Appraisals are becoming the fly in the ointment with more regularity. To say appraisers are more conservative these days is an understatement. If you were paying attention in 2003, you will understand why lenders and the appraisers hired to provide property valuations on their behalf have traded in their tie dye and love beads for a button down oxford.
But from my vantage in the cheap seats, things haven’t really changed all that much. Both then and now, appraisal practices were purported to protect the principals in the transaction. Both then and now, the principals are the ones getting the short end of the stick.
Then
Back in the glory days of home value appreciation, lenders couldn’t throw their money at the home buyer fast enough. I found this little explanation of the purpose of the home appraisal from RealEstateABC.com a chuckle and a half:
People get very emotional and excited about purchasing a house. When they’re in this highly emotional and excited state, they tend to just look at the cosmetic appeal of a house instead of the important factors. They forget that they’re not buying a CAR, they’re buying a HOUSE!! There’s a big difference between the two. One is a normal expense everyone has to incur occasionally. The other is the biggest financial decision most people will ever make. By becoming too emotionally attached to a deal, people often pay above market value for a home. This can cost them tens of thousands of dollars in an overpriced purchase. Since a house is such a major financial decision, it’s prudent for them not to take any chances. People should try to eliminate as much risk as possible.
So the point of the home appraisal is to save us from ourselves. That concern for the stupid, emotionally charged buyer must be what led to 103% financing and stated-income lending. Whatever. More to point, the obvious idea behind the appraisal is that the lender’s collateral is in the property, and he in theory wants to confirm that his investment is sound.
The punch line, of course, is that in 2003 plus and minus a couple of action-packed years, appraisers tended to use the “whatever you want to pay” valuation approach. It was an appreciating market, after all. Ironically, when appraisals should have been our biggest concern, they concerned us the least. They always came in precisely on the money.
Now
Today, the pendulum has swung in a big way. The lenders are not as generous; they’ve been burned by a deluge of bad loans. (One could argue that the consumer got a little burned as well, but hey – it’s not about you.) We still need someone to protect us from ourselves, of course, because you know how we get when we want something bad.
The government determined last year that it’s not just our own irrationality which poses a threat. Maybe the appraisers were bad children as well. Maybe they tended to act with bias; perhaps they were coerced by their mortgage-making clients, the banks, into returning flawed opinions of value.
The Home Valuation Code of Conduct was born. The idea was that appraisers would now act independently and with integrity. In practice, too many of the really good appraisers have been kicked to the curb along with their livelihoods as Appraisal Management Companies (AMCs) take over the task of assigning the job orders. Think of the AMC as the temp agency, and as in the case of the temp agency, they need to take their cut. The cost to the consumer of the appraisal went up, and the fees to the appraisers went down. Oh, and a lot of these champions of independence are owned by the banks themselves.
Why You Care
“So what?” you say. Well, here’s why you care. Based on my experiences of the past month, the biggest hurdle in the home sale transaction is now the appraisal. Keep in mind that buyers are no longer “qualifying” for loans with a wink and a handshake. They have to provide actual documentation of employment, earnings and reserves. They have to (gasp) actually have some skin in the game in the form of a real down payment.
Now, consider that in many segments of our local San Diego real estate market, prices are not declining but are actually increasing, whether it be because of the threat of a sunset on the first-time homebuyer tax credit, the fear of rising interest rates, the perception of a market bottom, or – and this is a biggie today – low, low inventory. Demand is up; inventory is down. This is what economists might call a supply and demand thing. It’s what drives free markets, but our market is anything but free.
First, you need to appraise.
My latest kick in the britches involved a beautiful little entry-level home. One day produced eight written offers and five others we turned away, each one at or above full-price. A few of the offers involved seller credits toward buyer costs. “Beware the appraisal,” I warned. My very smart clients, recognizing that seller concessions artificially inflate the target appraisal value and understanding the very real risks, selected an offer in the middle, one that represented the best combination of highest price and least baggage.
So I met the appraiser, a true independent who parked in the driveway for the four and half minutes it took him to sprint through the home like he was late to a meeting with the Joint Chiefs of Staff.
The appraisal came in low.
As I reviewed the report, it was obviously flawed. The appraiser had noted that the seller was crediting 3% of the sale price toward the buyer’s costs; there was no concession. The appraiser showed a range of adjusted “comparable” sales with a $20,000 spread between the high and low. (In the case of one, the MLS summary included no pictures, leaving the actual condition of the property to the imagination.) He picked the low one as “value.” He did this even though he gave a hat tip to appreciating area market in his narrative.
The next logical step would be to appeal the findings. Logic, however, is not a component of today’s appraisal process. The appraiser would not return my calls, and the lender said “we are standing behind the determination of value” (“we” as in “me and the guy who acts independently and without bias”). He kicked me, the seller and the buyer to the curb.
You want emotional?
You would think that thirteen people can’t be wrong. Think again. They were obviously blinded by silly things like the gleaming wood floors, not to mention the need for a place to live. But this is where emotions really kick in.
The buyer suggested that the seller “split the difference.” They are now thinking they are overpaying, and they have to come up with more cash to consummate the transaction. The seller, on the other hand, has mentally cashed the check and feels cheated. He wants to split the difference a little to the left, and doesn’t understand why the buyer isn’t just giddy that they are getting any “discount.” Nobody wins.
We could cancel contract, relist the home, rinse and repeat. The problem is that the appraisal is a turkey shoot, and there is no guarantee we will fare better on our next outing.
Caveat Emptor (and sellers too)
During my first twelve years in real estate, I never had an appraisal miss on one of my transactions. In the past six months, we’ve been nailed three times. It may not seem like an epidemic, but talk to enough agents, and you may find it is.
On the face, this trend would suggest that buyers benefit. If the appraisal misses, they get to renegotiate price, right? The problem is that in a multiple-offer situation, the listing agent is now advising the seller to place more weight on things like down-payment and requests for concessions. As the buyer’s agent, you had better hope your client has not only the strongest offer but the biggest bank account. This is bummer maximus for the VA and FHA buyer.
If you are a seller, know that value is not necessarily what a buyer is willing to pay. Those were the old days. Value is what the appraiser says it is, and you had better hope that he is equally moved by your staging and stylish appointments.
ABOUT THE AUTHOR Kris Berg is Co-Owner and Designated Broker of San Diego Castles Realty. If not-so static web sites are your thing, go here at once where you will find loads of real estate information including homes for sale, market trends, floor plans and more. Kris's hobbies include fencing and spot welding. She likes kittens. 
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{ 17 comments… read them below or add one }
Talk about closing the barn door after the horse is gone. Where was this prudence in 2005 when we really needed it?
Jakob,
That horse not only left the barn, but was later captured and canned at the Lehman Alpo plant in 2008.
Kris,
Value is determined by willing and able seller reaching agreement with a willing and able buyer at arm’s length. If one or both of the seller and buyer cannot consummate the transaction, it does not matter that they otherwise agree on price.
For many years, lenders were giving money away, and it was “Buyers Gone Wild (just like the video tape series, but much more obscene). Now, buyers must actually have the money themselves, or be willing to play by bank’s rules, however irrational, if they expect the bank to give them the money.
As an actual taxpayer stuck with a huge bill (understatement) caused in great part by buyers’ irrational opinions of how much to pay for houses enabled by unlimited easy money given to them by banks, I welcome the pendulum swinging a bit in the other direction.
Your seller has a choice: take what this buyer is able/willing to pay, or refuse and hope someone else will be willing (and able!) to pay more.
All appraisals prepared by state certified appraisers must comply with USPAP the uniform standards of professional appraisal practice. USPAP has also been adopted as state law in many states. If an appraiser doesn’t comply he/she may very well be investigated by their state boards. Realtors should provide the appraiser with any additional written offers on the property to consider as part of the sales history of the property. They can always supply sales data in support of their list price or contract price at the time of the inspection. Too many Realtors wait until after the appraisal is completed to provide the “better comps.”
John Did all that.
Jakob – Agreed to some extent, particularly where refinances were concerned. As for purchases, confirming stated income, qualifying based on future reset rates and not the teaser rates, and not loaning more than a home was worth would have gone a long way toward keeping things in check as well.
Smithers,
>Value is determined by willing and able seller reaching agreement with a willing and able buyer at arm’s length.
Reaching agreement really has nothing to do with consummation in this case, since the latter would have occurred had it not been for the matter of a bad appraisal. Everyone was very much in agreement before someone gave us a five digit problem.
I know my client’s choices, as does he, and they are moving forward. For the record, though, this wasn’t a case of a thoughtful appraisal thumping sense into the heads of crazy kids. It was a flawed appraisal that was delivered in a dictatorial fashion, no dialogue allowed. I admit I can’t say as much for one of the other two appraisal situations I mentioned.
I think I liked you better snarky.
Gosh, Kris, I thought I was plenty snarky, but I will strive to do better in future comments so I can avoid another smiley face icon.
I went back and actually read your post. I suppose I should always do that the first time before commenting….
Sounds like your buyer may have the ability to consummate said purchase at said originally agreed upon price by increasing the cash payment part to make up for the lower loan proceeds, but that the lower appraisal value has dampened said buyer’s enthusiasm. Got it. Mood-killer appraisal.
p.s., Yes, I know that you know (and that your clients know) your clients’ choices, and I suspect you knew that I knew as much, but I did not want to lead that last sentence with “as you know,” in case that would have been over-snark.
p.s.s., I was still (sort of) right.
Thank you, Smithers. Much better. (Resisting the urge to add smiley face… oh, to heck with it.)
The whole specter of appraisal came up in my latest failed bid to buy a home. I am totally lost as far as how much or how little to bid anymore. This latest property was a “traditional” sale (no bank-owned or short sale fiasco) and had a list price my agent thought was rather high – given the comps on other similar properties that had sold in the last several months. It was in the midst of upgrades to the kitchen and had new flooring and paint etc. But, the asking price was anywhere from $8,000 to $20,000 over other recently sold units.
Anyway…I decided to offer a bid at their asking price. My agent didn’t think it was prudent to go beyond that. Naturally, there were other offers and, ultimately, we were asked to submit our highest and best. I bumped mine up another $5000 and, as of yesterday, found that wasn’t good enough. I might have been able to bid more but 1.) I was wary of the steep HOA in this particular complex and 2.) I was wary of what it might actually appraise for and was worried about all the potential ramifications of that.
I just don’t know what it takes to buy anything at this point.
Here’s two or so cents from a 30 year appraiser who does not work in California but feels your pain regardless.
After years in the biz with nary a single failed sale for you related to appraisal issues – you can see the “check and balance” structure of the system was NOT working. Appraisal law (consistent country wide) requires the appraiser to be a market “follower”, not a leader. If appraisers have been keeping up with you (value wise) during the drive up years of the market, they were not doing their job as the job requires – but were merely puppets of the brokerage community (Mortgage brokerage community), who as you say so aptly, had no “skin in the game”.
Now, of course, the distance provided between production people and appraiser people allows the appraiser to do his job and FOLLOW the market. If your market is performing like your statistics show (the reverse bell curve on your website), then if the appraiser is following the law, he will ALWAYS be low. As his data is dated, and the market is moving. Its built into the requirements he must fulfill to provide a standards compliant appraisal.
You say you got a lousy appraisal. Not because he mis-measured the house or didn’t identify a bug problem. You say this because he didn’t agree with your client, your offer (and others) and yourself. Shameful! Isn’t rendering an opinion that’s not YOUR opinion exactly what he was hired to do? I’m not saying he was right – actually sounds like he was not right. But regardless, the world needs to quit perceiving the appraiser as a yes man as your long history of success has made him out to be.
Your appraiser, in the good ol’ days, wouldn’t be hired unless he consistently “hit the mark”. He understood well that many, like you, had commissions on the line and his service would no longer be useful were he not to confirm your ever-wise purchase decisions for your clients. Now, his Professional Liability policy is paying for those bad decisions, that the brokerage industry propagated for years, and he quite likely will be losing his practice, if not his fancy ocean viewing home, in the fallout. Will you? Will the mortgage broker?
With the advent of the HVCC and the disconnect now in place between production and appraisal, the appraiser is helpless to keep up when the market begins moving upward again. His lack of “courtesy” to you in not responding to your phone calls is quite likely his intepretation of the HVCC’s mandate to stay disconnected from all production folks. But how, really, does a market-measurer measure a market when prohibited from full access to market information because he can’t communicate freely?
Its shameful that the appraisal community is taking such a heavier than correct penalty for the lending market’s collapse. Its equally shameful that the HVCC and resultant AMC’s entry into the market are, in combined form, making a bad situation far far worse. And perhaps the ultimate resolution will come one day when, like your former neighborhood mortgage broker specializing in liar loans and little doc support, the role of the fee appraiser becomes excess. Maybe he’ll be replaced with someone more like an in house actuarian for the insurance company: a trained economist/statistician that can measure markets at a more macro level, and someone else will take responsibility for on site inspections (measuring, checking for rot and bugs and the like). When that day comes, we’ll repeat a day in history when “relationship banking” prevailed, and your goodwill, good job, and good credit will get you a loan from your friendly neighborhood bank staffer. In that future day, trust that the bank’s opinion of value will OFTEN be different than yours. I believe that’s what happens (should happen) when a system of checks and balances is working, and not broken. So perhaps you should get used to having this problem and find correct paths for consensus building when they occur. As they will, if history is our guide, and with more frequency I believe.
We’re returning to a day when people bought a home for living, and used their job for making money (and when nary the two would meet). That can’t be good news for you; for any appraiser I know or even for anyone in the brokerage community. But perhaps it will mean a future for our children that includes home ownership – a hope that’s been fading for years.
Kris (the other one) -
I don’t expect the appraiser to be a “yes man;” far from it. What I do expect is the same level of care given to delivering an opinion of value that I give when delivering my own opinion of value to my clients.
I have received three appraisals this week that were no more thoughtful than a Zillow Zestimate. In fact, the Zestimates were arguably more accurate. My most recent report included an incorrect sale price for the “subject” property (he forgot to read the counter offers) and a “comp” in which the two critical digits in the sale price had been transposed resulting in a $70,000 error. He ran with it, making adjustments to a mistake, and relied heavily on this property in his opinion of value since it represented the only model match.
A second “comp” was actually a trustee sale — the bank bought it from themselves.
Finally, all properties including my listing with the new $40,000 kitchen and the REO with original kitchen, a linoleum emporium with the garage door off the tracks and the one remaining light fixture sitting in the corner of the living room, were considered to be of “similar interior condition.”
I didn’t even mention the “pending comp.” I bothered to call the listing agent. “That one closed over full-price. We just haven’t updated the MLS yet.”
I swear, and I am not making this up, I think he used Redfin for his research. In trying to figure out where the mystery trustee sale comp came from, I noticed that the seven homes he chose for his “analysis” were the top seven in their list of recent sales — in order.
“So, call someone and have them fix it!” you say. Well, not so fast. No one will talk to me — not the appraiser, and not the lender. I am not even trying to argue his choice of comps; I am just trying to get the blatant errors corrected. But, here is the problem. This new system intended to protect the appraiser’s independence has eliminated all checks and balances. It’s a sentence without trial, and it is not protecting buyers from overpaying or lenders from overlending in practice.
What it is doing is giving dictatorial powers to the appraiser. While there are undoubtedly many, many fine ones who still have some semblance of a career in the wake of the HVCC, there are many others who just slam it home knowing that there are virtually no consequences to a few mistakes here and there, or an occassional best guess (in the case of one comp I saw with no photos and no description, yet the appraiser was able to make comparisons and adjustments for condition and effective age quite handily). They aren’t paid enough to spend any reasonable amount of time on the task at hand, yet the transaction hangs in the balance.
“Your appraiser, in the good ol’ days, wouldn’t be hired unless he consistently “hit the mark”. He understood well that many, like you, had commissions on the line and his service would no longer be useful were he not to confirm your ever-wise purchase decisions for your clients.”
Actually, I have never ordered an appraisal in my life. That has always been the role of the lender. If there was a tendency for the appraisal to “hit the mark” to protect a commission, it was the mortgage broker’s commission, not mine, he cared about. I was never his client.
And here is the irony — the powers that be wanted to eliminate the temptation for appraisers to act with bias, yet the only “disconnect” has been in the dialogue between the appraisers and the agents who really know the market. Many lenders have their own AMCs now, and the lenders and appraisers are still quite connected. Remember my loan officer who said, “We are standing behind the determination of value.” The use of the word “we” doesn’t smack of independence at all.
“Its shameful that the appraisal community is taking such a heavier than correct penalty for the lending market’s collapse. Its equally shameful that the HVCC and resultant AMC’s entry into the market are, in combined form, making a bad situation far far worse.”
I couldn’t agree more. Here is my biggest gripe. As much as I enjoyed the roaring ’03s, I did not invent credit default swaps, I didn’t offer 103% financing with stated income and teaser rates, and I never once approved a cash out refi thirty days after closing only to hand my “client” with no skin in the game a quarter of a million dollar check. Lenders have always lent, and I have always represented buyers and sellers in the transaction. The effect of what we have done in our attempt to address the sins of the past is to both punish and reward the wrong people.
Tim -
Didn’t mean to skip over you. I hear ya, and that is a different issue entirely which we are now facing. It helps to be an investor with all cash. Those are the guys closing the transactions at the lower price points.
Kris,
You say “I have received three appraisals this week that were no more thoughtful than a Zillow Zestimate. In fact, the Zestimates were arguably more accurate. ”
I am curious if in your experience Zestimates are impacting actual buyer and (non-distressed) seller behavior. You have discussed “zestimates” in past blog posts (I recall something about how buyers are bringing Zestimates to open houses). Do buyers refuse to go bid over the Zestimate, or expect a certain % discount off the Zestimate, even if a particular Zestimate is obviously too low? Vice versa, do sellers refuse to sell below an obviously too high Zestimate, fearing they might be “giving it away”?
What do you say to prospective sellers and buyers who whip out their Zestimates on you (beyond, asking them – nicely – to put it back)? Are you better off (as an agent) because of Zestimates, i.e., do they help more than they hurt in bringing buyer and seller together?
Apologies for total lack of snark in this comment.
Kris (the first one)-
Best post of 2009!
Doug – I can only guess you relate.
Smithers – Zestimates are quite serious business. No place for snarkiness there. (Insert smiley to reflect sarcasm.)
Actually, the Zestimates have become (at least in our little world) non-issues. We check them before meeting with a seller for the first time, because invariably the sellers will attempt to draw this weapon. However, and I blame this on the abundance of information (oft competing) out there, Zestimates truly don’t seem to carry the same weight with the consumer these days. They are easily dismissed.
What is really at issue is supply and demand (mostly latent demand), and Zestimates be damned. It’s kind of like an article I wrote this week for Inman News. There is so MUCH news out there, all of it different, that the consumer is tending to cherry pick the best for their circumstances. So, we have buyers with their proverbial hair on fire (”Must get free money tax credit NOW before it’s too late!), buyers who are waiting for the real Armageddon, sellers who have read that prices are going up-up-up and the recession is over, investors with cash burning a hole in their pockets, etc.
So, do the Zestimates help or hurt? Well, I suppose information is never a bad thing, and I have confessed that over time the accuracy of the Zestimate has improved. But, a bot can’t reason, so there is an inherent danger in putting all of your pricing eggs in this basket.
The key where all information is concerned is in interpretation of the information. That little variable continues to be a volatile one that is wreaking havoc on our market.
(It’s late, I’m tired, and I am silently hoping this sort of makes sense when I reread it in the morning.)
Thanks, Kris.
I have no idea how Zillow renders a Zestimate, but I am guessing it is simply the last sale amount adjust by the net percentage decrease or increase of the median sale value of “like” properties in the same geographic area since the date of the last sale.
I’m sure they will say there is sooooooo much more to it, but probably something like that.
Have a chardonnay and relax. Make Steve get the pizza. Watch a chick flick, or something.
Regarding Zillow, their data is only as good as their data stream, which in some cases is pretty bad.
My husband and I are investors. We purchased an REO in the spring of 2008. It had a listing price of $45K (Michigan), which we did not pay, although we put over $50K into a rehab.
The market did not bear a re-sale, so with winter coming on, we placed tenants in our beautiful home. Summer of ‘09, the tenants receive a knock on the door with someone wanting to view the interior and make an offer. Their source? Foreclosures.com, the REO arm of Zillow. Apparently the house was listed as a for-sale REO with an asking price of $45K. Over a year and the data stream had not updated! A few choice words with their webmaster and the listing was removed, but not before the tenants felt unsure of their tenancy footing.
Maybe I’m a little outside the box here, but after reading this post and comments I have to ask a question. Wouldn’t many of the problems described here be avoided if an appraisal is performed when the property is first listed, before an offer is made?
Jason-
Because another appraisal would still be required. The buyer’s lender has to dispatch their own “independent” appraiser once the home is under contract, rendering the first appraisal somewhat meaningless (and a waste of someone’s money).