Gulf Oil Spill Advisory

The Deepwater Horizon Oil Spill (the Oil Spill) on April 20, 2010 has added a level of uncertainty to an already unstable real estate market and has potentially complicated the process of properly valuing homes on the gulf coast and contiguous counties.  As such, relocation management companies and their clients have begun to further scrutinize current and potential inventory properties in the area.  Some of the questions we have been asked include:
  • Are properties only impacted that are physically located on the coast?
  • Have property values already been affected by this spill?
  • Is this a temporary condition?  How temporary will it be?
  • Can this property even be appraised within ERC guidelines?
Due to the significant impact the oil spill may have on our clients and network, we believe it is important to provide guidance on additional information that you may want  to consider,  factor into your analysis and include in your report.  We also wanted to suggest applicable areas of the Uniform Standards of Professional Appraisal Practice (USPAP) and other Appraisal Standards Board (ASB) communications which you may wish to review.

Carefully Read the Order Instructions

Do not assume that the order instructions have not changed when accepting an assignment. Be especially certain to review in detail any special instructions from the client regarding specific handling of properties in the area.

Information is Critical The information you provide in your report is critical to our clients as they evaluate the risk of a transaction as well as understand and substantiate the anticipated sales price you develop.  As such, some important points to consider:
  • Document exactly how far the subject is from the closest oil-impacted point.
  • Fully disclose in your report all that you know, and potentially do not know, about the Oil Spill and its impact on the subject market.
  • Be factual.
  • Do not limit your information to what you can fit in the boxes of the form, use an addendum as appropriate. More information is better than less.
It is critical that you provide the client with enough information in your report to allow them to understand the market conditions so they can apply that information in their decision making process.

Back to Basics

When developing the appraisal you may want to review USPAP Standard 1: Real Property Appraisal, Development.

USPAP provides additional advice for contaminated property and it is critical that appraisers accepting properties in the Gulf area are knowledgeable of the following:
  • USPAP Advisory Opinion 9: The Appraisal of Real Property That May Be Impacted by Environmental Contamination
  • USPAP 2010 FAQ 178: Sudden Market Changes Related to Catastrophic Events
Although Fannie Mae, Freddie Mac or FHA guidelines do not specifically apply to the development of an opinion of anticipated sales price, it would be prudent to consider their guidance. The subject will eventually resell and any impact from the oil spill may have financing implications.  In addition to the guidance provided below, the appraiser needs to stay current on the availability of market rate financing. Be sure to have the latest information on the following and address how this information was factored into your analysis:
  • Has either of the Government-Sponsored Enterprises (GSE) stopped buying loans in the subject market?
  • Is the subject located in a market that relies on FHA, VA or USDA financing?
  • Have these entities stopped insuring loans in the area?
  • How will any of these factors impact the subject’s marketability, DOM, eventual sale price?
Specifically, based on GSE’s B4-1.3-01: Special Appraisal Considerations for Properties Affected by Environmental Hazards also requires that when the appraiser has knowledge of any hazardous condition (whether it exists in or on the subject property or on any site within the vicinity of the property), the appraiser must:
  • Note the hazardous condition in the appraisal reports
  • Comment on any influence the hazard has on the property’s value and marketability
Fannie Mae does note, that the residential real estate appraiser is neither expected nor required to be an expert in the field of environmental hazards, but has a responsibility to note in the appraisal report any adverse conditions observed during inspection or information that he or she became aware of through the research involved in performing an appraisal.

In its Servicer Guide (section 44.6) Freddie Mac takes a different approach and focuses on what is considered an unacceptable appraisal practice in its Unacceptable Appraisal or Inspection Practices, this includes:
  • Inclusion of inaccurate or incomplete data about the subject property, the neighborhood or any comparable sales used in the appraisal analysis
  • Failure to report and/or consider any apparent factor that has an adverse effect on the value and/or marketability of the subject property

Know the Market

It is strongly recommended that appraisers use comparables that contracted after the Oil Spill; however, in most areas, not enough hard sales have occurred since the Oil Spill to provide sufficient evidence that a change in market conditions has occurred as a result of the spill. Other ways to evaluate the market impact can be considered:
  • Are listings being reduced to encourage sales?
  • Was there an oversupply of inventory prior to the Oil Spill, has the supply grown?
  • Have commercial real estate values trended down, as this tends to be a precursor to a change in the residential real estate trends?
  • Is the local economic engine driven by tourism, energy or aquaculture industries? If so, the impact of the Oil Spill may be more direct and immediate.
  • Are governmental or regulatory influences, such as the moratorium on deep water oil drilling, expected to have an impact?
  • If there is a local BP Claims Center in the market, would that be an indication that the Oil Spill will have an impact on the local economy?
  • BP is committed to paying all claims for damages resulting from the Oil Spill including property damage, removal of oil and cleanup costs. If a property meets any of the requirements, should this be considered in the valuation?
  • Unemployment may be difficult to assess. The potential short-term jobs created by the cleanup effort may mask the loss of employment (to include the moratorium on deep water oil drilling) created by the Oil Spill.  In addition, unemployment numbers from The Bureau of Labor Statistics are based on “non-farm” jobs which exclude the hard hit aquaculture industries.
  • Are lenders or insurance companies shying away from the local market or requiring special conditions for transactions?
Make sure that you are relying on current market-specific data and avoid making unsupported assumptions.

Be Resourceful

There are many websites that you can use to gather information to help you in your analysis. Specifically, as it pertains to the Oil Spill, some common sites that you might find useful:
  • BP corporate website provides you with latest information regarding the clean up activities and the claims program including locations of their claim centers.
  • National Oceanic and Atmospheric Administration provides the latest news, scientific data and includes maps of the Oil Spill’s trajectory with fishery area closures and pinpointed locations of oiled shoreline.
  • Bell Anderson & Sanders LLC provides informative articles regarding real estate damage economics.
  • US Environmental Protection Agency provides updated information regarding the oil spill and the EPA’s response.
  • NewsVoyager provides links to local newspapers to access gulf coast publications.
  • RealtyTrac provides various real estate-related data.
Besides monitoring the recommended website and keeping current with the news, be on the lookout for training sessions and webinars that are starting to become more prevalent. The Appraisal Institute, for example, has just announced a webinar planned for August 25, 2010, entitled: Oil Spills and Property Values.

We are extremely proud of the strong network of professional appraisal partners we have developed over the last 30 years.  As a profession, the industry has encountered many difficult circumstances that have required us to carefully analyze and scrutinize data and information in developing a fair valuation for our clients. The Oil Spill is no different and we are confident that we, with your help, will continue to provide excellent and professional service to our clients.

If you have any questions or comments regarding this announcement, please contact Dwellworks at (800) 399-2626.