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Blockchain and crytptocurrencies

 

By RAC member Ernie Durbin, SRA

Not a day goes by without multiple news stories about cryptocurrency. Numerous cryptocurrencies are active in the marketplace but the oldest and most well-known is Bitcoin. Cryptocurrencies, like Bitcoin, all rely on the foundational technology known as Blockchain. Cryptocurrencies are disruptive and have created a great deal of excitement, however, the Blockchain technology they are based on promises to revolutionize any industry that relies on big data. Some have said that Blockchain technology will transform our lives the same way the Internet has over the last several decades. So, what exactly is Blockchain technology?

At its heart, a Blockchain relies upon a system of “ledgers,” which is certainly nothing new. Ledgers have been around since clay tablets were used to record financial transactions. Double entry accounting is based on permanent ledgers where new entries are added, and previous entries are left unmodified. Each transaction builds upon previous transactions. Blockchain technology takes a simple ledger to a whole new level, one that is completely decentralized. A Blockchain ledger system is distributed over a peer to peer network. Everyone in the Blockchain network has an instance of the same identical ledger. Rather than relying on one trusted entity to maintain the ledger, all participants have a validated record of every transaction. Transactions do not have to be financial in nature; they can be any digital data. Financial transactions, medical records, retail inventory, anything of value can be tracked in a distributed ledger via Blockchain technology.

Blockchain stores information in batches called “blocks.” These blocks are linked together in a chronological order creating a continuous “chain” of information. If you need to make a change in a previous block of information you do not overwrite it, you simply add a new block with the correct data. The new block records that “X was changed to Y;” all renditions of the chain of data are kept intact and distributed to everyone in the Blockchain. This is a nondestructive way to track data changes over time similar to the centuries-old general financial ledger. The big difference is no one entity is in control of the master ledger, everyone in the peer to peer Blockchain network has the same complete “master” ledger. In addition, each block contains a “hash” which is essentially an electronic fingerprint unique to that particular block. As blocks are added to the chain, they include their own hash as well as the hash of the previous block. Tampering with or changing the data changes the hash of that block. This ensures that data cannot be modified or changed on any one node in the computer network. Combination of immutability and the distributed nature of the Blockchain creates trust in the data without a central authority required.

Before a new block of information can be added to the chain, a few things have to happen. First, to create the block, a cryptographic puzzle must be solved by the initiating computer. Next, the computer that solves the cryptographic puzzle shares the solution with all the other computers within the Blockchain network. This process is called “proof of work.” The network of computers will then verify this “proof of work” and, if it is correct, the block will be added to the chain permanently. The verification process works by consensus, requiring a majority of the computers on the network to validate the information before it is added to the Blockchain. Combining a complex math puzzle with the verification by numerous computers ensures every block on the chain can be trusted. Trust in the data is fostered by the distribution of transparent peer-to-peer information, without a central keeper of data.

By establishing trust in the data, Blockchain technology removes intermediaries from the data verification process. Many transactions today require a trusted intermediary such as an attorney or financial institution. We rely on these intermediaries to keep our information confidential and to verify the information of the other person involved in the transaction. As an example, title companies verify the “chain of title” on a piece of real estate prior to transfer. If the verified information was available in a Blockchain network, a history of all transfers of title and other property rights would be instantly available and verified as accurate. Title companies serve market participants by reducing risk, but they do so at a cost of time and money. Removing intermediaries and relying on trusted data would greatly reduce transaction time and cost while also controlling risk. Blockchain provides a trusted interaction with data completely changing the way we access, verify and transact with other parties.

Blockchain technology is currently in its infancy. It has been widely deployed by cryptocurrencies and its use in this sector has demonstrated some of its weaknesses. The largest cryptocurrency, Bitcoin, has an enormous distributed ledger. Every transaction since Bitcoin’s inception is included in the Blockchain that is distributed globally. Since Bitcoin is a monetary transaction, very few data points are required to be added to each block. In spite of the small amount of data, each distributed ledger has grown to gigabytes of information. Bitcoin is demonstrating that a broad public Blockchain has scalability issues.

The Bitcoin Blockchain, because of its size, can only process approximately 7 transactions per second. Compare that to approximately 20,000 transactions per second MasterCard can process. Time to verify a transaction is prohibitive by modern standards. Imagine ordering your favorite coffee from your local barista and trying to pay with Bitcoin; it might take 30 minutes to complete the transaction! In addition to the slow verification process, the energy costs of maintaining a globally distributed network are staggering. Forbes Magazine reports that global Bitcoin Blockchain consumes enough energy to power a country like Switzerland each year or 1.5% of the energy consumption in the United States. Most of this energy is a result of the proof of work calculations, essential to the distributed ledger.

Technology advances will eventually solve some of the weaknesses of Blockchain and overtime, Blockchain will change the way we do business. Trusted data sources that do not require intermediaries in transactions will disrupt many industries including the real estate industry. In a future article, I will address how Blockchain is being used and might be used in the real estate industry. As with any application of technology, there are tremendous benefits and unintended consequences. The real estate industry is entering the era of big data and Blockchain technology will be a part of how we interact with that data in the future.

Republished with permission by Appraisal Buzz – found here
https://www.appraisalbuzz.com/blockchain-technology-data-can-trust/

This article was first published in the Appraisal Buzz magazine. Subscribe now to receive your edition of the Appraisal Buzz Spring 2019 Magazine!

Relocation Appraisal as market niche

 

Every appraiser has a type of assignment that is near and dear to them. One of my very favorites is Employee Relocation “WERC” work. These are a specialty assignment within the realm of the residential expert. They have long been a favorite type of appraisal work for me, because the relocation client has a real problem that needs to be solved correctly. Their problem relates to potentially purchasing the home of a transferring employee, which is offered to help make the transferee’s move more seamless and less stressful. This is a laudable goal, because anyone moving from one location to another is going to have many mixed emotions, and the stress of a home sale should not be an additional stressor.

Because of the real need for a supported answer, companies hiring appraisers to handle this type of work want to ensure that the appraiser they retain knows how to handle the problem correctly. There are differences between relocation work and most residential assignments. The differences largely relate to the definition of value, which on a relocation assignment is “Anticipated Sales Price” versus “Market Value”. Within the definition of Anticipated Sales Price, is the component of “Forecasting”, which includes the analysis of what has happened in the past, compared to the current market, and projecting out in time within a defined period (usually 120-days), in order to affect a sale within this period. This can be tricky in changing markets, as the past may not predict the future, and the appraiser has to be sensitive to what is happening, right here, right now.

This forecasting adjustment, whether it is positive, negative or zero, must be considered and made. In rapidly advancing markets, the prices may be rising at each sale, leap-frogging each other. The appraiser has to consider this as a possibility/probability, just as when the market is starting to retreat. Even when the market is balanced and stable, seasonality comes into play and may require an adjustment. For example, in the market in which I work, we tend to slow down after the Fourth of July, and the appraiser should consider that, just as much as they would want to consider how the market normally picks up in February. This is because we are projecting out in time to what the house will likely sell for within a marketing time of 120-days.

Another stark difference between the relocation assignment and a mortgage assignment is the detail involved in the market conditions section. The form, as developed, allows the appraiser to truly analyze the market segment they choose as representative of the subject’s competition. Appraisers can use whatever they consider relevant, and personally I like to lay this out as an annualized monthly data run. Some appraiser run it as quarter-to-quarter, others year-to-year, and so forth. This allows flexibility and can help organize the thought process to what is happening in the market as of the effective date of the report. In fact, this format is easy to use for any residential appraisal problem, and would be a benefit in lieu of the 1004MC.

In addition to the forecasting that is made, another difference in relocation assignments relates to décor, far more than with a mortgage assignment. The form guidelines specify that we consider the property’s appearance as it was shown, as of the date that we saw the property. Sometimes we are asked to value “as if vacant” – this is another challenge as the transferee may have a very coordinated color décor with wall hangings, furniture, and so forth, but when all of that is gone, what’s left may be personalized wall or floor coverings. Personalized colors and special design features that may be attractive to the transferee, may actually be a detriment to marketing the house. This needs to be addressed. For example, consider the built-in hot tub in the main bedroom (not the bathroom), or the 5,000 sqft house with pink vinyl siding, or the house where the teenagers thought painting the walls and ceilings black was a good idea.

Just as in a mortgage assignment, functional issues with a property have to be addressed. We have all seen houses with a captive bedroom which requires that you have to go through one bedroom to get to another, or where the bedrooms are on the second floor, and the only bathroom in the house is on the main floor, next to the kitchen. In an increasing market, the buyers may be more forgiving of these types of quirks in a property, but when the market slows, they can be make-or-break situations. As the relocation company and employer could well be offering a buy-out to the transferee on their property, it is of critical importance that these types of quirks are well analyzed and described.

Unlike a mortgage appraisal with the current UAD requirements, relocation appraisals require the appraiser to rate the quality and the condition based on relative versus absolute factors. If a house is almost new, and all the sales used are almost new, and the neighborhood consists largely of similar properties, then the condition is going to be “average” compared to these properties. If the house has amenities that are atypical for the market, then these may be “excellent” or “good” compared to others that compete. Or if there is a functional issue, this may or may not be average for that market, because other properties that are comparable may have a similar functional problem. The ratings are addressed in the Definitions and Guidelines page of the ERC form, and anyone who is considering completing this type of work should make themselves familiar with these guidelines, as well as with the definition of Anticipated Sales Price and Forecasting.

In relocation appraisal assignments, we are judged not only by the analysis that is presented in the report, but in comparison to another appraiser. It is quite common for the two appraisers who are completing the relocation assignment to use common sales or listings, but to include different information. This is common with items such as basement bathrooms, which the MLS may report as on the main floor, as opposed to a basement. Or maybe the ubiquitous days on market for the listings, when the reports were prepared at different times. If the Anticipated Sales Price for two reports are outside of a spread (commonly 5%), then the requirement is often a third appraisal report, allowing for possibly more noted discrepancies far after the fact. The appraiser handling relocation assignments has to be prepared to answer multiple questions from the relocation company in a prompt and professional manner. Appraisers who are not familiar with relocation appraisal guidelines can cause more call backs and requests for information. This is because of the compare-and-contrast function in the review of these assignments — one appraiser may consider a forecasting adjustment necessary and support it, while the other may not adequately address it. If you decide to do this type of work, educate yourself on the process and be prepared to answer questions on most reports that you complete.

If you enjoy the analysis, and describing your analysis and conclusions, then I would encourage you to explore the process in more detail. The Worldwide Employee Relocation Council has an introductory webinar series to relocation appraisal that is found on the website with the following link: https://academy.worldwideerc.org/relocation-appraiser-resources/
Chip Wagner has also developed and perfected a class on relocation appraisals which addresses unique situations that arise in this type of work. If you are interested in learning about relocation work, I highly recommend the class. You can also ask your local education provider to host it.

Of course, if your goal is to become the best relocation appraiser you can be, check out the RAC organization. RAC (Relocation Appraisers and Consultants) which is dedicated to advancing the relocation appraisal profession, but also includes members who specialize in appraisal of complex residential properties often involving litigation. First and foremost, however, it is a relocation appraiser organization, to which I am very happy to belong to. Each year, RAC hosts a 2-day conference dedicated to the residential appraisal profession, with emphasis on relocation appraisal. This is a great place to meet professionals in this field, and to learn more about this niche market. For more information about RAC, please visit the website at www.rac.net.

Relocation appraisal work offers the appraisal professional an opportunity to do their very best work, showcasing their writing and analytical abilities. Our conclusions have to stand up not only by way of comparison with another professional appraiser, but also with the eventual sales price. We will be measured on both of those fronts, as well as in our professional demeanor. There are few options available for this type of work outside of the litigation arena. In relocation work, we have the opportunity to do excellent work, as well as test it, and even more importantly, to serve those with a very real need.

This article first appeared in Appraisal Today, and was republished with permission.

Appraiser competency for relocation assignments

Am I competent to complete this relocation assignment? Who on earth wants to ask themselves that question? Who on earth thinks they may be incompetent?  We have to remember to ask ourselves whether we have the competence to complete an assignment, or whether we can gain the competency to do so by the time we deliver our appraisal report.

The Uniform Standards of Professional Appraisal Practice addresses competency as its own rule, which stresses how important this rule is.  The appraiser has to be competent to perform the assignment, or if lacking, acquire the necessary competency to perform the assignment.  The appraiser must inform the potential client before accepting the assignment about any lack of competency as well as address it in the report and what they did to become competent. If the appraiser will not be able to perform in a competent manner, they have to decline or even withdraw from the assignment. It does happen occasionally that in the midst of an appraisal, a problem arises that the appraiser will not be able to solve. At that point, they will either need to get assistance or withdraw.

What happens when the property type and location are something that we have familiarity with, but there are assignment elements that we do not? How about accepting a relocation assignment without understanding that the definition of Anticipated Sales Price is not Market Value, and that there are steps that are involved in this type of assignment that are not found in a mortgage report?

Relocation work is fascinating, and allows the appraiser to apply their knowledge of the market, and what drives value in a very detailed manner.

Being in touch with trends within your own community related to what buyers want in various market segments is key, as well as understanding supply and demand, and the fact that the past may not dictate the future is important. Understanding and being able to measure what is happening in the market, right now, as well as what is likely to happen in the very near future related to the listings that are on the market and competing with your property are critical.  At the very least, an appraiser who takes on relocation work who has not taken classes or learned the process, needs to disclose this to their potential client. Let the client decide if they want to use the appraiser, or chose someone who does understand this work and has the experience to do it properly. Relocation work does allow the appraiser to gain competency while working on the assignment, as long as the report is competently completed by delivery.

There are appraisers who have made this type of work one of their primary specialty, and most are happy to help someone who sincerely desires to learn and understand the vagaries of the product type. The first place to start if you have not completed this type of work, is to visit the Worldwide ERC website and sign up for the Relocation Appraisal Training Program https://academy.worldwideerc.org/relocation-appraiser-resources/the-relocation-appraisal-training-program/. There is a cost for this program, but if the desire is there to take on a different type of assignment, this is a small price to pay, and a good foundation of knowledge.  In addition to the training above, WERC sells the guide for relocation appraisal, found at https://erc.org/Resources/USRealEstate/Pages/Relocation-Appraisal-Guide.aspx. The cost for the guide is $95 for members and $195 for non-members, but is a “must-have” for the new relocation appraiser. Another option is to go to the ERC 2010 form report itself, and study the first page. This first page lays out the requirements of the form and helps the appraiser understand the process.

Asking relocation appraisers for help is another great way to learn, but please be respectful of their time as well, as they are likely helping without any compensation. Much of what we need to become competent in this type of work is readily accessible, and there are articles written addressing the differences between Market Value and Anticipated Sales Price, and elements that may be important in a relocation assignment. Some things to watch for related to this work is that we do not use UAD language; condition and quality is relative, not absolute; floor plans are cross-examined by a peer appraiser’s work; and colors, modernization and property oddities might be extremely important here, as well as general upkeep. Anticipated Sales Price does require the analysis of forecasting, and listings and pending sales are very important in the relocation process. Where the subject property is positioned in relation to the listings is something to consider and address, and the appraisal report WILL be compared to another appraisal report (or two).

Relocation work is rewarding and interesting work, but the appraiser has got to be competent in the product, not just the property type and location.  If a call comes in to complete a relocation assignment, and you have never done one, let the potential client know. It is possible that they will be fine with someone new to this field, but will want to ensure that the work was completed in a manner that meets the needs of the client. Although it is uncomfortable to admit that we may lack competency in a type of assignment, this is one where we can actually gain it during the process. That is, if we are open to learning.

By Rachel Massey, with great assist from Chip Wagner