Was I a bad girl (appraiser)?

Was I a bad girl (appraiser)?

Beverly A. Bayer, SRA - Moreno Valley, CA

This week I finished an appraisal concluding that the property was selling for 15% over current market value, knowing it could probably kill the deal.  I know the real estate agents will not be happy, and probably the loan broker and lender will be very angry.  I have not yet been paid for the appraisal, and could very well have problems getting paid for my work.  I understand real estate is a success based business: you sell a home - you get a commission / you make a loan - you get a commission; and everyone wants the appraiser to be part of the loan making team.  But we are not part of the loan making team - we are part of quality control and our job is to help the lender made a prudent lending decision. 

The question has been asked "why do we need appraisals, why can't we just accept the purchase price as value"?  Certainly very often the appraisal comes in at or near the purchase price.  And we use the purchase prices (not appraised values) of the chosen comparable sales to determine value in our appraisals. 

There is a reality in the appraisal world: you kill a deal, you lose a client.  And if a loan is not made - the thought is why we have to pay for the appraisal, especially if the appraisal was believed to be the reason why the loan was not made.  The appraiser is paid for their time, expertise and opinions, they should not be paid for success (a loan is made).  That loss of a client or an appraisal fee - pushes many appraisers to become accommodators: appraisers who will hit the needed value and overlook issues about the property that might affect its current or future value or marketability. 

How many bad loans were made in recent years with inflated values and misleading information?  Were those homebuyers well served and are they happy with all the people who helped put them into a home and loan they could not afford.   How was society served with irresponsible lending - resulting in a record number of foreclosure homes - causing home values to drop across American.  In the preamble of the Uniform Standards of Professional Appraisal Practice (USPAP) is says the purpose "is to promote and maintain a high level of public trust in appraisal practice by establishing requirements for appraisers.  It is essential that appraisers develop and communicate their analyses, opinions, and conclusions to intended users of their services in a manner this is meaningful and not misleading."

 Here are some quotes from USPAP:

"An appraiser must perform assignments with impartiality, objectivity, and independence, and without accommodation of personal interests.

An appraiser must not advocate the cause or interest of any party or issue.

An appraiser must not accept an assignment that includes the reporting of predetermined opinions and conclusions.

An appraiser must not communicate assignment results in a misleading or fraudulent manner.  An appraiser must not use or communicate a misleading or fraudulent report or knowingly permit an employee or other person to communicate a misleading or fraudulent report."

Under Management: It is unethical for an appraiser to accept an assignment, or to have a compensation arrangement for an assignment, that is contingent on any of the following:

•1.       The reporting of a predetermined result (e.g. opinion of value);

•2.       A direction of assignment results that favor the cause of the client;

•3.       The amount of a value opinion;

•4.       The attainment of a stipulated result; or

•5.       The occurrence of a subsequent event directly related to the appraiser's opinions and specific to the assignment's purpose."

It is all about appraiser independence and the public trust.  So how would an appraiser feel about missing the needed value in an appraisal?  I feel bad, and in this case it was for new client - that now will probably never call me again, and the question remains will they pay my appraisal fee.  If you look at the USPAP requirements - you will see appraisers can't accept a reduced fee for a loan that is not funded.   So other than the legal ramifications of producing a misleading report, why even provide a report that is not helpful to the client.  First, if the buyer is paying too much for the house they now have a "professional" opinion of value that they can use to renegotiate the purchase price.  Second, it could prevent the lender from over-lending.  Since this was to be an FHA loan, it will also prevent over-insuring the loan.   Now the client might look for another appraiser who will gladly over-value the property for an appraisal fee.  However it turns out - I will be considered the bad guy (gal), causing a loss of an appraisal fee, time; and possibly the whole deal and commissions all around. 

Now you might wonder could I have gotten the value wrong, for after all isn't an appraisal just an opinion of value.  That is possible, in the past I have been able to prove other appraiser's values low - mostly in times when values were going up, or when the comparables the appraiser used where not that good or were misused.    The truth is when I start to disagree with a purchase price, I go into more depth.  For this property I made a list of pending sales with comparable list prices - finding those properties where significantly larger in size.  And I had lower priced listings - a true test of the competition - for why would anyone pay more for a house then the current prices of comparable homes?   A likely reason a person would over-pay for a house is that they are unaware of the competition at lower prices, a problem often with out of the area buyers or buyers working with agents who do not expose them to other listings.  Other times games are played to facilitate larger loans, sometimes with cash flowing outside the transactions.  Any deception on a lender is mortgage fraud which I think would come as a shock to most homebuyers and often to the people who helped them buy a house.

Many believe that an opinion is an opinion and how can you get in trouble for an opinion; appraisers sitting in Federal Prison for mortgage fraud may ask that of themselves.  The issue is was this a professional opinion based on good data, well analyzed and not the opinion wanted by the appraiser's client.  When the request for the appraisal lists the needed value and the appraiser gets to that number by ignoring relevant data and manipulation - mortgage fraud is the result.  In the real world much mortgage fraud goes unnoticed and unpunished; but that is not an excuse for appraisers to appraise to the requests of greedy clients - who might be more concerned with collecting a commission then protecting the interests of their borrowers, their lenders and the holders of their loans on the secondary market.