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Appraisals, Underwriters and the Third Rail of the Housing Recovery

Real Estate Agent with Homesmart

In theory, an appraisal is an independent evaluation of a property by a neutral third party to determine its likely worth in the open market.

In practice, it has become the de facto final word on a property’s worth, overriding the agreement between a willing buyer and seller.

How is it that the guestimation of value has supplanted the actual sale as the ultimate arbiter of worth? That the tail has come to wag the dog? Thank your friendly financial institution.

You see, appraisals are rarely ordered for cash transactions. Why? Because the buyer has already reviewed the recent sales comparables and negotiated the best terms he/she could with the seller before arriving at the final sales price. Appraisals are requirements of (most) financed transactions because they are really not for the benefit of the buyer. They are an added layer of protection for the lender that is putting up the bulk of the purchase money.

Certainly an understandable requirement from an institution that is taking on the risk of lending money against a property that may or may not represent suitable collateral, depending on the drooling-idiocy factor of the buyer. The bank demands an appraisal to validate the purchase price before ponying up the cash; makes perfect sense.

Where things have gotten a bit off-kilter as of late is in the bank’s internal review process of the appraisal. Times were, the appraisal came back at value, and you were good to go. Your shrewd purchase was confirmed by a non-biased review by a licensed professional. After the housing meltdown, however, banks have taken to assigning the bulk of the blame for the whole fiasco to unscrupulous loan originators and appraisers for falsifying loan applications and willfully inflating values, respectively; ignoring their own ridiculous loan products that were offered to people who never should have been candidates for stated income, interest-only financing vehicles, they are determined to stamp out any potential for fraudulent dealings that exposes them to similar risk in the future.

Tightened appraisal standards came to pass, including restrictions placed upon direct selection of appraisers (most orders go to faceless appraisal management companies now, who in turn select the appraiser). Loan originators and Realtors have limited access to appraisers these days, lest we corrupt their sensibilities and bend them to our devious aims.

The appraiser is now free to perform his evaluation in an ivory tower, unencumbered by the incentive-laden hands that would pull at him to bring in a value reflective of the sales price.

Or is he?

While charges of fraud and artificial inflation of value have been heaped upon the working stiffs from up high, I posit that the exact opposite is now occurring.

With the current barriers in place, the banks themselves are the only ones with unfettered access to the appraiser during the course of a transaction. Beholden only to those banks, appraisers have been put in the impossible position of providing fair evaluations of properties for institutions that have a vested interest in suppressing value/risk.

Bluntly, banks are actively pressuring appraisers to devalue properties.

By using the veto power of the underwriter review, they may demand that an appraisal which came in at value be reworked to use different comps or adjustments made to the physical attributes of the house that they dispute (square footage adjustments, etc).  They may demand that adjustments (downgrades) be made for market trends, etc.

In short, some bean counter in an office in South Dakota is using his position to dictate the final version of the appraisal to the licensed professional who has actually physically viewed, measured, photographed and evaluated the property.

This is how appraisals initially come in at $400,000, only to get knocked down to $350,000 upon underwriter review. And when that happens? You get to appeal the appraisal … to the very institution responsible for the final disparity in value.

Akin to taking one’s death sentence appeal to the hangman himself.

Appraisers have little choice but to comply if they want to keep their accounts with the big banks in good standing. Further, until the underwriter signs off on the appraisal, it really doesn’t matter what value is reflected in it. He decides the house isn’t worth what you are paying for it, your loan is scuttled. Unless the seller agrees to sell the property to you at the reduced price (unlikely in a market that is now generating bidding wars) or you have additional cash to plunk down to make up the difference, you are out the cost of the appraisal, inspections and emotional investment in the property.

The big banks are artificially suppressing our values, and they are charging you $350-400 a pop to do it.

What’s the best way to ensure that you are working with an institution that is actually interested in helping you purchase the home of your dreams? Think local. Many small, local banks not only work with select appraisers who actually know the areas they cover (as opposed to trucking them in from Tuba City on the luck of the draw), but are more likely to keep your loan in their portfolio. One of the primary drivers of a big bank’s decision to take on your loan is how sellable it is on the secondary market. Any quirks with the property, such as it being recently “flipped” by an investor, and the loan becomes less attractive to them. Out come the knives.

Add the suppression of value and subsequent hindrance to the market’s recovery to the list of charges I wouldn’t mind seeing in a financial perp-walk. Such manipulation of the market and coercive impact on property values does not merely effect buyers, but it robs sellers at large of what little equity they may have left. Of course, I suppose it is only fitting that the very institutions that spawned the ponzi schemes that led to housing’s demise are the same that would stand in the way of its nascent resurrection.

Such practices are an affront to us all, and must be stopped.


Liz and Bill Spear
Transaction Alliance 513.520.5305 www.LizTour.com - Mason, OH
Transaction Alliance Cincinnati & Dayton suburbs

Paul, Love the review of the system and inherent biases.  Thinking local does seem the best chance of success with getting fair representation of value.  Bill

Feb 14, 2012 01:23 PM
Paul Slaybaugh
Homesmart - Scottsdale, AZ
Scottsdale, AZ Real Estate
Hi, Bill. Ironic, no? Appraisers have been ushered away to limit our ability to unduly effect their evaluations, but who's watching the banks' opposite and far greater influence over the process. As far as I'm concerned, it's nothing short of fraud perpetrated on both the buyers who pay for the manipulated result, and the sellers whose values are degraded by it.
Feb 14, 2012 01:38 PM
Susan Haughton
Long and Foster REALTORS (703) 470-4545 - Alexandria, VA
Susan & Mindy Team...Honesty. Integrity. Results.

As always, you hit the nail on the head.  So glad I kept my subscription.  ;-)

Feb 19, 2012 12:27 AM
Nancy Laswick
United Real Estate - Phoenix, AZ
Your REALTOR® For The Valley Of The Sun

Just ran across this post. Very well written, really tells it like it is, at least like it is right now. Can't imagine how this didn't get featured. Suggested, probably too late but suggesting anyway.

Feb 26, 2012 07:23 AM
Nancy Conner
Olympia, WA
Olympia/Thurston County WA
Frustrating state of affairs for sure! The lack of accountability and the pressure on appraisers is just more of the power of big banks ....and sure does nothing good for the real estate market. Almost all buyers are already way too skittish to consider overpaying for a house, but their determination of market value holds no weight with the reviewers. I'm with you on thinking local banks and credit unions are a great option for buyers.
Feb 26, 2012 07:42 AM
Jeanne Dufort
Coldwell Banker Lake Country - Madison, GA
Madison and Lake Oconee GA

Excellent post Paul - glad I found it.

My pet peeve is handing the contract over to the appraiser - IMHO they should come up with their opinion of value based on comps and their site visit, and not be influenced by the contract price.

The underwriters review is sure trouble, however - it may have sounded good in principal but it sure doesn't work well in practice.

Feb 26, 2012 07:47 AM
Karen Anne Stone
New Home Hunters of Fort Worth and Tarrant County - Fort Worth, TX
Fort Worth Real Estate

Paul:  What an absolutely one-sided post.  I am guessing that you have been burned by what you felt were "low appraisals" being made on your "deals."  You forget one major thing.  It is the lender's money you are talking about.  Or the investor's money.  Or whomever's money.

The $400,000 appraisal you use as an example.  Ok... so it came back at $400,000.  An then an underwriter gets it in front of them... and reviews it... and decided that $350,000 is a more realistic value to use.

IF... the underwriter sees that only the highest and best comparables were used... and others that were of lower values were ignored... why SHOULDN'T that underwriter make some "adjustments?"

If you were to take every single thing of value you own... that could be sold... and I do mean everything... and convert it to cash... just how liberal would your appraisal guidelines be if it were YOUR money that was going to be lent ?

Would you take every cent of your personal worth and lend it to that buyer who is willing to pay, or according to this underwriter... willing to "over-pay" for this home... would you take that risk ?

Paul... you can make all the claims you want about lousy appraisals... but until you are willing to substitute your own money for the risk... how can you fault these lenders/investors for not wanting to take that risk, either ?

PS... you also have not mentioned that when an appraisal comes in low... that the buyer has the option of coming up with the extra cash to make the deal work.  If they don't have it... get it from friends, in-laws, the lotto, or somewhere.

Would they do that ?  Heck NO.  They don't want to take the chance that they are over-paying for that home, either.  And anyone who might lend them that extra amount would have to be nutz to do it, as well.

Feb 26, 2012 01:50 PM
Karen Anne Stone
New Home Hunters of Fort Worth and Tarrant County - Fort Worth, TX
Fort Worth Real Estate

One thing I do agree with you about... is if "out of the area" appraisers were used who didn't know the market.  Using an appraiser who doesnt know the local market does not make sense.

Feb 26, 2012 02:04 PM
Paul Slaybaugh
Homesmart - Scottsdale, AZ
Scottsdale, AZ Real Estate
Interesting take, Karen Anne, but if you think my gripe is with appraisers, you clearly misunderstood the post. My beef is with non-licensed appraisers overriding the impartial results from the professional THEY selected (or caused to be selected through an AMC). Why are they charging my buyers $400 for a report they may or may not accept? Are you suggesting the underwriter several states away better understands the market, value and the home itself than the trained professional charged by the bank with providing the analysis? I clearly state in the body of the post that banks are expected to determine that the asset being put up for collateral is sufficient to offset thebrisk of default. Only a loon would assert otherwise. My challenge is to who decides the true market worth of the property: a licensed, third-party professional ... or an underwriter. I'd be curious to know what makes you think an underwriter is more qualified to do so. And, yes, this post is one-sided as I am not a news organization curating a story, but an agent pointing out an alarming trend that I believe is artificially tamping down our local values: harming buyers and sellers alike. No, this post was not written as backlash to a lousy appraisal(s). It's a broad trend in my market at present. I'm a big boy. I can accept a low opinion of value from someone licensed to provide it. I cannot accept it from someone who is not, simply because he/she has a vested interest in minimizing his/her employer's exposure. But by all means, don't be dissuaded from the hypothesis that I'm merely wailing over low appraisals and don't grasp the concept of risk mitigation. Now, I must beg off for the next week or so. I have a brand new baby girl to dote on as of today. :)
Feb 26, 2012 02:56 PM
Karen Anne Stone
New Home Hunters of Fort Worth and Tarrant County - Fort Worth, TX
Fort Worth Real Estate

Paul:  Debating the merits of this post of yours is all fine and good... but the most IMPORTANT thing here is the birth of your newborn daughter.  Congratulations to Daddy, and more so... Congratulations to Mommy.  (She DID do all the work, you know !  LOL.)

OK... what have you named this little princess ?  And... how soon do we get to see pictures ?

Again... congratulations, and Blessings to All.

Feb 26, 2012 04:22 PM
Paul Slaybaugh
Homesmart - Scottsdale, AZ
Scottsdale, AZ Real Estate
Thanks, Karen. We are all aglow. Perhaps, more because of a thermonuclear sheen in my case, but aglow nonetheless. Sorry for jumping down your throat on the challenge of the post. Was entering the first stages of sleep deprivation when I got the notification.
Feb 27, 2012 06:02 AM
Paul Slaybaugh
Homesmart - Scottsdale, AZ
Scottsdale, AZ Real Estate
Hmm, after reading your disparaging remark on J Phillip's blog, I retract my retraction. You are some piece of work.
Feb 27, 2012 05:55 PM
Sharon Alters
Coldwell Banker Vanguard Realty - 904-673-2308 - Fleming Island, FL
Realtor - Homes for Sale Fleming Island FL

Paul, just came over to see if you had written anything lately and oh, I so agree with you on this one. Not sure where some other people are coming from...

I have had appraisers tell me to my face that they do not give anything really for the overall condition, eg, upgrades of a house. That it's basically four walls. What???? And the fact that there is no formal review process to sppeal an appraisal. Not fair.

But finally I guess the banks think our values are low enough, as some changes went into affect recently where appraisers are given more latitude for condition and I even read a blog from one who adjusts for distressed sales. I have asked that question over and over to appraisers during the last 5 years and not one of them would admit to doing this. Not one. Hmmmm.

As always, excellent and congrats on your new baby daughter! Now Brandi has a little gal pal and you have a little pricess:)


Mar 04, 2012 04:18 AM
Paul Slaybaugh
Homesmart - Scottsdale, AZ
Scottsdale, AZ Real Estate

Hi Sharon,

I could write about puppies, and a certain demographic would take issue. Stick around any platform long enough and your bound to run afoul of a certain percentage.

Appraisers have a brutally difficult job in the best of circumstances, and their current captivity in the underwriter's ivory tower merely exascerbates that truth. My concerns with the present market has less to do with the competence of the appraisers, but the constant demands from underwriters for the professional arbiter of value to adjust reports to fit his/her untrained sensibilities. The banks don't want buyers, sellers and agents to influence the evaluations, and thus have lobbied for the tightened standards that limit contact, and yet they are allowed to essentially dictate the terms of the appraisal to the appraiser unchecked. It's a farce. Not only are buyers losing the homes they have their hearts set on despite an initial finding from an appraiser that the sale is at market value, but manipulated appraisals adversely impact sellers at large by stifling prices. 

Thanks for the congrats on my baby girl. We are one happy brood at present. :)

Mar 04, 2012 05:47 AM
Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life

If it makes you feel any better, she isn't a fan of mine either.

Hope all is well, amigo.

May 24, 2012 06:21 AM
Eric Michael
Remerica Integrity, Realtors®, Northville, MI - Livonia, MI
Metro Detroit Real Estate Professional 734.564.1519

Wow. How did I miss this one? Totally agree, buddy. Do I have some lady who opened up her house watch my kid or someone who's licensed, tested, proven the house is safe, etc?

Aug 29, 2012 07:33 AM