I ran across this Q&A at MarketWatch: How fair are appraisers who already know home price? and I got very annoyed at the assumption made by the person posing the question, stirring up an already healthy dose of irritation at the predicament my industry is in.
Q: One of my pet peeves for years has been how appraisers are given the house contract before they appraise the house. Why is that, other than the fact he needs to make sure that his valuation comes in close to the contract price, otherwise the deal is off and he won’t get any more business from that real estate and/or mortgage company? Appraisers should be above this. -Timothy Murray, certified financial planner, Chantilly Va
He further proposes to make it illegal to allow the appraiser to have contractual information about the sale.
Do you think that the appraiser can’t find out what the sales price is without viewing the contract? Duh. Ok, make it illegal to provide the contract. Boy, that will really prevent appraisers from being pressured by their clients. Do you think a bank or mortgage broker, who is trying to make the deal, would feel the same way this questioner does? How about the real estate broker who has a commission riding on it? Of course not. In a mortgage related transactions, the appraiser usually only interacts with people who have a stake in the outcome.
Here are some thoughts:
We are mandated by law – its part of our licensing requirement – to review the sales contract. Why? To understand the terms of the sale. Its not all about the price. What is the actual asset being delivered to the buyer? Are their concessions provided by the seller in lieu of a lower price? Is the proposed new kitchen part of the price? and on and on.
We need to understand who the parties are – Fannie Mae has made this a top priority in their quality requirements and revised their appraisal forms a few years back to address this specific concern. They want the appraiser to have an understanding of what the transaction is about. If its a flip, the lender wants to know. In other words, does the seller name match with the owner on record? What and when was the prior sale and does it correlate to the current sales price?
We do not need to know the loan amount – That’s definitely a heads up from the lender that tells the appraiser what they need to come in at without actually telling them. This is prevalent in refinance assignments where there is no sales price to guide the unscrupulous or incompetent appraiser. The appraiser can safely assume that as long as the mortgage amount is 80% of the appraised value, there won’t be any problems with the deal.
The level of precision possible in valuation is not always practical in a blind scenario. – For example: A property sells for $1,001,000 and the “blinded” appraiser estimates the value at $1,000,000. Could the value be $1,001,000? Of course it can. At that level, there is not that type of precision. That’s 0.1% accuracy. I think the best we can hope for as a profession, is 3% unless you get lucky and nail it. The value could be $998,000, $1,010,000, etc. The empirical evidence used to estimate value is not the granular. Yet the loan to value ratio may require it and in the process, invalidate the transaction because of a variance of 0.1%.
So is the issue resolved by hiding the price from the appraiser? Of course not. It may make you think that you have made the appraiser unbiased. But that’s incredibly naive.
So to figure out the solution, we need to understand why this happens.
Because, in real world lending practice, the appraisal profession has been shredded into nothing more than an army of form-fillers.
Appraisers have to play ball. Its all about making the number. Instead of window dressing the problem, how about protecting the appraiser’s independence so we can provide a real service to the lending industry and the consumer? Not fear for our income because we didn’t make the loan work?
The good appraisers want this to happen, to be protected, because for those who haven’t sold their soul (there are only a few of us left who haven’t), its a losing battle. Just look at firms that specialize or base their practice nearly all on mortgage broker business. Lenders haven’t been incentivised to change their standpoint on understanding the value of their collateral for so long because values have been rising for a long period of time. With the fallout from the sub-prime mess, this may change, but it will take a long time.
Instead of lumping us in with used car salesman (sorry guys), lets try to be a little smarter.
I hope Timothy Murray gets the message, because while it bugs me just as much as it does him, lets try to effect change on the actual problem, instead of simply using a band-aid to feel better about the whole issue.
Tags: Fannie Mae, Sub-Prime
Well I suppose appraisals could be funded by a tiny tax on MBS issues, since the MBS holders are the ultimate bagholders, but then who would decide who gets hired?
Perhaps requirements for annual assessments for property tax purposes could be enforced, and those could be used, with a regionwide trend used to adjust from an individual property’s most recent assessement to the date of sale. But you wouldn’t necessarily want to work for the government either.
As an agent, I want the appraiser to tell my client the true value of the home (as close to it as can be reasonably expected). If it comes in low, my client needs to understand why. If it comes in higher than asking, great.
I don’t ever pressure appraisers to hit a number. They are being paid to appraise the home, not the deal. I don’t tell them how to do their job, and they don’t tell me how to do mine.
That’s not to say I haven’t questioned a few appraisals in my time. I’m not an appraiser, but I can get very close based on comps and experience. If an appraisal comes in lower than expected, of course I question the appraiser. They are humans too, and will occasionally miss something. Or maybe, being human, I missed something.
I’ve worked with appraisers from the brilliant, to the not so swift. The vast majority of the time they do a great job. A couple were complete dolts, but that’s to be expected of any group of people. In the dolt situations, a second appraisal was obtained and the deals progressed to closing.
Analyzing contracts is a must. Appraisers are generally under pressure to finish an assignment in less than a week, whereas, the attorneys and agents have been doing their due diligence for much longer. The contract can have a lot of valuable information. Two examples that come to mind:
(1) I appraised a unit within Castle Village, in Upper Manhattan. This is a group of buildings in upper manhattan. A retaining wall behind one of the buildings collapsed. Each owner had to pay between $10,000 and $20,000, because their insurance would not cover it. Surprise, surprise the managing company and the agent did not mention this factoid to me. I only discovered this by reading the contract. To put it mildly, I was thankful that I had the contract to examine.
(2) I appraised a coop unit a few months ago and the contract revealed that the new owner had to pay to replace the windows within a certain amount of time. This was very expensive and certainly explained why the unit appeared to be selling under market value. And again, the agent did not “fill me in.”
I can see the argument that what the buyer pays is wholly independent of an opinion of value, but things that do affect value can be found in the contract.
The real issues here is INTEGRITY, COMPETENCE, PROFESSIONALISM, AND BACKBONE. Too many so-called appraisers are “form fillers” bending over for everyone with an interest in the deal, except for the poor buyer who often doesnt even have the loan company looking out for them. As far as contracts go, Competent and professional Appraisers with INTEGRITY and BACKBONE need them for data and information that would otherwise not be known. With 30+- yrs in the appraisal field I am very concerned about the lack of COMPETENCY, INTEGRITY, PROFESSIONALISM AND BACKBONE exhibited by many working in this field. We are now accepting more reviews in hope that it will raise the CIP&B of appraisers in the area.
As a fellow appraiser I highly agree with all of your points Jonathan, except for the first “we are mandated by law”. Strictly from a USPAP perspective, Advisory Opinion No. 1 (AO-1) clearly recognizes that for one reason or another despite earnest attempts, appraisers may not always be privy to the purchase contract or 100% the details in connection with a pending sale. In fact, AO-1 cites one major reason for the lack of cooperation in this regard is the fact that unfortunately it’s not an across the board statutory requirement.
As for the financial planner that suggested making it illegal for the appraiser to know the pending sale price, I say that concept will never see the light of day. From what I’ve been reading, industry-wide things are likely to move in exactly the opposite direction and more in your direction.
jose – yeah, perhaps “mandate” is a bit of an exageration. We need to make a best effort to get it. If we are unable to get it, it sure seems like someone is hiding something, doesn’t it?
Again, I absolutely agree with you in what may be behind not getting the full story. Beginning with the most egregious, flipping scams or some deliberately undisclosed concessions which essentially make the deal non arms length come to mind. It only helps to make the so called “imperfect real estate market” even more so and is ethically and financially bad for everyone. On the flip side, how many times have we as appraisers experienced where having the full details was in the best interest of all and resulted in the most objective and supportable assignment results?
As for the mandate I agree, at least for the time being anyway. But if you’ve been reading the Appraisal Institute’s monthly newsletter, etc., it’s abundantly clear through the many proposals and initiatives being tabled on the state and federal level all pointing to greater not less disclosure and accountability. In sum, I believe the pendulum will begin to swing and one day “mandate” will be official. So you were correct, but just a bit early Jonathan! Nice piece by the way and kudos for taking it head on.
1 USPAP STATES THAT WE ARE TO REVIEW THE CONTRACT. #2 FANNIE MAE etc ASK FOR INFORMATION ABOUT THE CONTRACT. #3 THERE ARE OTHER ISSUES TO BE CONCERNED WITH IN A CONTACT THAN THE PRICE. REMEMBER AN UNDERWRITER CAN CHANGE OUR VALUE IF THEY FEEL SOME PERSONAL PROPERTY MAY BE INVOLVED.
CHECK THIS OUT: OFFER FOR $210,000 INCLUDES REFRIGERATOR IN HOUE AND GARAGE, FREEZER IN GARAGE, RIDING MOWER, TRAILER AND PIER.
LOOKS PRETTY VALUEABLE MAYBE TO AN UNDERWRITER?
REAL ESTATE WAS WORTH $210,000.
I PRECEDED TO DEFINE THE PERSONAL PROPERTY AS FOLLOWS:
THE REFRIG(S) AND FREEZER WERE THE TYPE THE LOCAL PUBLIC SERVICE IS PAYING TO TAKE OFF PROPERTIES BECAUSE THEY ARE ENERGY GUZZLERS; THE GARDEN TRACTOR IS A CRAFTSMAN 1956 MODEL WITH THE RUST TO PROVE IT AND THE PIER WAS 6 FEET LONG AND LASTLY THE TRAILER WAS THE BACK OF A PICK UP TRUCK WITH A WELDED HITCH.
AS A COURTESY I PROVIEDE THIS EXPLANATION AND GUESS WHAT THE UNDERWRITER LEFT MY VALUE ALONE.
SOMETIME WE ARE IN THE ASSURANCE BUSINESS!!!