Are Appraisals an Accurate Depiction of Real Estate Market Value?

By
Real Estate Agent with Florida Property Experts

houseReal estate appraisals and true market value. Where do I start?

You'll have to eExcuse me while I ramble a little bit on this post. I'm just going to dump all my thoughts right here, without choosing a side, or even sticking to a specific angle. Please read carefully!

I just read a post my Rich Kruse, titled "Appraisals vs Market Value". Read Rich's post to find out the drastic differences he found when he had other real estate agents do a market analysis/BPO to compare to recent appraisals on the same properties.

Rich made the statement that he doesn't believe appraisals anymore. That got my mental wheels spinning. I know we have a lot of appraisers here on Active Rain.

I read a post yesterday by Sara Goodwin, titled "More Crazy Things That Lenders Decide to Put in Writing". Sara is an appraiser in Oregon.

I'm not trying to pit the REALTORS and Appraisers against each other. Let's face it. We need each other. But I am interested in hearing opinions from professionals in both fields.property values

We know that banks have been kicking back many appraisals in the last few months, and taking it upon themselves to lower the appraised values. The bottom line is, the banks believe there is more correction to be made in the real estate market and they're going to cover their assets. (No pun intended)

So here are some of my thoughts... If appraisals are coming in too high, I personally have a huge problem. One of the ways I help my buyers feel comfortable with making an offer on a house, condo, land or whatever they're interested in buying, is to add a clause that's similar to real estate appraisalthis... "This purchase is contingent on the subject property appraising at or above the contract price. If subject property does not appraise, buyer's deposit will be refunded in full". This type of clause will usually calm the buyer's concerns about over-paying. But if the appraisals are no longer the determining factor of real estate values, then what is?

Of course there's always the age old rule that "A property is worth whatever a buyer is willing to pay". But right now, buyers aren't even sure what to offer. They need a professional in the field of determining real estate values. If the banks, are no longer valuing the opinions of the appraisers, that sends a strong message to the buyers that the appraisers can't be trusted. Of course that just puts the appraisers in the same boat with every other professional in the real estate industry. The finger pointing is at an all time high, which is further eroding the confidence of the consumers. I'm not saying I disagree with Rich's opinion on appraisals. The erroneous values he discovered are alarming! So my questions to appraisers are...real estate

  1. When you're doing a appraisal on behalf of a seller, do you try to keep the seller happy by valuing the property as high as possible? (Many real estate agents have made this same mistake.)
  2. OR is there a possibility that some appraisers are still doing business the way they would in a seller's market? (Many real estate agents are guilty of this one too.)
  3. How big of a problem do you think it is, that lenders have required the appraisal to come in as closely as possible to the contract price? (Read my post titled "The House Appraised For How Much?")
  4. Based on question number 3, with each lender now making drastic changes in their policies pertaining to the appraised values, are we seeing a complete breakdown in how real estate is valued?

I had one more thought about the appraisal factor. Call it a conspiracy theory if you like... Banks have been trying for years, to position themselves in every aspect of real estate. By eroding the confidence of the consumer, are they trying to position themselves in the eyes of the consumer, as the only accurate and reliable source for all things pertaining to real estate?

Lisa Hill
real estate brokers
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Rainmaker
250,068
Mike Klijanowicz
Cummings & Co. Realtors - Perry Hall, MD
Associate Broker @ Cummings & Co. Realtors
I personally feel that appraisals are not always correct!  You see, it is in the banks and the appraisers best interest to make the deal work, if the buyers have decent credit.  If the appraiser "blows the deal" do you think the bank is going to continue to do business with them?  That is just my personal take, I'm not making any acusations here, just trying to get everyone to thing about the bigger picture here!
Nov 23, 2007 11:57 AM #1
Rainmaker
120,400
Sara Goodwin
Ashcroft & Associates - Portland, OR
Portland, Oregon Appraiser

Hmmm... not sure if I should be flattered to get a mention in this post or not, Lisa -

I understand your discouragement regarding appraisals and just like any other RE professionals, unfortunately, there are some unscrupulous appraisers out there.... as well as more than a few of us that feel constant heat from Lender pressure.

Underwriters are shooting down values now.  I have had a couple of appraisals where the underwriter reduced the final value.  Both were thorough and honest appraisals, but lenders are scared these days and won't believe that there are still some appreciating markets out there.

My favorite appraisals to do are FSBOs because I get instant feedback as to whether my opinion of value was in sync with the final sales price.  Almost every FSBO appraisal I've done has sold within 5% of the appraised value.  This post reminded me to go check on one lingering FSBO I had appraised.  The sellers had it on the market for over a year (well over the average DOM around here) and it sold for nearly $20k more.  At nearly 9%, that's the most off I've been on a FSBO. If the sellers would have communicated that they were not worried about time, I would have put that into consideration when forming my opinion of value.

I urge you to post this to: http://activerain.com/groups/appraisers if you are looking for other appraiser's opinions.

Nov 23, 2007 12:01 PM #2
Rainmaker
595,563
Lisa Hill
Florida Property Experts - Daytona Beach, FL
Daytona Beach Real Estate
Sara- Perhaps I need to do some re-wording? I'm not bashing appraisers. I'm just asking questions. If I had to place blame, I'd be pointing fingers at the banks. That's why I ended with my conspiracy theory.
Nov 23, 2007 12:06 PM #3
Rainmaker
595,563
Lisa Hill
Florida Property Experts - Daytona Beach, FL
Daytona Beach Real Estate
Michael- But what about the banks being overly concerned about lending money at all? They seem to want to shoot down the sales lately. If you read Sara's post, you'll see an example of the banks trying to discourage the appraisers.
Nov 23, 2007 12:09 PM #4
Rainmaker
120,400
Sara Goodwin
Ashcroft & Associates - Portland, OR
Portland, Oregon Appraiser

Oh... and I ranted without actually answering your questions.  To answer all three, Appraiser's are to adhere to a strict code of ethics.  If they are found breaking these ethics, the state can 1) fine them thousands of dollars 2) make them take additional continuing education classes and/or 3) pull their appraisal license. 

Oregon's appraisers board will actually publish all the offending Appraisers in their quarterly magazine (which is viewable online).  These are not always blatant infractions of ethics but sometimes innocent ommisions of information. 

I am going to go out on a limb and tick some of my peers off when I say that I'm glad Underwriters are being less lenient because finally Lenders are realizing that even if they continue to push Appraisers around to inflate value, they are learning that an Underwriter can 'blow the whole deal' at the final stretch.  

There are instances where my reports have come in well above the contract price and others where they have gone below.  Believe me, when a report comes in well above the contract price, it's going to take longer for your loan to close... Underwriters take out their magnifying glasses at that point.

Nov 23, 2007 12:13 PM #5
Ambassador
252,287
Jesse & Kathy Clifton
Jesse Clifton & Associates, REALTORS® - Fairbanks, AK
Retired

Hi, Lisa

I'm not an appraiser, but thought I would throw my .02 worth in anyway. :)  Appraisals are based on sold/closed properties, which depending on the way the market is moving may make them a little off.  For example, on my new construction I had to fight appraisers tooth and nail several years ago to get them to raise their new construction numbers because they were lagging behind costs... when the market is moving down, appraisals have to catch up there as well. 

Jesse

Nov 23, 2007 12:28 PM #6
Rainmaker
595,563
Lisa Hill
Florida Property Experts - Daytona Beach, FL
Daytona Beach Real Estate
Sara- I know from experience, the results of what happens when the appraisal comes in too high. I've experienced that nightmare. I even have an old post about it. And I'm aware of the rules of how the appraisals have to be done. I was not aware of the Code of Ethics. I think that's great. I'm very concerned about the ego trips of the banks though.
Nov 23, 2007 01:04 PM #7
Rainer
137,413
Rich Kruse
Gryphon USA, Ltd. - Columbus, OH

Hi Lisa - I have 2 designations as a machinery and equipment appraiser, but not for real estate.  As such, I have a pretty good understanding of appraisal approaches which is why I get so fired up about this.  In addition, my firm JV'd with an appraisal firm for about a year.  On a daily basis we would get calls asking us to "pre-comp" property.  The LO wanted to know if the asset was going to "come in" and would then usually tell us where they needed to come in.  Can you say "influenced valuation"?  Of course the appraiser are now going to have some bias. Can you say "collusion"? 

Last year I ordered an appraisal from the most well respected commercial appraiser in town.  The report came back at $825,000.  Buried in the report was a line that said this is the value providing that the 2 most likely buyers would purchase.  A little investigation determined that both companies had put a 5 year hold on buying more land.  So the highest and best use value was clearly not the most likely result, right?

This type of thing happens all the time out here.  When I am in the position of state court receiver, I now need to fight with the lender and many times the debtor about the validity of the valuations, the best way to sell the property and at what price to list it.  It puts me in a bad position with all of the parties and often puts me in a hearing.  Guess who is going on the witness stand?  The appraiser.

This gets me to the point of my mini rant hijack.  Nobody ever tells the appraiser "Thanks.  Now go sell it for that price."  That burden is always laid on the broker.  Those guys are saddled with pulling a rabbit out of their a$$.

One could argue that the brokers come in low because they know they are going to need to sell the asset.  Maybe.   

So in short, the whole process is like an old Yugo.  Massive design flaw in the major operating systems.

Nov 23, 2007 11:47 PM #8
Rainmaker
595,563
Lisa Hill
Florida Property Experts - Daytona Beach, FL
Daytona Beach Real Estate
Rich- You have great points. That's why I posed everything in my post as a question, instead of an accusation. I wanted the appraisals to do some explaining. So far, no one has really answered my questions in a direct manner. I've always been concerned with the policy that the banks have forced on the appraisers, to make the property appraise at the contract price. Thank reeks of collusion, except that it's not a secret. That's what led to my "conspiracy theory" about the banks. Your post set off a huge chain reaction of thoughts in my brain and I have yet to get any answers =/
Nov 24, 2007 06:04 AM #9
Rainer
15,002
David Hintz
Accurate Appraisals & Consulting of AZ - Maricopa, AZ
AZAppraiser

Lisa

I'll answer your questions in a direct manner:

Question #1.  When doing an appraisal on behalf of the Seller   (I assume it's a pre-listing appraisal)   the FMV is determined for a specific time using comparables that are, the most recent sold,  most similar to,  and closet to the subject property.   In addition  analysis of sold, active, pending comparables,   analysis of the market conditions of the subject's market area,   analysis of the general market conditions of the area surrounding the subject's market area should be included in the report, to justify the value conclusion, and to aid the seller in determining a selling/listing price.   The same also applies for Buyers and their "offer price".   Valuing as high as possible (for the seller) or low as possible (for the buyer) is not and should not be the purpose or the determining factor of value for an appraisal.

Question #2.  Yes, there are some appraisers still doing business the way they would in a seller's market.  Unfortunatelly, they are also doing appraisals the same way in a buyer's market and a stable market.   I call them the  "Wham, Bam, Pay Me Man" appraisers and appraisals.   They are the ones that value a property at what ever amount is needed or requested.  They are the ones Lenders, Brokers, LO's look for to make a deal work.  They are the ones that give the appraisal industry a black eye.  They are the ones contributing to the real estate mess (along with Realtors/Agents/Lenders/Brokers/Loan Officers/Underwriters/Investors  who share the same Ethics - or Lack Of).   The answer to #1 would also apply to how appraisals should be done in a Buyers, Sellers, or Stable Market.

Question #3.  It is a very big problem.  Mortgage Professionals have always required appraisals to come in as close to or above the contract price in order for the deal to work so they get their commissions or YSP.  The pressure or requirement to hit the value needed has increased even more in a declining market.  It will also continue until appraisers start reporting those who pressure, but that won't happen because appraisers that report presure will not receive any work from others when they are black listed in the mortgage industry.  The same when the value needed is not achieved, the appraiser is added to a do not use list.

Question #4.   With tighter requirements on borrowers, changes in Lenders and the mortgage industry, changes in the appraisal industry, increased prosecution of mortgage fraud and appraisal fraud, and the increase (in all areas of the real estate industry) of holding professionals accountable,  the only breakdown in how real estate is valued is occuring with those who do not comply with the current regulations and process for valuating real estate.  There is nothing wrong with the regulations, guide lines, and process currently required for all appraisers to follow when determining a value.  The actions of those who disregard regulations and ethics for profit, project a false image of a breakdown much the same as their reports provide a false (inflated) value.

 

Nov 26, 2007 10:45 AM #10
Rainer
137,413
Rich Kruse
Gryphon USA, Ltd. - Columbus, OH

I see only one solution:

An independent 3rd party / quasi government entity assigns ALL appraisals based on a random "wheel" where qualified appraisers are beholden to the 3rd party QC and not the LO.  Loan applications need to include a non-refundable fee for the appraiser.

This takes both the choice of appraiser and the fee issue out of the equation.

Of course, this only works for origination appraisals.  This rotation works in all of the state court judges assignments as well as all of the CH7 bankruptcy trustee assignments.  All the mortgage industry needs to do is copy their systems of assignment.  This isn't new.

Nov 26, 2007 11:22 AM #11
Rainmaker
595,563
Lisa Hill
Florida Property Experts - Daytona Beach, FL
Daytona Beach Real Estate
David- Thank you! I appreciate the honest answers. #3 is, in my opinion a huge problem. Read my post titled "It Appraised For How Much?" and you'll know why I have a beef with that one!
Nov 26, 2007 12:00 PM #12
Rainmaker
595,563
Lisa Hill
Florida Property Experts - Daytona Beach, FL
Daytona Beach Real Estate
Rich- None of this mess is new. I'm in the middle of a rant post right now... Should I be afraid that Evil Rich is rubbing off on me? Maybe I'll blame him in the post =P
Nov 26, 2007 12:01 PM #13
Rainer
137,413
Rich Kruse
Gryphon USA, Ltd. - Columbus, OH
Blame away.  That heartless SOB doesn't care who hates him. 
Nov 26, 2007 12:03 PM #14
Rainmaker
595,563
Lisa Hill
Florida Property Experts - Daytona Beach, FL
Daytona Beach Real Estate
LOL!
Nov 26, 2007 01:22 PM #15
Rainer
194,151
Jeff Payne
The Payne Group at Keller Williams Success Realty - Panama City, FL
Panama City Real Estate
I see the appraisers being conservative when they can.  I sold a home that is exactly like my home.  My home recently appraised for 16,000 more than the exact same home that just sold.   I don't blame the appraiser, the lenders really just need to know that the home they are lending on is worth what they are lending, IMO.
Nov 26, 2007 01:33 PM #16
Rainmaker
316,351
James Downing - Metro DC Houses Team REALTORS®, CRS, GRI, ABR,MRP, MilRes
Real Living | At Home - Washington, DC
When Looking to Buy or Sell - Make the Right Move
I have also lost faith in Appraisals as of late.  A current deal had a crazy low appraisal - instead of using a current comp in the same block - he used a comp from last winter to lower the amount.  Makes no sense!
Nov 26, 2007 02:57 PM #17
Rainmaker
595,563
Lisa Hill
Florida Property Experts - Daytona Beach, FL
Daytona Beach Real Estate
Jeff and James- I believe the appraisers are using these tactics because the banks are requiring it. I read a post here on AR about a bank that forced an appraiser to use old comps. I read another post about a bank that reduced the value the appraiser had determined by $100,000 because the bank felt the market was not finished correcting itself and they were not going to lend too much money. When it comes to dealing with the banks, the appraiser's hands are tied. That's why I ended with my conspiracy theory.
Nov 26, 2007 03:50 PM #18
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Lisa Hill

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