Bad Appraisers or Flawed System?

During the past week, several articles were released regarding appraisers relating to deals being killed because of bad appraisals. Several points in theses articles have a strong foundation for being valid.

However, the word educated guess is an insult to those appraisers who are trained, experienced and act as professionals. With over 25 years of experience in the field of appraising, I have seen many educated guesses that were not worth the paper printed on and these appraisers cause the problem for the entire group. The old saying, "one rotten apple…" applies here as well.

For years, no one wanted an appraiser who killed a deal because of a low appraisal estimate.

That said, it is extremely difficult to appraise at Market Value when one-third of the sales are foreclosures and sales activity is 40% lower than levels of the last five years. Financial institutions require the most recent sales, not necessarily the best sales. What is an appraiser going to do if there simply are not enough sales to accurately determine a property value?

And, yes here is the educated guess. Three sales and three listings are presented in over 90% of appraisals. Think about this for a minute, a community of 5,000 homes and the appraiser is determining the value for one property based on less than 1% of 1% of all properties. Mass valuation systems have been used for years by assessors throughout the country to determine property assessments for taxation purposes. These systems use thousands of sales to determine value and provide statistical factors to prove the value, generally covering between 20% and 25% of all properties. There is a strong argument for more is better.

We can blame the appraiser, because in some cases we should. But we also need to look at the system and realize there is a more efficient manner to appraise where there is transparency. A perfect example is that the new rules require the reporting of a property sale going back three years. Prior to this crisis it covered only one year.

If this one rule was in place think of how many fraudulent transactions would have been avoided. And there are the builders. How did we build so many housing units that exceeded the national population growth? How did we end up with over 2 million excess housing units? It is not because the markets collapsed; it is because the demand was not there. As a result, the excess supply caused the markets to drop.

We can go on and on about the causes, instead we should be looking at the current system and determine a solution that works for all, is transparent and most importantly relies on professionals to be the safety value not the fall guy. History does repeat itself; these same arguments were presented 20 years ago regarding this same point.

Comments

[rrtzmd:]

..."trained, experienced and act as professionals"?...no disrespect intended but now possessing the experience of having bought and sold several homes, I'd have to say that appraisers were never more than "yes-men" who managed invariably to appraise the property to suit the loan requirements...some of what they came up with was so unbelievable that I actually was embarassed to present it to the loan officers...

Jul 02 11:08 AM

[Cold Reality:]

This very informative article identifies a at least two egregious flaws in the way that appraisals are conducted and used.

First, note that the article emphasizes that the appraiser is using real estate transaction data almost exclusively--never mind the attributes of the property itself, such as age, construction quality or condition. In my own experience, appraisers never set foot on the property or enter the buildings, so their "appraisal" of the actual value of the house based on its merits (or demerits) is thereby inherently flawed.

Second, in the event of a situation (and in fact precisely this situation exists in my own neighborhood right now) where the last three sales all occurred in the last three years, and all closed at the peak of the price hysteria in early 2006, "appraisals" predicated upon these artificially elevated values will thereby skew current appraisals.

This is precisely why the real estate agents want to continue to manipulate and control appraisals. If they can only get one or two ridiculously high-priced sales closed in any defined area, then it makes it all the easier to not only bamboozle new sellers and buyers, but to get the deals closed at the inflated prices.

Now you might argue that in a free market, there would be no "ridiculously high priced sales" but that makes my point that residential real estate is not a free market, because of these pernicious influences that artificially manipulate key components of nearly every transaction in every particular.

The real property sale, embodied by the principals to the transaction, is the perfect host to the real estate agent parasite as it feeds on encouraging and facilitating the setting of a high asking price by a manipulable seller who is pre-conditioned to believe that he or she is entitled to and should get an unrealistically high price.

The property is then touted to a susceptible buyer who wants the property and is willing to buy into the real estate agent's litany of claptrap about its very high value. The buyer, under the strict coaching of the real estate agent, makes an offer that meets with the real estate agent's approval, and the real estate agent submits the offer to the seller, who is encouraged to accept it. Poof! There is a deal, if only it can get financed!

This is where the ability to manipulate the real estate appraiser, even if through the lender, is so essential to a successfully hyper-inflated real estate transaction. In fact, the faulty appraisal becomes the sine qua non of progressively inflated real estate transactions. Without this key mechanism of control, the free market would prevail, and there would not be--never would be--real estate booms and busts like what we are experiencing today.

Jul 02 04:24 PM

[John Preston:]

This was written toungue-in-cheek...rig...


On Jul 02 04:24 PM Cold Reality wrote:

> This very informative article identifies a at least two egregious
> flaws in the way that appraisals are conducted and used.
>
> First, note that the article emphasizes that the appraiser is using
> real estate transaction data almost exclusively--never mind the attributes
> of the property itself, such as age, construction quality or condition.
> In my own experience, appraisers never set foot on the property or
> enter the buildings, so their "appraisal" of the actual value of
> the house based on its merits (or demerits) is thereby inherently
> flawed.
>
> Second, in the event of a situation (and in fact precisely this situation
> exists in my own neighborhood right now) where the last three sales
> all occurred in the last three years, and all closed at the peak
> of the price hysteria in early 2006, "appraisals" predicated upon
> these artificially elevated values will thereby skew current appraisals.
>
>
> This is precisely why the real estate agents want to continue to
> manipulate and control appraisals. If they can only get one or two
> ridiculously high-priced sales closed in any defined area, then it
> makes it all the easier to not only bamboozle new sellers and buyers,
> but to get the deals closed at the inflated prices.
>
> Now you might argue that in a free market, there would be no "ridiculously
> high priced sales" but that makes my point that residential real
> estate is not a free market, because of these pernicious influences
> that artificially manipulate key components of nearly every transaction
> in every particular.
>
> The real property sale, embodied by the principals to the transaction,
> is the perfect host to the real estate agent parasite as it feeds
> on encouraging and facilitating the setting of a high asking price
> by a manipulable seller who is pre-conditioned to believe that he
> or she is entitled to and should get an unrealistically high price.
>
>
> The property is then touted to a susceptible buyer who wants the
> property and is willing to buy into the real estate agent's litany
> of claptrap about its very high value. The buyer, under the strict
> coaching of the real estate agent, makes an offer that meets with
> the real estate agent's approval, and the real estate agent submits
> the offer to the seller, who is encouraged to accept it. Poof! There
> is a deal, if only it can get financed!
>
> This is where the ability to manipulate the real estate appraiser,
> even if through the lender, is so essential to a successfully hyper-inflated
> real estate transaction. In fact, the faulty appraisal becomes the
> sine qua non of progressively inflated real estate transactions.
> Without this key mechanism of control, the free market would prevail,
> and there would not be--never would be--real estate booms and busts
> like what we are experiencing today.
>

Jul 03 09:39 AM

[Accuriz:]

RRTZMD
I do not disagree with your statements at all. With over 25 years in the business and having worked through the S&L Crisis of the late 80's I saw enough bad appraisals to make me sick. What I have yet to see is the enforcement to penalize these appraisers. I have very strong views on this and I am the outcast in my area regarding fellow appraisers. We need to be accountable. Respect is earned, it is not an entitlement from taking courses that are so diluted they mean nothing.

This nation will loose over $1 trillion, some say $4 trillion in lost equity because a small group of mortgage brokers, working with bad appraisers corrupted the system.

When will we learn.

Jul 03 10:49 AM

[Accuriz:]

Again, nail being hit on the head.

The current system reguires a minimum of three sales, three listings. This is amazing with the technology and databases available today.

There is no reason why at least 25 sales can not be presented with a statistical coorelation presented. Not every house is the best house in the neighborhood.

When the market is increasing ethical appraiser loose out, when it decline they also loose out because they are lumped in with the bad appraisers.

In the end, those who survive tend to be the more legitmate, professional firms. But that is only my opinion.

The realtors have to much influence on the process and laws. In an ideal world the appraisal would be conducted without influence, but that is an ideal world. We live in a different world.


On Jul 03 09:39 AM John Preston wrote:

> This was written toungue-in-cheek...rig...

Jul 03 10:55 AM

[SoCalGal:]

<< Realtors have too much influence on the process and laws. In an ideal world the appraisal would be conducted without influence. >>

Man, you said a mouthful. Appraisal influence must end, once and for all. Even supplying the appraiser with the purchase agreement is subtle influence. ("Mr. Appraiser, here's your number to hit.") The price at which two over-enthusiastic agents and their hapless client agree to transact is of no relevance whatsoever. Yet when an appraisal comes in below what two over-enthusiastic agents and their hapless client agreed the price should be, the real estate agents scream bloody murder. The buyer's agent's response is never, "Whew! You dodged a bullet and didn't overpay for the property. Be sure to send the appraiser a Starbucks gift card." Oh, no, that would be too much like a fiduciary would behave.

Why can't the conventional world follow the model of Veterans Administration fee appraisals? That is, the appraiser is selected by the agency (VA). He or she appraises the property. If the appraisal comes in "low"--again, according to whom?--that's just too damb bad. The buyer can still pay the contract sales price; it's just that the lender won't lend on that price. The appraiser's opinion--not the judgment of two self-absorbed real estate agents--is the value, take it or leave it, and the fee appraiser's next job isn't dependent on the real estate agents' judgment of value as indicated by the purchase agreement.

Jul 03 01:03 PM

[John Preston:]

Let me share some background.....

I have held, or hold, all of the licenses available in the housing industry...Real Estate, Mortgage Broker, and Appraisal....

Of the licenses, appraisal was by far the most demanding to get....real estate was the easiest...

The appraisal license is also the most easily lost...as the state appraisal boards are fairly aggressive on "bad" work....

I say this because I know appraisers who were "ok" who got nicked and dinged...had to do extra education and submit new work to the AZ state board to get off of the probation-like lists....the first step in the de-licensing process....And, I am aware of some who lost licenses....

Many appraisers are "bent over" by the market place....and they do write bad reports....

I was appraising in CA during the early to mid 90's...for a solid firm....all bank clients....Reports took 8-10 hours a piece to complete in total...minimum...while a report may contain on 6-9 comps (as ours did), the file may have contained 2-3 dozen properties that were considered....

It is not the number presented...it is the clarity in the communication to the reader...usually the lender....and the completeness of the research, anaylsis and conclusions that count.

Remember, the "number" you cite...the value... is what the lenders want to make the process easier...for years, the Appraisal Institute has lobbied for a "range of value"...which is what really results from the report....

Every appraisal report, included in every loan file, submitted to every lender, was subject to the lenders review....every time. Once the lender "accepted" the report....and the file....and closed the deal...whose problem was it. Perhaps bad lenders didn't care....

If lenders accept bad files from bad brokers....and bad appraisals from bad appraisers...????? You will get bad results....lenders (including the agencies) ultimately set the tone and tenor of the market place....and had the responsiblity for policing the process....

Bad work has no place in the industry...but bad work should be expected, guarded against and culled out....and it wasn't! The originate to distribut model was a parent-child relationship...the parents just did't care, at least not when it counted.

On Jul 03 10:55 AM Accuriz wrote:

> Again, nail being hit on the head.
>
> The current system reguires a minimum of three sales, three listings.
> This is amazing with the technology and databases available today.
>
>
> There is no reason why at least 25 sales can not be presented with
> a statistical coorelation presented. Not every house is the best
> house in the neighborhood.
>
> When the market is increasing ethical appraiser loose out, when it
> decline they also loose out because they are lumped in with the bad
> appraisers.
>
> In the end, those who survive tend to be the more legitmate, professional
> firms. But that is only my opinion.
>
> The realtors have to much influence on the process and laws. In an
> ideal world the appraisal would be conducted without influence, but
> that is an ideal world. We live in a different world.

Jul 03 01:42 PM

[Cold Reality:]

This was most certainly NOT written 'tongue in cheek'!


On Jul 03 09:39 AM John Preston wrote:

> This was written toungue-in-cheek...rig...

Jul 03 06:32 PM