Michael Dresden: The Evolution of Appraisals

Mortgage Media had the opportunity to sit down with Michael Dresden of Dart Appraisal and discuss the company’s overall strategy, how technology – like drones and tablets – is impacting appraisals, encouraging the next generation of appraisers and more.

Suresh Ramakrishnan: This is Suresh Ramakrishnan from Mortgage Media. I’m at the MBA Annual convention in Austin, and I’m pleased to be joined today by Michael Dresden. Michael is the president of Dart. Thanks for agreeing to do this interview.

Michael Dresden: Absolutely.

Ramakrishnan: Mortgage Media likes to get different perspectives from various participants in the industry. We speak to lenders, we speak to service providers, and I think it’ll be good to get your perspective on a number of different issues. We’ve known each other for several years. And I haven’t seen a perspective from an AMC, so I think it’ll be good to get that. So how have you guys been managing, especially since March, with what’s happening in the market?

Dresden: If you look back a year ago, a lot of our lenders were paring staff down. They were looking at 5% interest rates and reduced volume and forecast for 2019 that we’re going to be really slow, maybe even going into a recession this year. So, they were reducing staff and paring down and then rates suddenly went down in the spring, a little bit in March, a little bit more in April, and then pretty dramatically in June. It’s been a real violent swing in volume where we’re predicting a soft year in 2019, and it became a bit of a boom year, especially in the summer and fall.

Ramakrishnan: How did you, from a staffing and just the crash of orders that you had, how were you able to manage that?

Dresden: Again, we were predicting going into a soft 2019, I think we were staffed for a softer 2019. We typically build in some capacity, so we’ve got a 20% cushion for volume fluctuation, which is important. But we had a more than 20% surge in volume, so we had to employ some super Tuesdays, where we’ve got the teams working 12-hour days. And then we employed some weekend help, and then we’ve had to hire, so we’ve been in the position of hiring pretty much all summer and fall, and hiring people to ramp them up in our industry is really hard, so we’ve had to specialize.

We’ve been doing some hiring, and it’s hard to ramp somebody up quickly in our industry. So, we’ve been creating specialized activity where we can ramp somebody up a lot quicker. For instance, we’ve hired people specifically to follow up with appraisers on open appraisals, trying to ensure that activity was done timely.

It’s a bit of the squeaky-wheel approach, but if we do that, we’re ensuring a faster delivery back to us from the appraisers. And we feel that people can get trained for that type of activity pretty quickly, so we’ve been able to ramp up.

Ramakrishnan: So, it’s both extending work hours and so on, and also streamlining some of the processes.

Dresden: Exactly. And that’s something we probably always should have been doing, but we employed that much more dramatically this year.

Ramakrishnan: Necessity is the mother of invention, right?

Dresden: We had to, yes, yes.

Ramakrishnan: Okay. So, tell me a little bit about Dart.

Dresden: Dart Appraisal is a nationwide appraisal management company. We have three to 400 lenders that we work with across the country in all 50 states and have been in business for 26 years. We have about 10,000 independent contractor appraisers that we work with, delivering services to our lender customers. We do both residential and commercial. We acquired a firm about a year and a half ago that specializes on the commercial side. That brought a new vertical to us, and it was really important for our growth strategies.

Ramakrishnan: And is commercial very different from residential.

Dresden: It is. Yes, so we learned a lot through that process of acquiring that firm, but the cycles are longer, the activity is much more complex. It’s more specialized, so it’s a good balance for our residential side.

Ramakrishnan: And have both sectors been growing?

Dresden: They have, yes. The commercial side has been growing, but it’s more steady throughout the year. In our business on the residential side it can be really violent. And what’s interesting is on the commercial side, is that a lot of times you’ll see a surge in volume near the end of the year as they’re trying to use a budget and things like that. Whereas on residential, it’s going to follow more on rates.

Ramakrishnan: And it’s not as interest-rate sensitive there.

Dresden: It’s not, no. It impacts it, of course, but it’s not as sensitive.

Ramakrishnan: Prior to 2008 when you had an appraisal, you would call your local appraiser, say, “Hey, can you get my property valuated?” And they would ask the question, “What value would you like?” Thankfully we’ve gone away from that.

Dresden: We don’t do that anymore.

Ramakrishnan: But how as an AMC, given that you’re nationwide, how do you ensure that you get a local appraiser to evaluate a local property so the values are more aligned with what the local markets are?

Dresden: A lot of what you’re referencing, when the changes went from pre-HBCC, AMCs were newer. We weren’t. We’ve been around for 26 years, but a lot of AMCs were newer and they didn’t have developed panels. So, who they had was who they used. We never experienced that for a variety of reasons, but one is we had a well-developed panel that has been in place for over two decades. And then, our system is going to highlight the appraisers for each assignment based on a score, and one of the elements in that score is going to be their geographic competence and their proximity to the subject.

So, we’re going to highly weigh quality, but we’re not going to ignore the fact that we need appraisers that have geographic competence and are local and proximate. That’s really important for us.

Ramakrishnan: And typically, when you look at geography, you say it’s within 10, 15, 20 miles?

Dresden: So, in Manhattan, it might be a couple of blocks. In Montana, it might be 70 miles. It really depends on the market. A good rule of thumb is going to be that in a metro area, it should be less than 10 miles. If you pull them for more than 10 miles in a metro area, then it’s going to be harder for that appraiser to demonstrate that geographic competence.

In a suburban, you might get out to 15 or 20. We can dial that in or out too based on the needs of the lender. So, if a lender wants a tighter tolerance, we can do that.

Ramakrishnan: And so, typically, what requirements have lenders been placing in this? Are they looking for extremely local? What do you see lenders requiring?

Dresden: Proximity was the hot-button topic that we had in 2010, ’11, ’12, and a lot of it had to do with what I was speaking about earlier. A lot of AMCs that they were working with might not have had developed panels. So, it became a hot button. It’s been quieter since then, but I think that’s because panels have matured and companies have been using more local…

Ramakrishnan: And that issue is not rising as much as it used to.

Dresden: Not as much. I’m sure it still does, but it’s not as much. On high-end properties too, for example, we’ll vet the appraiser to make sure he has experience in that neighborhood. We’ll do an interview prior to engagement to make sure he really understands that neighborhood, in particular, not just the area.

Ramakrishnan: Since that is the big fundamental collateral you want to ensure that all the noise is taken out.

Dresden: So important.

Ramakrishnan: Another issue that we’ve seen is about 62% of appraisers are aged 50 or older, and 24% are between 36 and 50. There’s only 13% that are 35 and younger. I don’t know if you agree with those statistics. But the Appraisal Institute suggested that over the next few years, as the demographics keep getting older and older and appraisers keep retiring, the volume of people available for you to source as appraisers is getting smaller. So, with fewer appraisers available to handle the volume of home sales, either appraisal fees will increase to attract more people in, or the turnaround time is going to get longer. How do you manage in this environment, when you have two opposing forces coming in?

Dresden: I think the appraiser population peaked at the top of the housing market. In 05, ’06, we had the most appraisers in the industry overall, and then when that crisis hit, ’07, ’08 into ’09 and a lot of appraisers got out of the business. One of the biggest reasons was demand. There just wasn’t as much demand and as independent contractors, they need to follow the work. When the work wasn’t there, many got out of the business.

And then, unfortunately, right about the same time we, as an industry, put some restrictions or barriers to entry for appraisers where we required a college degree. So, anyone that wanted to come into the business after housing crisis now had to have a college degree, and 3,500 hours of field experience in many states. It just became an unrealistic entry point, and one that wouldn’t solve itself for three to seven years later.

When demand came back in 2012 and then again in 2016, the industry, they didn’t replenish that stock from all the appraisers that left in the mid-2000s. Thankfully, we’ve done some things to change that, so the industry has now removed some of those educational and experience requirements, while not impacting quality. I think that’s a big benefit.

Ramakrishnan: So, you don’t need a degree anymore?

Dresden: In a lot of instances, you don’t. There’s still some college required, but it’s not a full bachelor’s degree.

Ramakrishnan: Is that a state-by-state requirement or a Federal requirement?

Dresden: There’s some overlaying Federal requirements and then states have underlays, so states can have individual rules in place, as well.

Ramakrishnan: Does that make this more confusing that in certain states you can have more appraisers, in others you can’t?

Dresden: Well, many appraisers don’t operate in more than one state, so it’ll be specific to them. We’d certainly be in favor of one licensing requirement for the whole country. If you have a driver’s license you can drive in all 50 states. Why can’t you have an appraiser license that transfers as well? There’s some conversation around that, but right now it’s a state-specific license, but most appraisers only operate in one state.

Ramakrishnan: For an LO, there’s an additional licensing that’s being discussed. Whereas, if you move from a depository lender to a non-depository lender, rather than preventing you from doing business, they’re talking about 120-day sort of window where it gives you the time to get the licenses, but doesn’t prevent you from conducting your business.

Dresden: It’s made our operation more complex. It’s added the need for us to have segmented compliance department, so it’s certainly added complexity and cost and oversight. And it’s made our job more difficult to manage and oversee, but we try to make that as seamless as possible for the lenders or anyone that we’re working with.

Ramakrishnan: So, as far as then attracting new participants into becoming an appraiser, what has been going on in the industry to make sure, “Hey, appraisal is a good business to get into”?

Dresden: There’s some advocacy being done at the university level, where they’re actually putting some interesting programs in place, knowing that some appraisers are still going to have that limited college experience. They’re advocating at the university to talk about appraisal as a profession.

Also, there’s much more technology in the process today, which is attractive to younger workers. If  you describe the job of an appraiser, someone that could work out of their home, that could call their own hours, that could use technology, that could meet and interact with different people every day, it really fits a lot of the needs of what a Millennial is looking for and today’s workforce is looking for, So there’s a good match there. We need to do a really good job of marketing that aspect, and they’re starting that effort, which is really encouraging.

Ramakrishnan: You could almost be like an Uber driver in the gig economy.

Dresden: It could be considered a gig.

Ramakrishnan: You could go to a certain place, do your appraisal, and then pick up your next ride and go back.

Dresden: You certainly could, I mean, you’d have to learn certain geographies, but yeah, absolutely.

Ramakrishnan: With the changes that are taking place, homes $400,000 and under may not need an appraisal. The Federal regulators approved a proposal to increase the threshold in which properties would need an appraisal. If that rule passes, what is the impact on Dart and other appraisers? How does that impact your business and appraisals in general?

Dresden: I’ll address the de minimis change first. So, while the de minimis change to $400K has potential to be impactful, it’s just giving the opportunity to not require an appraisal. But they’ve had similar things going back to the 80s, where there’s been approved transaction waivers for properties up to $200,000. So, it’s available, but it’s not always used, and a lot of the reason is that borrowers and lenders still want an appraisal in many circumstances and instances.

There’s been a growth in waiver usage, so investors are offering waivers more often, Fannie and Freddie in particular, and we have seen an increase in that utilization in the past few years. I can’t imagine that that’s going to explode much more than where it’s at right now.

If you’re in the 10, 15% of the population for a waiver, that seems appropriate. But there are certain transactions where you might not need an appraisal, especially if it was appraised recently, there’s good data, it’s in a homogenous neighborhood. You might not need that appraisal. But for any kind of a complex transaction or rural transaction, a home that doesn’t have a previous appraisal done recently, maybe it’s a new borrower situation, an appraisal is absolutely necessary.

Ramakrishnan: It may not be a full waiver, but it could be from a full appraisal to a drive-by or or something like that. I’ll give you an example. I was talking to somebody the other day and they said, “We can do appraisals with drones.” Whatever, right? Just because from the outside it’s perceived to be this great neighborhood and so on…but for all you know, on the inside upkeep may not have been done.

Dresden: Well, an ABM or a drone or any technology is not going to feel the ground squishy, water saturation as you’re walking up to the home. It’s not going to smell the cat smell, right? When you walk into the home, it’s not necessarily going to see some of the functional obsolescence that might be evident inside the property. There are a variety of things that a trained credentialed appraiser is going to see that technology is going to have a harder time seeing.

Ramakrishnan: That seems to be the way that it’s trending, at least on the margins, it may not be everywhere. But as an investor, how would they get confidence that what they think is collateral is really worth what it is, even though on the face of it, it may be? Because, like you said, the ground may be squishy or...

Dresden: I think it’s important that we need to be sensitive to the needs of the lender and the investor, so they want to know sooner, faster, the information on that collateral. So, if we can make the overall process faster, that’s a good thing. And there’s ways that we’re looking right now at bifurcating that process by separating the actual valuation process from the inspection process.

And in some cases, that makes sense to have a trained inspector, not an Uber driver, go through a standardized review checklist and look at everything that they need to on that property, take a ton of photos and documentation, and then provide that to an appraiser for review.

And the appraiser is going to have to say, “Hey, I didn’t inspect the property, but based on what I’m seeing, here’s how I would value it, looking at the other comparables in the area.” But there are instances where that works, and there are instances where that’s not going to work. And there are some times when the appraiser is going to get the data, and still want to go back out to the property to verify some things.

Ramakrishnan: So, you find yourself using more and more technology into the appraisal process?

Dresden: We are and the more that we can make the process easier for the appraiser, the better. There’s some talk right now about redoing the forms, even making the forms flow more like a TurboTax transaction, so it’s not a form-filling activity, it’s more of an information-gathering and data-analysis activity, that’s favorable.

Ramakrishnan: And that hasto occur at an industry level…

Dresden: It does, yes, it’s that Fannie and Freddie form. But they are working together on that. It’s a multi-year project from what I understand. But once they publish that, that can be a great benefit to the appraiser.

Ramakrishnan: So, as mortgages get more digital with Day 1 Certainty and so on, is there some kind of an issue like that on the appraisal side?  Is what you just described part of a broader initiative?

Dresden: Yes. Absolutely. And then also just utilization of trainees. So, an appraiser having a trainee actually assist with the inspection process where that was forbidden and was another barrier about 10 years ago. Back then, using a trainee was a bit taboo, which discouraged more appraisers coming into the profession. There’s more of a light shone on that right now, so it’s more accepted and even encouraged in many markets. I think that’s helping the appraiser too – having more assistance in the process.

Ramakrishnan: Access to more people that can help them…

Dresden: Exactly, and we’re seeing fewer and fewer clipboards in the field and more tablets. Appraisers are utilizing technology while they’re in the field and they can get much of that reporting done prior to going back to the office. In the past, the process would be much more manual in the field. And then, when they’d get back to the office, then they’d have to put everything together.

Ramakrishnan: And they might almost forget. You look at three houses on the same day, by the time you get back, you might forget what house…

Dresden: It’s possible. It’s possible.

Ramakrishnan: Yeah, so I think technology is very important.

Dresden: Yes, where it’s helping. Yes.

Ramakrishnan: What do you do in this crazy industry to relax and blow off some steam? Besides watching the Michigan football team?

Dresden: Well, that was nice. We had a little beat-down on Notre Dame this weekend.

Ramakrishnan: Yes, that was good. I agree.

Dresden: That was certainly good to see. I travel a lot for work, so I’m away from home. When  I am home, I want to make sure I spend as much time as I can with my kids. I have four children under the age of 12, so they’re very active. That’s kind of my life when I’m home, and as crazy as it can be, it’s still what gives me a ton of energy, and so it’s where I like to spend my time when I’m not working.

Ramakrishnan: What is a piece of advice that you would give to someone in this industry? Not just necessarily in the appraisal business, but in the mortgage industry, to navigate the ups and downs? Because, like we talked about, planning is not that easy.

Dresden: No. It’s not.

Ramakrishnan: But how do you do it with the unexpected nature of the movements, upgrades, and so on?

Dresden: I think what I had mentioned earlier is really important. There was a lesson that we learned this year that I think could help others. That would be to take a look at work process, and if there are ways to break off some of that process. Maybe someone in the past that was a generalist, that did many things. Maybe there are certain segments that you can break off. So, in times when you’re busy, you could ramp up an additional resources quickly, because they’re just learning one task. And I think that could help out. Specialization of routine tasks.

So not complex tasks, you know? Like I’d mentioned, follow-up and things like that. I think that’s a way to get resources up to speed a lot quicker. The other thing I would say, is to make sure you have a warm bench of candidates. You should always be talking to talent, always be talking to candidates because when you need to look at adding, then you already have those people in the pipeline

Ramakrishnan: How do you keep the bench people motivated? Because, when volumes are down…

Dresden: Well, you have to have an opportunity for them, right? You can’t just talk and talk and never have something for them. But if you can demonstrate that you have brought people on and there could be opportunities for them, then I could see how that would be something to encourage them to keep talking to you.

Content has been edited for length and grammar.