Several months ago, our appraisal firm completed an appraisal of a one family in an urban market that has been undergoing gentrification for about five years. The property was renovated (not to excess) and if it closed, would be the highest property sold there recently. It was exposed to the market for a typical period of time and sold near the list price. We used sales from the immediate area that were renovated and recently transferred. The market is rising rapidly and this property was slightly larger than the recent sales, hence its record price. It was not a white elephant.

Because the sales price was above $1M, two appraisals were completed as SOP and we believe the other firm also came in at or near the purchase price.

The lender then ordered a field review and their local staff appraiser (who was located out of state) commented to the real estate broker before walking into the property that “There is no way any house in [neighborhood] could ever be worth more than [price]. Needless to say, this field review came in approximiatley $1M low or about half the purchase price. The field review contained sales that we either inspected or we were familiar with. The sales were basically shells (wrecks), or multi-family properties with rent stabilized tenants. Amazing.

The buyer went to another national lender who did the deal and I believe they relied on the two appraisals.

Myself and another principal, who was the appraiser for this assignment, were removed from the approved appraiser list without notice (because I reviewed the report), yet the remainder of my staff, including trainees were still approved. A mortgage broker who submitted our reports to this lender was told they would accept our firm’s reports if we would simply remove our names from the reports and they could jam it through the system. Of course we would never do that.

We dogged the lender for weeks for an explanation since we did nothing wrong. Ultimately we were reinstated after other work of ours was reviewed.

In summary, it appears that:

  • This lender was redlining.
  • Their appraisers are being pressured to come in low on sales in marginal areas because of pre-conceived opinions about values and risks. It ironic that appraisal pressure in this case is clearly the opposite of what we typically see, which is to come in higher than the value.
  • Competent appraisers can be easily weeded out in favor of form-fillers. We fought them on principal for our reputation despite the fact that we do very little work for them.
  • Out of state review appraisers are not always experts in the markets they review. How can lenders base significant loan decisions on out of state review appraisers, even if they are on staff?
  • If lenders take this position, how do emerging neighborhoods have a chance to develop?

Is anybody out there listening?

UPDATE Since this incident, there have been a number of sales in this neighborhood over the $2M threshold. I forgot to mention in the first paragraph of this post that we also received calls from their underwriter telling us to bring down the value because they didn’t think the neighborhood could support the price.

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3 Responses to “Redlining Is Alive And Well”

  1. Dave says:

    I’m not sure they were redlining. The out of state appraiser may not have had access to a local MLS system, and may have relied on tax records (such as through Realquest) to produce a market analysis. In this format description of the comps is not provided.

    If the subject was recently rehabbed, their sound like there was a big discrepancy between previous sales price and estimated value, which may have thrown up red flags. If the sales history of the “wrecks” was similar, perhaps the reviewer assumed they were in similar condition.

    So possibly, the reviewer was so confident in their investigative skills and forgot that the knowledge is in the field.

    That or they were redlining.

  2. Jonathan J. Miller says:

    Thats a bit naive, wouldn’t you think? If you have a local expert, and you rely instead on an out of town reviewer who did not confirm the condition or tenancy of the comps, who had a pre conceived opinion before inspecting the property and pressure from the underwriter, that is not evidence of redlining?

  3. USPAP, USPAP, USPAP, ever heard of the Competency Rule? It applies to a review appraiser too. In my little opinion, I think this reviewer fails because of the competency rule because of a lack of understanding the local market. It’s not correct to assume that if one pays enough for access to some MLS or Tax Record Provider that they have enough knowledge about a local residential market.