Appraising the Home Appraisers

[Glenn Sarlitto]

Article found at Appraisal Insight originally from Kiplinger's Personal Finance magazine
November 2008

Interview:
Appraising the Home Appraisers
They're supposed to be the market's gatekeepers. But who are they really working for?
By Anne Kates Smith, Senior Associate Editor
From Kiplinger's Personal Finance magazine, November 2008

Susan Wachter is a professor of real estate at the Wharton School of the University of Pennsylvania.






Appraise Your Appraiser
Here is an interesting Q&A with a professor from the Wharton School of Business, where she discusses the appraisal profession.



Why are home appraisals so crucial to the home-buying process?

Real estate is the most important asset in terms of share of worldwide assets. It's the largest asset class. But real estate is unlike other assets that trade continuously, such as stocks, which can be priced from the market. Real estate is local, and properties are idiosyncratic. You're not going to learn what the price is from the market. Besides, a property may not have traded for several years. You need to have judgment in the valuation process.

What part did appraisers play in the most recent housing debacle?

There's always pressure for appraisers to "hit the number," but in this past cycle it became extreme. There are many stories of appraisers pressured to certify that the price a buyer was willing to pay for a particular property was what the property was actually worth.

Isn't it?

Appraisers shouldn't simply rely on whatever a buyer is willing to pay. They have to look at comparables -- genuinely comparable properties -- that show that the price a borrower is willing to pay isn't an outlier. But then there's the question of what is a comparable. When a wave of low-cost financing comes to a neighborhood suddenly, you have a lot of comparables. That's the limitation of appraisals.

Have reforms been put in place to ensure that appraisals are on the up and up? This isn't the first time a real estate bubble brought the system down. After the savings-and-loan crisis, appraisers were required to be licensed, and uniform standards were adopted. One problem is that the response to a violation might be to take an appraiser's license away -- that's very draconian, so appraisers are hesitant to penalize their own. Self-regulation can't be the entire solution. Banks and mortgage brokers must have an incentive not to push deals that don't work in the long run.

What can home buyers do to ensure a fair valuation? The appraisal is not meant to identify the right price for the borrower. The appraiser's responsibility is to tell the lender whether to make the loan. Buyers should do their own due diligence and find comparables in the local market.


It is nice to see the meme about appraisal pressure spreading into Academia.

[Matthew Hyatt]

"The appraiser's responsibility is to tell the lender whether to make the loan."

I found this comment interesting. I think this is a common misconception of what we do. It is our job to represent the property we are appraising as of the day we are appraising it. Our job is to give as much information possible about a market, neighborhood, and house. Then it is the Lenders decision whether or not to make a loan based on the data that they recieve. Appraisers do not decide whether or not a lender makes a loan. Im sure we have all dealt with angry loan officers or home owners who claim we told the lender not to do a loan.

Aside from that it was interesting to see some mainstream exposure about the appraisal profession.

[Glenn Sarlitto]

Matt,

Ditto to what you posted regarding the appraiser's responsibility. When I first read that myself I thought that I must be using old forms because the ones I'm using do not have any boxes to check for loan approval or denial recommendation.


As far as dealing with angry loan officers or homeowners, I've never gotten involved with the final loan decision making; never voiced my opinion in that regard. I have however, and still do, update my clients prior to completing the appraisal report if I discover a "RED FLAG" regarding the subject property, current market, neighborhood, whathaveyou that may lead to a loan denial.

I can't think of anything that makes a lender/loan officer more angry than delivering a report that can't be used to close a loan; especially, when the lender/loan officer wasn't informed of any "Red Flag/s" in the first place.

[Jeffrey A Patterson]

The appraiser supporting value is much like the legs supporting a table. The more legs you have, the more stable the table is.

Tools and approaches are the appraisal reports legs. The carpenter is the appraiser that decides which and how many legs to use. As with a table, too few legs (approaches and tools) will create unstable or unreliable table. The use on one leg (or approach) is not adequate to support the table when any weight is placed on it. Regardless of whos fault it is, soon people will no longer be buying our table.

Things need to come back full circle, when appraisers were being asked for more reliability and more stable product.

For a representative of a school, I am surprised that she gives very little weight to education.

Pressure on the appraiser has always exist and always will exist the answer is to increase the reliability of the product not the external influences that effect a majority of appraisers.

[Chris VanDyke]

What a joke.

Here's EXACTLY what the problem with the current system is. The media asks the so-called "experts" about what's broken, and they shoot their mouths off when they have no idea what they're talking about. The general public would (and possibly should) consider a professor at one of the most respected business schools in the world an "expert", yet she has no clue what she's talking about.

Just as Matthew mentions, I have yet to see any box on any report I've filled out that asks me to "approve the loan". As I understand it, that's the people who work for the lenders' job. Unfortunately, "mainstream exposure" like this only continues to complicate the problem IMO.

"Updating my clients prior to completing the appraisal report if I discover a 'red flag'" will be eliminated if and when the HVCC officially goes into effect. This can be both good and bad all at once. While many appraisers have always tried to be the "good guy" and inform others during the process, this simply isn't our job either. How many times are you willing to take time to do an inspection, begin working on a report, and then realize there are "red flags" and call someone to tell them? Then you feel guilty and agree to not complete the report and simply charge an inspection fee to be nice. Just one more way to help eliminate the appraiser from the process. Mortgage officers have just as much responsibility to understand their markets as we do - if they get someone in their office applying for a loan that they KNOW from the outset is going to be tough to make, why order an appraisal in the first place? When you accept these assignments and start them (knowing in your own mind that the value likely isn't there) you're simply spending extra time doing a "comp check". Insulating us from mortgage officers will help this, but at significant cost if AMCs aren't regulated. They already pressure us by stating up front that if you don't agree to their fee schedule that you won't be placed on their approved list.

I'd strongly urge each of you to push to organize a state organization like the one I belong to - NCPAC. There's much more strength in numbers, trust me. While I grow increasingly weary of constantly having to educate seemingly everyone I talk to on the phone about the process AND how to do their jobs while I'm trying to do mine, I'm buoyed every day in noticing that more and more of these people are beginning to hear about our organization and that we mean business. I just returned from a Conference in Raleigh where the guests included a member of our state legislature (who also happens to hold license #9 in our state), the President of the North Carolina Appraisal Board, the Vice President of the North Carolina Board Of Realtors, and a director with the North Carolina Commissioner Of Banks. As a group, we have these people's ears, and they're all VERY interested in what we have to say - these happen to be "experts" that have some idea about the process and the appraisers' role in it, and they also happen to understand that the current market problems have absolutely nothing to do with competent, responsible, reasonable, and professional appraisers.

[Glenn Sarlitto]

Chris,

Before I reply to what you posted, I'd like to compliment you on your balanced follow-thru based on that pic of yours. There is one thing that puzzles me though. Are you wearing gym shoes? For the life of me I can't figure how in the heck you got your left foot pointing towards the target area if you were wearin spikes.

With that aside, it was me and not Matt who mentioned the approvel/denial BOX.

Regarding my RED FLAGS commentary that you disapprove of, I'd just like to point out to you that that is a business decision. If you think everytime you get an order gives you the Green Flag to produce a report and deliver it to your client knowing full well your client, based on your client's guidelines, will not be able to produce a loan based on your report then by all means go for it. You certainly have the right to do that. As well as taking that 300-400 bucks from the borrower who is paying for the appraisal in the first place and in many cases can't really afford that 300-400 bucks to purchase something that is in essence totally useless for their immediate needs, or even future needs.

Continuing on with those RED FLAGS, you seem to be focused on VALUE as you mentioned that what I am doing is nothing more than an extended COMP CHECK. A RED FLAG can be many things. It could be a ZONING issue. Could be a LOCATION issue. Could be a FLOOD AREA issue. Could be a CONDITION issue. Could be almost anything other than value that would have a great impact.

Regarding your comment....

" Mortgage officers have just as much responsibility to understand their markets as we do -"

I disagree. And I'm glad that that isn't there job. If it were there job, I'd be out of a job as they wouldn't need me in the first place. There job is to take the application and process the loan. Analyzing the market and market value is the appraiser's job.

I guess what it boils down to is there are many ways to go about one's business being an appraiser when dealing with the financial sector. There are many ways to do it right and still be a competent, reasonable, professional appraiser and be successful.

CHEERS!

Glenn Sarlitto
ValSpec Appraisals Services
Milwaukee, WI