Home : Blogs : Adam Bogle, CRS, Southern Oregon... The Most Recognized Realtor in the Universe : Adam's Blog

Appraisers are outdated, and no longer have a place in real estate purchases

I don't agree with the title of my blog. I do believe appraisers are working a system that is devaluing themselves, and should look into changing their practices.

Appraisers should base their appraisals on independent judgment without a predetermined set price in mind. That is their job, and therefore their inherent value.

If the determing value of real estate is a willing buyer/willing seller under no duress, than the job of the appraiser is of little to no value if you have those two components. Thus, the appraiser does not have a place in the real estate transaction. But that leaves no watchdog for the bank, or the consumer.

I believe that one of the problems with the current appraisal system is that the appraisers seem to have a different model of determining value based on whether it is a purchase or a refinance.

Appraisal value should be based on comps, not what the lending institute, buyer, or seller want. The appraiser needs to be the unbiased 3rd party. Now every appraiser I have talked to about this says that they are. However, almost every purchase I have help with in the last 5 years, the appraisal has come in at contract value, or within a couple of thousand dollars.

So the current system where an appraiser is required to have the earnest money agreement for a purchase, but is not allowed to know what a refinance request amount is creating unequal appraisal based on the purpose.

My argument is now, and has always been that the appraiser needs not be a party to the earnest money contract. It should not be their job to determine if the purchase price is an appropriate price. It should be their job to look at the comps, and determine value regardless of purchase price.

I am in no ways trying to bash appraisers, or the profession. I believe in appraisers strongly, as long as they do the job they are hired for. Appraisers who look to justify sales price. That I have issues with. The business needs an unbiased 3rd party. I just don't believe that we are getting that from the appraisal community consistently enough.

I'm sure this blog will probably upset some realtors, some appraisers, some lenders.

However, I do believe that the appraisal board needs to look at their practices, and see if they are serving the long term interests of their appraisers.

Posted by Adam Bogle, CRS, Southern Oregon... The Most Recognized Realtor in the Universe on 04/25/2008 04:03 PM

Comments (20)

appraisers, appraisals, lending, fraud

Post is included in group: Appraisers

20 Comments on Appraisers are outdated, and no longer have a place in real estate purchases

APR

2008

I agree with you in some ways, and in others, disagree. The appraiser's job is really, to protect the lender. It is to make sure that the property is "worth" AT LEAST what is being paid for it, to protect the bank's interest. I agree that it shouldn't really be based on just what the contract says... and a lot of times it seems that it is... but at the same time, there is a lot of weight on what "value" actually IS if someone is willing to pay that much for it. Something may be "worth" different amounts to two different people.

I somewhat agree as well. It is pretty funny that the appraised value seems to always equal the sale price. I actually had a buyer ask me about that. She thought she was getting the home for a steal but why did the appraisal come out exactly what she's paying for the home. I tried to explain as best I could without "devaluing" the appraiser. On the other hand, I think if appraisers, especially in this market, didn't know what the sale price was, we, as realtors, would have alot of deals in trouble. Maybe if the appraisers could do a price range instead of one exact number.

I have to disagree with the concept of deals being in trouble.

If the way business was conducted was normally with appraisers coming back with a value without benefit of knowing the sales price, we would have our buyers and sellers prepped better for the subsequent negotiations.

APR

2008

Adam -

I concur with the desire to keep the appraiser blind to the committed offer price. It would help if the standard Calyx forms (that we receive from the lenders) would eliminate the sales price, estimated value and loan value all together.

The updated appraiser code of conduct (to be enforced specifically by Fannie Mae and Freddie Mac in 2009) will likely weed out the bad seeds related to the appraisal transaction. Some new changes include:

Mortgage Brokers will no longer have authority to select appraisers;

Lenders will be prohibited from using "in-house" staff appraisers and

Lenders will be prohibited from using appraisal management companies that they own or control.

(the above is a quote from Benjamin Smith's post).

I know that I'm swerving a touch off topic, but these are examples of other industry issues that 'they' are looking at 'correcting' (hopefully in an educated way).

Back to the topic at hand... Absolutely, if there are no lenders involved, then by all means eliminate the appraiser's out of the transaction. Heck, lenders have been using AVMs (automated valuation model) that are no more accurate than Zillow for 'easy' transactions for years. Eliminating appraisers from the process and 'saving money' ...

And then came the sub prime debacle. How many of these loans were produced from AVMs, dishonest appraisers (I won't fool myself into thinking there are no 'Skippy's' out there) and stated income? More than a handful, I'm sure.

When it comes right down to it, we're all (real estate professionals) lumped into the category of 'car sales people' due to some of our associate's unscrupulous actions. We can all be replaced... Realtors=FSBOs, Appraisers=AVMs, Inspectors=the buyers friend that built houses one summer... the list goes on... Sadly, none of us are saving the world with our career choices, but I'd like to believe that the AR community is a place where some of the more savvy and ethical real estate professionals join together to understand and think of solutions to make each step better.

In the end, I still believe that appraisers do have a valid job in the market, even when a transaction is concerned... Someone has to determine whether that last $10,000 in closing costs 'breaks the bank' or not, right?

I do hope that made since on this groggy Saturday morning entry.

Please feel free to cross post in the appraisers group. I promise you'll get more appraiser's opinions if you do!

Thank you for inviting me, Adam... it's been quite a while since I've debated with a man in a kilt... :-)

Appraisers are hired by the bank to protect their interest. BUT also the bank puts a lot of pressure on the appraisers to "make value" so the loan will go through. Quite often, if the appraiser can't make value, the bank will find an appriaser who can. I've seen this first hand. Really, what needs to happen is the banks need to get out of the appraising business and let appriasers do their job (and not provide the selling price to them). The banks also sit on the appraisal boards, etc. Quite frankly the whole system is fraught with faults. I'm (almost) married to an appriaser who is very honest. He has been doing it for over 20 years. He routinely turns jobs down if he is pressured to make value. Fortunately, he can afford to that but not every appriaser can. Quite frankly, the banks are the ones that need to be scruitinzed.

I don't disagree with comments made by you Gail, or Sara.

In fact, I think they are very accurate.

The new rule that

Mortgage Brokers will no longer have authority to select appraisers;

I don't believe to be fair to appraisers. There are many appraisers who have spend years acquiring a reputation that they are good, timely, fair appraisers, and have built solid reputations with lenders.

Now they are going to be told that those relationships are no longer important? Lenders are going to be stuck with whatever joe-blow, regardless of whether he is timely.

Better practice to me seems to be to eliminate the line that asks for sales price.

APR

2008

Adam, I agree with many of your points. So many buyers I have worked with question what their $400 + or - fee is going to if the appraisal report simply comes back with the purchase price for the appraised value. And many buyers get REALLY upset when they know the appraiser has been given the purchase price and/or purchase contract.

MAY

2008

This was a good blog to post because there is a lot of commentary for all sides of the story. I have enjoyed reading these comments and learning....

MAY

2008

I am an appraiser in Los Angeles. I agree that it is confusing that the appraiser be required to remain completely objective, yet is required to have a "target Value" i.e. sales contract price, in order to legally complete the appraisal. The following is one of the suggestions I made in response to the pending HVCC (Home Valuation Code of Conduct):

""Why must a sales contract be reviewed by the appraiser? Instead of requiring it, is there a way to forbid appraisers from seeing sales contract price, and only require us to see certain signed pages with any applicable Sales Concessions? In addition, there should be some type of phraseology in the Reconciliation which states that the appraiser did not know the refinance or sales contract price, and that if the appraiser did have access to that information during the appraisal process, it voids the appraisal? Contract price information should be kept confidential from us, and only between the lender and client (a similar dynamic to the lawyers' Attorney~Client Privilege). If we as appraisers are required to be absolutely objective, why must we be required to have access to the sales contract price? By having access to that one piece of information, doesn't that intimate hitting the number? If lenders were to remove the sales contract price from the contract review procedure, it further and completely removes the implied target value.""

MAY

2008

Sounds like a preplexing problem indeed. I think the meeting of the minds with the buyer and seller should be a factor in what an appraiser comes up for price but not the factor just one of the factors.

MAY

2008

The reason the appraiser is provided a copy of the sales contract is primarily to make him or her aware of any seller concessions or repair conditions that might not be readily apparent. Regardless whether the appraiser is provided a copy of the contract, you can be sure (under the current pre 1/09 "rules" in many if not most cases) that the mortgage broker, commissioned loan officer or real estate broker or salesperson will let them know in no uncertain terms what the magic number is to make the deal fly. Also in many cases the real estate broker or salesperson will be sure to provide the obligatory list of the highest, most uncomparable sales imaginable.

Kenneth,

If the purpose of the sales contract is to be aware of seller concessions or repairs, than why not make those the pages of the contract that you need, not the entire contract.

I understand what you mean about the Lenders, and Realtors providing the info anyway, but that too I would like to see averted.

California Trainee,

You don't have a link to your page. If you see this post, please email me directly. I would like to brainstorm with you about ways to maybe make the system better.

Providing the contract is almost immaterial & I could care less whether I get it or not. USPAP requires we at least ask and comment on why we couldn't get it as well as whether anything in it impacts the appraisers estimate of value and why.

The much larger problems are...

1. Mortgage brokers and commissioned loan officers often broadcast fax something like the following to dozens of appraisers: (got this this morning):

hello, i need a comp check ...looking for $630K XXX parkhill ave massapequa ny 11758 single family section/block/ lot: xx/xxx/xx cape 1878 sq ft gross living area 6 bedroom/ 2 bath thank you tony 718.xxx-xxxx

Of course, the 1st appraiser to call "Tony" to tell him, no problem - I can make $630K gets the assignment.

2. Real Estate Brokers/salespeople who scream bloody blue murder when the value needed isn't obtained an make a point to tell you that you will NEVER get another assignment from their office again unless you raise the value to $xxx,xxx...

3. Many AMCs that pretty much do the same as #2 - except with slightly more subtlety.

4. Many AMCs pressure the appraiser in many other ways such as demanding ridiculously inadequate turn times making proper due diligence (verification, etc.) impossible, not to mention drastically inadequate fee splits (some major AMCs pay appraisers $125 to $150 for a URAR-1004 in my market)

MAY

2008

Wow, talk about a blog topic which ignites the fury of the appraisal industry.

The current appraisal forms were designed by the lending industry to shift as much liability as possible to the appraiser. Changes in that direction include: reviewing contracts and concessions; evaluating if contract terms are typical of market; providing an ownership history for the subject property dating back 3 years; confirming the seller is the present owner; stating there are no encroachments or easements which affect property; stating the sales history for comparable sales for past year (sometimes requested for 3 years); and the list goes on. These are functions properly performed by underwriters, title companies, and survey companies. During the S & L crisis, the lending industry realized that shifting the blame for poor lending policies kept them out of jail. Thus was born the licensing of appraisers - the S & L scapegoats. It has continued during the past 20 years as we've entered another financial crisis brought on by poor lending practices but blamed on everything from subprime lending to declining markets and I'm sure Mickey Mouse shoulders some of the blame.

Back to the blog at hand, appraisers are required to review the Purchase Contract and, when I've checked the box that it was not reviewed and commented that it was not provided, the report is usually sent back requesting a change with the inclusion of the Purchase Contract. The value of it? Without it, many appraisers would merely match the listing price found in the MLS. But the one benefit I've found, is a major RED FLAG goes up when a property sells substantially higher than the listing price and the contract is filled with seller improvements prior to closing and financial seller concessions for the buyers prepaids and closing costs which end up totally most of the required down payment for the property.

A large part of the appraisal community does adhere to a theory that the selling price, if an arm's length transaction, should be the value. I have over the years adamantly opposed this view. In one USPAP class I once took, the instructor made the argument for hitting the number by stating that, if the property appraised differently, then future use of that sale would require a concession adjustment based upon the value above or below the sales price that the property was valued. My disagreement with this theory, is that the buying decision is largely influenced by emotion and cosmetic appeal. If all buyers were qualified appraisers with thorough training, then there would be relevance to the sales price as the value. But I have often seen inferior homes based upon measurable features sell for less than inferior homes with better appeal (the dollar value of warming cinnamon in the oven during the showing).

I like to know the loan value for the following reason: Appraising is not a science but an educated opinion of value. Being such, value ranges are always present. I do believe that, while not hitting a value, that if my range is $92,000 to $101,000 and I'm bringing in the value at $96,000 when $96,500 is needed for the loan, it's proper and acceptable to be at $96,500 or $97,000. Again, it's not a science, only a human judgement. I used to appraise in a market area where one local appraiser always came in $500 to $1,000 below sales price. I don't know why but when the FHA fee panel was dissolved, he was out of business.

In conclusion, a Purchase Contract should not dictate the appraised value because the value of a property should be a certain figure or within a defined range regardless of whether the buyer got a deal or not.

MAY

2008

I recently appraised 2 condos in the same complex with a purchase price of $715K each. When the report was done they came in approx. $130K below the sales price.

I received a request to reconsider the value with their additional data. My response was it would not change my original opinion of value and why. If they had read the report all the data and facts supported the value. I used 5 closed sales and 2 pending sales. None of the comps were over 5 months.

I received a copy of both sales contracts. "It Is What It Is" on all my reports. The Realtor, Builder and Lender did not like my opinion and are welcome get a review of my report or get another opinion.

I am sure the purchaser was happy they received a proper report. An appraiser's job is to give a fair, justifiable and ethical report regardless.

Russell - I question whether the buyer(s?) will ever know what your appraisal report said... My guess is that the broker will tell the buyer you were not on the lender's approved list and then send it to another appraiser who will 'make it work'. This is my experience when they ask that I 're-consider' a value.

MAY

2008

I tell the purchasers & owners they have a right to a copy of the appraisal and to request it.

It was ordered by Bank of America so hopefully the seller lowered the price. I will check TAO to see what the final sales price was.

MAY

2008

I think one difficulty with appraising for mortgage lending purposes is that appraisers have to give a NUMBER and not a range of numbers. I would often give a value range in the comments and if the sale price fell into that range reconcile the number to the sales price if that made sense. (I'm also an appraiser). I agree with others that the contract should be reviewed for concessions (it is easy for concessions to be written in a number of places so the entire contract is needed).

JUL

2008

Thanks for yout taking the time to provide us with this information in the Active Rain network. AR is the new "cyber backbone" of the industry, and with it's uplink to Localism.com it will transfrom the marketplace. Agents who don't see which way the cyberwind is blowing are going to find themselves at a considerable disadvantage inside of three to five years.

Leave a response…

Name:

Email:
(optional)

Comment:

What does the graphic say?