty much the whole state of California. Anything in say New York City, really high priced markets, Boston, some areas of Connecticut, a lot of the Northeast is like this. Miami would be like this. Markets where the properties don't get good rent to value or RV ratios, they don't cash flow well, in fact they cash flow terribly massive negative cash flow in most of these markets. And they're markets where people think they're investors when they're really gamblers. And it is so sad because you see so many people go broke in these markets, so many mistakes made. And, and here's one of the reasons. Okay. Now we've talked about this before on many past episodes. But the real value of a property I think can be quantified in either the monthly cost to you if you want to rent it or the monthly income to you if you own it and you're the investor. And the example here is the million dollar home. Our event was in Irvine, California. So Irvine, where I owned a traditional real estate company for many years and I was a traditional real estate agent there for many, many years before I owned my own company. And in that market, the typical example would be a million dollar home in Irvine, California. You know, the suburbs of Irvine, California. Right. And that home will rent for about $3,500 per month, maybe 4,000. You know, it's give or take, but that's an approximation. Okay, so that's a 0.35 RV ratio or rent to value ratio, rather than the ideal that we want to see, which is 1%. We think if you invest a million dollars in real estate, you should be generating at least $10,000 per month from that million dollars invested. And so the real value of that property, I say, is what it rents for. That's the utility value. That's the, that's the total indicator of its value, not its speculative bubble nature where people might pay a million dollars for it in a good market and then they'll only pay 650,000 for it in a bad market, when even at 650, it's not worth that much. Because the concept we have to understand is, it was outlined very well when I was, I was at church years ago and I was listening to the Pastor Tim Timmons, and he was saying that none of us really own anything. We are all just the trustee from birth to death. And that's most certainly true. Right? We, we come into the world with nothing except our own lives and ourselves, and we leave the world with nothing. There's, there's no luggage racks on the hearse, as the old saying goes. And, and so all we get to do is manage things while we're alive. And the, the value.

Of a property is what it costs or what it generates per month. That's how we have to look at it. Everything else is gambling, everything else is speculation. The real value comes in. What experience do you have now? You know, I've talked before on the show about the Khan Academy, okay, which is a fantastic website where people can go and get free education on a multitude of topics. And my foundation last year donated some money to the Khan Academy. I really like what they're doing because people, you don't even have to go to college anymore, really. You know, you can. If you just go watch every video on the Khan Academy website for free, you'll be more educated than the vast majority of college students, I would venture to guess. And they had this video that was made back in 2008 and it was about should I buy or should I rent? And he was giving the example of should I buy a home in Silicon Valley, right in like Palo Alto, which is super expensive, you know, a one million dollar house, which they're at the time, would probably buy you a crappy little two bedroom, one bath, old, old house, or should I keep my 250,000 which would represent 25% down. Should I keep that in the bank and earn interest on it? Which now you really don't earn any interest in the bank. But it's just an example. But back then you, you might have had 4% interest. And what he said was very telling. He said, I can rent this property for $3,500 and have the exact same experience, which is all we really own is the experience as buying it and paying $250,000 down plus a mortgage payment on the remaining 750,000 per month. It's the same experience. So the real value of the property, I say, is what it rents for. That's the real value. It's not what you can buy it for. Any thoughts?

Yeah, I mean, as you know, I just became a renter about a year and a half ago here in Southern California.

Congratulations.

Talking about all this time. Well, and it was tough because. And I still have my other house and it's not a great deal.

It's.

The RV ratio isn't great, but it's supporting itself for now until I decide what to do with it. But another piece of this equation is this sense of freedom I have that I'm not attached to that mortgage anymore. Like I said, that property is stabilized. And now not only am I getting a great deal on my rent, far less than the mortgage would be, but if my income goes down at some point I can downsize. I'm not attached to the house. If my income goes up, I can get a bigger house. I just feel really free.

Hey, not just that. What if your husband is offered a job in another area that's, that's a really good opportunity. You can move, I mean, you know, without a lot of attachment and hassle. I have long said that the best deal is most of our listeners are upper middle class or wealthy people, right? And so they live in a high end property or an upper end property. Probably the best deal is to rent a high end property for yourself, as do I. And you do too, and own a lot of lower end properties that you rent to other people because there it's, the RV ratio is so favorable to you, the renter. I was talking about this area right near us in, in, it's called Crystal Cove. It's in Newport Beach, California. And it's a beautiful, beautiful high end area and it was right near where we had the event. So I mentioned this area and I remember looking in there and I owned, at the time, I've, I've owned my own home almost all my life. Very few times have I ever been a renter. I always kind of look down on renters now. I think they're really smart, you know, if they're renting a high end property. So now I, now I got it right, I think. And at the time you, properties that were selling for $6 million in Crystal Cove, you could rent them for like 8,000amonth, 6,000amonth even, sometimes. Whereas if you invested 6 million in properties through our network, we would want you to get 1% per month. What is 1% of 6 million? What's $60,000? So you just see how good a deal it is to own a lot of lower end properties. And when I say lower end, I mean properties that maybe average $100,000 each for a single family home. Some a little higher, some a little lower, but about 100,000. And they rent for a thousand a month. For $6 million you could buy 60 of those versus one home that you would live in for yourself that you could, that you could own in quotes the exact same experience for maybe $8,000 a month. Okay. Or at least at the time when I was looking, you know, I don't know, four or five years ago, it changes a little bit, but the concept remains the same. The concept is that you double arbitrage this because from the people that rent your lower priced properties, you're getting a great ratio. Everything in life is all about ratios and percentages, okay? Or at least in investing and the property that you get to experience and you own the experience without all the obligations of ownership, you, you experience and own that experience every single month, maybe for years at a time for pennies on the dollar in terms of RV ratio. Very good deal, huh?

Yeah, I mean, it is a great deal. And I'm sitting here thinking about all the young couples, you know, that might be listening that are just figuring, trying to figure out how they get their start. And maybe they've been saving and saving and saving for their first home, for example, in an expensive market like Southern California. And you know, they've got this, this slush fund here waiting for their first home. And I would just encourage them, go rent where you want to live and use that and start investing because, you know, it's only a matter of time until you're going to miss out on these low interest rates, you know, so get in while you can because, you know, you don't know how many people I talk to that are trying to figure it all out and they don't know that there are opportunities for them to get started.

So no question. Well, what other thoughts? I mean we'll, we'll tease that out a little bit more. We had some great examples on the concept of that RV ratio stuff from Meet the Masters and big discussions on monetary policy as always and all sorts of things like that. But you know, any other thoughts or impressions from the event, Sarah?

No, I mean, I really think we covered it all. It was a good time. I'm looking forward to the next one, maybe a property tour. So I'll be looking forward to hearing the announcement on that and hope to see some new faces and some old faces as well.

Oh, there is one thing I have to say. This was the first Meet the Masters event I think ever where we did not have the Lone Star state of Texas represented amazingly one of them because we basically cut off one of our providers who was, who was not up to par, up to standard there. But the other one was because a good provider that we have from Houston was not able to come. So surprisingly, no Texas, we still like Texas quite a bit. But at this particular Masters we did not have a Texas local market specialist. Now, what are your impressions in terms of markets and what markets do you like the most now, Sarah?

It depends on the overall goal of the investor for cash flow. If you're looking for strictly cash flow, I really like Memphis, Birmingham, Little Rock. I think Ohio is even going to be a good market for strictly cash flow. But I still really like Houston as a growth market. I've had my house there, I bought it brand new in 2007 and I've increased the rents every year. I've had very little maintenance, you know, so the rents are definitely trending up in that market, which, you know, again increasing the cash flow. But I think from a rental standpoint, all of those markets have been very strong. So I would say those are my favorites.

Good, good stuff. Did you want to talk about any specific properties today by chance?

So here's one I found since we're talking about Houston. This one is brand new construction. It's a three bedroom, two bath home, 1345 square feet and purchase price is $126,990. Now typically in Houston, with these new builds you're purchasing, putting the property under contract and it's about a 30 to 60 day build until it's complete and ready to close. But this particular one is ready to go right now. So if you're looking to get started in Houston, we have one that's already built and ready to close. It was going to an Owner occupied buyer, their financing fell through, so it became available to us.

Okay, good. Let me tell some of the numbers on this. So total cash needed, of course, subject to qualifying is $37,800 basically. And here your projected cash flow is about $3,100 per year. And that gives you a cash on cash return projected at 8% annually. Not as good as they used to be for sure, but, but where else are you going to get 8% on your money and also retain the advantages of having appreciation, tax benefits and the multidimensional characteristics of an income property investment? So not only do you get capital appreciation potential, not only do you get dividend potential, but you get those other multidimensional characteristics. That's why they call income property or real estate the ideal investment. And that ideal, of course is an acronym that we've talked about before. But total return on investment here, projection. Sarah, what, what's the number?

Total return on investment, 32% annually.

Annually. Yeah, so. So again I always like to say if it only goes half as well, that's 16% annually. Not bad. And it's a brand new property and of course we've got our conservative assumptions in there for, you know, a vacancy rate that's included at one month per year, management fees included at 8% per month and maintenance. Now this is, this is a brand new property, but we're still projecting 3% of the income to be used to maintain the property. Probably the first couple of years you're not going to use anything. So looking pretty good. Looking pretty good. And the mortgage is quoted at 4.75%. So investor mortgage is always a little bit more expensive, but in a way, who cares really because we outsource our debt to tenants, we don't pay our own debts in real estate, the tenant pays them for us. So pretty, pretty good deal. Any other thoughts on this one, Sarah?

No, I mean brand new and that includes the refrigerator, microwave, stove, dishwasher, blinds, landscaping, garage door opener. I mean it is ready to go. So if you're looking to get your feet wet and want something real conservative, maybe something a little more passive, less hands on, this is a great, great starter property for somebody.

Good, good stuff. And you can find that@jason hartman.com in the properties section and take a look at that as well as many other properties and many other cities as well. So regardless of what area you like, we've got them in many areas that we like all over the country. So. So good stuff. Well, hey Sarah, thank you for joining me today. And Recapping on our Meet the Map event a little bit and let's go to our guest. Okay.

Yeah, thanks for having me.

Hey, I'm here with Chailie Ridge and I was wondering, Cheli, what are some of the things that an investor needs to be prepared for when applying for a mortgage on an income property?

Good question. Lots of different variables, but the top three things they want to be concerned with are their credit score, their debt to income ratio, and their asset allowance.

Where can they find you?

Www.ridgelendinggroup.com Fantastic.

And if you don't remember that, you can always contact your investment Counselor through Jason Hartman.com and get the information.

It's my pleasure to welcome Ken Wilson to the show. He is the president of the Appraisal Institute and valuation appraisals and all of the things related to that, like lending and mortgage sizes, obviously very important. This all came to light again in the last financial crisis. So there's a lot to talk about with Ken today. And Ken, welcome. How are you?

Just fine, Jason. I'm happy to be here with you today. How are you doing?

Good, good. And I guess you're located in Plano, Texas?

That's my hometown, yes.

Fantastic. And for those who don't know, that's a suburb of Dallas. So what is going on with the world of a crisis appraisal since the financial crisis, the last one, of course, we always seem to have one every several years. But, but, but, but the last one, I think it maybe changed a bit with these appraisal management companies. And, and so I want you to touch on that. But the question is more broad. So go ahead. I'm sorry.

Well, unfortunately, you're correct. We seem to do have these financial crises about every five to seven years. And every time we have one, we, you know, feel or believe that, you know, we're going to learn from the past.

After, when the market conditions improve, it seems that everybody reverts back to old habits. But coming out of the last crises, there was a lot of pressure put on the lending community and the appraisal community from the regulators to create a separation or a firewall, so to speak, from the lending process and the underwriting process, from the credit or the risk part of the equation.

Yeah, let me, let me just address that with a real world, like, simple idea of it. Okay. Because the appraisers I've known over the years that I personally know as friends of mine in the old days, Ken, this is the way it would work. They would know all of the loan Reps, they would in fact court the loan reps, the loan officers to give them business. And I remember them coming in to the mortgage offices and, and bringing everybody cookies or bagels or treats and sending them a gift basket at the holidays. And so.

When that loan rep who was doling out business to the appraiser needed to get the valuation of an appraisal at a certain place to make the deal happen, there's some pressure there, right?

Absolutely.

So that's how it used to be. Now has this concept of these appraisal management companies and, and I'll let you explain what that is for the listener's benefit. But has it worked? Is there a separation? Is there a firewall or do they still know each other and they're still all friends and they're still ratcheting up the prices of deals to make the refi work or the sale work?

Well, for the most part, I think the intentions were good and they're there and there is that separation. But like in any business, that does not totally eliminate pressures, and that is still occurring. So part of the process, part of the Dodd Frank act that Congress enacted, create a hotline where complaints could be, you know, called in or go to a website to direct them to the right place to try and eliminate these pressures. And what you previously described too was a relationship based business. And there's nothing wrong with that. But you know, there is a certain line that you have to draw where you remain professional and an appraisal is defined as an independent third party opinion. And you know, we did get away from that to a certain degree in some markets and you know, residentially based especially. So the intent was to, to create these appraisal management companies to create that firewall or separation. And for the most part they've accomplished that. But unfortunately, as part of the process, money came into the equation and now the pressure is on the appraiser. They're basically engaging the individual or individuals who can perform the quickest and the cheapest. And with that, you don't necessarily get the quality that is commanded when an institution is making a decision on a high dollar loan.

So that's. Oh yeah, so now we've got a new problem. So they have, they have separated the parties a little bit. So, you know, maybe there's less pressure before you, you don't, you know, you're not like buddies with the person on the other end of your deal. The loan officer and the appraiser aren't, aren't good friends. So you've, you've Reduced that. But now they've put in these like lower quality appraisers, I guess is what you're saying, that are just not as experienced or not as good.

Well, and I won't say that's in all cases, but in many cases that's what the result has been. And it's been a flight from quality whereby instead of giving a reasonable period of time for the appraiser to do their work, they're demanding it in a very quick turnaround fashion. There's downward pressures on the fees along with that. Because part of the process is the lending institution engages the appraisal management company for the entire process and they give them X number of dollars per transaction and within those X dollars they have to pay the appraiser. So to maximize their profits, they're putting the pressure on appraisers to come back with a lower fee quote. And unfortunately it goes back to the premise you get what you pay for. And then also adding to that, because of the pressures on fee and time, a lot of the competent and qualified appraisers are choosing not to continue to play in this arena. So they're going down to a lower common denominator. And in many instances they're bringing people in from outside the market area that may or may not know it. And it's what we refer to as geographic competency. And that's also contributing to the problem.

Well, very interesting. There's always the law of unintended consequences, right? So tell us a little bit about the Appraisal Institute, if you would. What is your organization? How many members do you have, too?

Well, we have roughly 22,000 members. And one thing most people don't realize, we're not just a US based organization, we're an international organization that these members are in almost 60 countries on six continents. Having said that, the majority, you know, roughly 21,000 of those individuals are in the United States. But we are represented throughout the world. And what we do is establish, maintain and publicize our designation requirements that are generally known to be well above any other governmental, regulatory or customary minimum requirements as we speak. It's been this way for more than 20 years. In order for an appraiser to practice in the market in most states and in any transaction that's titled federally related, they have to hold a state license or certification. And in order to get that, they're basically meeting the minimum promulgated standards and requirements. But in the case of the appraisal Institute, we require advanced education, advanced experience, as well as testing requirements. So you know, we like to say we represent the best of the best. And how many members in the U.S. roughly 21,000.

And how many appraisers are there in the U.S. well, you know, that's actually an interesting probably.

Well, no, actually, you know, through the states and the licensing agencies, There is about 82,000 right now, but that's down from a high or a most recent number of about 105,000 about five years ago. So, you know, part of the problem is we're in aging and a graying profession, but also at the same time, you know, and it's forcing retirements and unfortunately deaths and people get out of the business for various reasons. But one of the reasons is because what we've talked about prior with the pressures on fees and turnarounds, especially in the residential community, people just feel, I can go do the, you know, do something else and make as much or more money without the headaches.

Yeah, well, they'd probably be a, be a broker in a high end area. That's, that's in a good market. Yeah, well, in a good market, yeah, because I remember in Newport beach, where I'm, I'm from, you know, there were a lot of starving brokers that were losing their houses and their cars and then last, last time around in the crisis. But when it's good, it can be pretty good. So talk about licensing. I mean, what happened since the last financial crisis? I mean, we had licensing in some states before that. I believe California did have licensing well, quite a while ago.

Well, this licensing came about around 1991. This will go back to the financial crisis from the 1980s. And they created a federal doctrine known as FIRIA, the Financial Institutions Reinforcement Recovery Act. And at that point in time, they required licensing and certification for appraisers. So it's nothing new. Even since the last financial crisis, this has been in existence, you know, for the last 23 years, give or take.

And so you're talking about California.

No, all states, you know, had this going back to 1991. Prior to that, very few states had any requirement, you know, as a licensure requirement for an appraiser. Some states, Florida as an example, required an individual to have a real estate sales or broker's license in order to appraise. But prior to the, you know, the mid to late 1980s financial crisis, there was no other requirement to have a specific appraisal license.

And do you segment the markets or do appraisers segment into like different types of markets? You know, one of the things we teach Our investors, investors all the time, is that there are three basic types of macro real estate markets. There's a cyclical market like most of California, where you have grand highs and really ugly lows or troughs. And then you know, you have these more linear markets like Texas that just sort of chug along and you know, appreciate and perform well from a cash flow perspective. For sure, the cyclical markets don't perform well from a cash flow perspective if you're an investor. And then we have, have hybrid markets and Phoenix the last time around became a hybrid market in the last boom and bust where you know, it was always pretty linear until a lot of California money flowed into it the last time around. And I remember giving investment seminars in Southern California and it's, it's, it seemed like every other person I talked to owned a couple rental properties in Phoenix. Not necessarily wisely, but, but it's interesting. Do you segment things into different types of markets?

Well, not in the same respect that you do. You know, many appraisers are involved in what we call the capital markets and that's just the buy and sell market and whereby appraisers are looking at point in time values and that's pretty much what lenders are looking at. But recently, you know, the Appraisal Institute has really developed some education and terminology to benefit our appraisers to do more than just point in time values. And it's called fundamental market analysis, whereby they're looking at a lot more information than just the comparable sales or rentals and making a short term projection. This is actually looking at more information from the market, not only in terms of real estate, but employment, population growth and seeing the way these cycles have behaved themselves over the course of, of time and then making some additional projections on what direction that the market may be going or has the possibility of going. So we're enabling our appraisers to do more type of work than just point in time values.

So in other words, the appraisers are actually making predictions.

Well, if you think about it, they have been over the course of time, even before this new concept, because part of commercial valuation on a multi tenant property, you're looking at a discounted cash flow and you're making projections over the course of time what rents are going to do, what expenses are going to do, you know, capitalization rates, discount rates, et cetera. So appraisers, you know, so to speak, have been making predictions for a while, but this is just taking it to a new level.

But that's still I mean, when they appraise a hundred unit apartment building, for example, I mean, they're not predicting the future, they're just saying this is what it's worth today based on, on various multipliers, basically.

So they're reflecting what the market is doing today and just extending it out. But with fundamental market analysis, you can actually make some of these predictions because you can see how a particular market has behaved and reacted over periods of time. Because, you know, if you go back and look and you know, do any type of statistical analysis, you know, markets haven't really acted linear for the most part. Like you say, you know, there's these troughs and there's these, these curves and bell curves that they have peaks and valleys and actually fall in value. And in terms of point in time value, that's what lenders want to know. That's all they're really concerned with. And that's what the traditional appraisal market has revolved around. But there are other types of people in the market, the investors, the REITs and entities like that. They really want more information. We have been told by the national association of Real Estate Investment Trusts NARE that we really don't care about what the value is on any particular day, but we want data and we want information so we can make these types of projections. And that's where appraisers can come in because, you know, they have access, you know, to this information.

So they're, they're looking at path of progress, they're looking at growth and job creation in various cities, things like that, huh?

They certainly are, yes.

Okay. All right, good. Back when I was in real estate school, a long, long time ago, in the old days, you know, we were taught that there are three basic kinds of appraisals. You know, there's the income approach, there's the cost approach, and the comparison approach. And you talked about this fundamental approach that you just mentioned. Has it evolved? Has anything more come about other than those three basic things? I mean, the fundamental thing's sort of a different category, but, you know, are there any other ways to look at value nowadays? And you know, I just want you to know where I'm coming from when I ask this question, because it's kind of a funny place in an unrelated industry, okay? And it's, it's the crazy tech world. You know, we all heard a few weeks ago about that offer that the company Snapchat turned down for like three or four billion dollars from Google was willing to pay. And I think they must, they must Be out of their mind is what I'm thinking. You know, they've, they, they've never had any revenue. They have no plan to have any revenue revenue in the future. And it just seems kind of like a gimmicky product to me. But hey, maybe I'm just out of my mind. I could be totally wrong here. Apparently they would disagree with me. And so after that offer happened, there was all this talk about do we even understand valuation anymore? Is it really all about a multiplier of net income, price to earnings type of concept? And, and so, you know, I'm wondering, I look at my take on the whole thing there in the world of stocks and Snapchat, et cetera, are real companies make money, period. Right? Okay. Real monies have, real companies have revenue. Okay. And same with real income properties. So, you know, I'm just kind of wondering if people are getting funny about appraisal valuation in the real estate world at all or if there's any newfangled stuff.

You know, there's newfangled stuff, so to speak. And that's, you know, I wouldn't call it newfangled stuff. There's new tools for the tool belt, you know, to allow appraisers to do their job. Going back to the original part of your question, there are still really only three traditional methods for valuing properties. As you mentioned, the cost approach, the sales comparison approach, and the income capitalization approach. The cost approach is less relied upon these days than any of the others just because of the fact when you're talking something that's not a brand new property, that's a, a little bit older and established, you know, many buyers and investors and lenders aren't concerned with what the cost or replace or reproduce that property is, except, you know, in the case of an investor, they want to know what the absolute cost is new, that they're getting it for less than that. But you still have to factor in depreciation and other things, and that's very subjective.

And your insurance company's always interested in the cost approach, though.

They're definitely, they are interested, but you know, in their respect it's not a true cost approach because they don't care about the land value, they're just looking at the improvements. So it's not a complete cost approach doing a replacement cost analysis or something along those lines. So for the most part, I won't say the cost approach has been eliminated, but it's been abandoned in many instances. So that leaves you with the sales comparison approach and the income Approaches. As we said, the sales comparison approach looks at sales of similar properties that have transpired in the hopefully not too distant past similar market. A lot of things, things being equal, the problem is with that is they're always historical and they may only be a few days old, but in some cases in a down market, they may be 6 months, 12 months or 2 years old. So you're really looking in the rearview mirror in just a traditional sales comparison approach and that makes it a little bit more difficult. And then the most reliable approach I think in a commercial appraisal anyway, because obviously it's really not going to apply to residential, unless it's a small income producing residential property, is the income approach. Because that's taking the income that is in place with the tenants, looking at future projections, any vacant space, at what market rates are, and deducting expenses and then capitalizing that income. In talking about new tools in the evolution, if you go back 20, 30 years, the only method or the real method for the income approach was directed capitalization. Now you take that potential income, subtract expenses, capitalize into perpetuity and you get down the road. Now we had the advent, going back into the late 70s, early 80s of the discounted cash flow where it's a little bit more intuitive and a lot more information going. And instead of just taking a snapshot of one year of income, you're actually doing a projection typically over a 10 year period. But it could be as few as three years, five years, seven years or even up to 15 years. And that's going to give you a greater snapshot of the way that property performs over the course of time.

Well, you know, on that note, I mean, how do you analyze market cycles? Or did you just answer that?

I think I kind of answered that, but it's, you know, or actually I answered it, you know, prior in the conversation that you look at more than just what somebody is asking for a property, you know, a rental rate today or what somebody signed a contract rental rate, you know, three months ago. You obviously have to look at that information. But in fundamental market analysis it's much more. You're looking at what employment has been doing in that particular market area, you know, has been declining, has it been increasing, you know, stable. Same thing with, you know, population growth. That's important, you know, to retail properties, you know, what the demand for retail space is to, going, going to be and just, you know, with what, you know, disposable incomes are and all of that. And looking at it, you know, over the course of time. You know, what. What have they been doing in the past and making those projections?

Are there any specific tools, Ken, that you can recommend that appraisers are using that, you know, maybe the public has access to websites, places, you know, software places for data, et cetera? I mean, everybody knows about Zillow and Trulia and those take them with a big grain of salt. It's better than nothing, which is what we had before. But.

They can be misleading, too.

Oh, absolutely. You know, one of the problems with those sites is that they're dependent upon public information. And I'm not saying that they're bad, but you're only as good as the information that's input. And public information isn't always or necessarily accurate, you know, because they're taking it from public records, the assessor or the apprenticeship appraisal district. You know, websites of square footage as a property could be inaccurate. Age, condition of properties, et cetera. But those are probably, you know, at least from a residential standpoint, you know, the primary sites that are out there and that are available. Unless, you know, you want to get into subscription sites where you're, you know, you're paying a lot of money to get that data. And I think your typical consumer probably isn't interested in that.

Yeah, good points. What's next for the Appraisal Institute? Before you go, you know, what's on the horizon? What's coming up this year or next year?

Well, we hope it to be an exciting year. A couple of years ago, the board of directors decided to move from a professional association to a professional society. And focusing on our designated members, the people that have decided to elevate their skills and their careers. And we created a Candidate for Designation program which was implemented and took effect January 1st of 2013. And during 2013, we had a near record number of new designees who were getting through the process. It fell a little short of 2012, which was a record year. We designated 515 individuals that. That's the greatest number in any single year in more than the past 20 years. So we're very excited about that and we're. We're just exploring some new initiatives that we have come up with, expanding our education network. We're actually creating a separate wholly owned subsidiary to create specialty certifications for people who are interested in setting themselves apart in, let's say something the category of green building or valuation for financial reporting, when you're talking about companies that have real estate on their books, and just an added credential for people that are interested in really establishing themselves as true professionals.

Good stuff. Well, give out your website, Ken, if you would and tell people where they can find out more.

I'd be happy to. The website is www.appraisalinstitute.org and if you go there and take a look at it, be patient. We're in the process of rolling out a brand new website and it should be sometime this month and we're real excited about that as well.

Fantastic. Well, Ken Wilson, President of the Appraisal Institute, thank you so much for joining us.

Thank you, Jason. It was my pleasure.

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