Real, Real Estate Reform Needed

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Real, Real Estate Reform, System Make-Over Needed

What a crazy system we have grown into since Dodd-Frank.

All this talk about “Big Data” and “Standardization” makes me want to scream! Enough is enough. Before we get to the appraisal process discussion, let’s talk about how real estate is priced all across this country. Realtors® price homes, period. No Big Data, no thoughts of mortgage risk, accuracy, consistency, transparency, and no one is looking over their shoulders asking “why” on every choice they make. No regression analysis, no quality or condition ratings, not too much of anything that resembles an appraisal these days. Yet, they are quick to point out they are best people to call to “know your home’s true market value.”

Competitive Market Analysis (CMAs) are easy to find and study. And, they are most often pretty simple. What do most Realtors® do to calculate home values? In the real world, in small offices all across America, Realtors® use the magical formula – price-per-square-foot. Most agents will take 3/4/5 sales which they deem the most “comparable” and calculate a price-per-sqft. They take the average price-per-sqft of their comps and then apply that average number to their listing’s square footage total. Where they get that number from is one of those “it depends.” Too many agents simply take the sqft number from the local tax office and do the math (very few agents measure homes any more). Let’s just say we have a 2,200 sqft dwelling, and multiply that number times the average of $120.00 per-sqft, and they get a listing price of $264,000. The problem starts with the accuracy of the tax department’s sqft numbers. After over a decade of studying the tax records, these numbers are wrong far more often than they are right. With the exception of large urban markets where there are thousands of similar homes built in tract developments, the majority of sqft information in tax records is wrong; and in error enough to change home values anywhere from five to fifty grand. Think about that! It’s not the tax department’s job to get precise sqft data. They don’t need it and never get to go inside any house-mission impossible.

Realtors® have the least amount of training of anyone who works in the home buying/selling process, and they typically get paid the most. Anything wrong with that picture?. Most don’t get the training they need to really do a professional job of pricing homes. For the agents who say “we just don’t use a price-per-sqft formula,” I say let’s look at the last five CMA’s from your office and then we’ll talk.

After an agent prices a home and gets a contract, then the sky darkens and the world rumbles with changes. All of a sudden everybody wants to know every detail of how the home is valued. They want to know every choice an appraiser makes. They want things explained that take appraisers years to learn. So even if the appraiser explains it in great detail, they have no clue. It’s like the janitor insisting the doctor explain every move he/she makes. What a crazy system we have grown into since Dodd-Frank. Just imagine if we asked a few of these questions to real estate agents… silence would fill the air.

Appraisers get the blame for too many low appraisals, when the real problem started at the beginning of the process with the listing agent, who might have been swayed by Zillow® or the over-confident home-owner, or even the mailman who has a daughter that works in real estate in the next state over. In the big picture, our system is out of control and common sense has left the building. All this talk of standardization and big data is useless without accurate data, and MLS just doesn’t provide it anymore. Every property is unique in some aspect and appraisers are the best chance at finding out the fair value. Is the system perfect, no. However, it is far superior to any automated solution. Local expertise and a physical inspection are important parts of consumer protection. Without it, and without a living, human appraiser in the process, consumers will end up being cheated. All this technology is meant to help the appraiser, not to replace them. The automated revolution needs to be stopped in its tracks. It is NOT the answer to better appraisals.

It’s time to look a little closer at the home pricing system at the beginning stages of the process. And, to look closer at the MLS and how real estate agents are trained. It’s time to get off the appraisal reform bandwagon and look at Realtor® reform, which actually might make the system better. All banks see is the potential profits from an automated valuation system. If the government truly cared about consumer protection, the real estate pricing system needs a make-over. We need to reform real estate education, improve the “quality” in MLS, and get Realtors® to be more responsible for the real property information they provide.

Hamp ThomasBy Hamp Thomas, founder and president of the Institute of Housing Technologies. He is also the president of Carolina Appraisers & Real Estate. He is the author of the American Measurement Standard; the Size Matters – Residential Square Footage books, continuing education courses (for agents and appraisers), the course Inside the New Appraisal Process; ANSI, Home Measurement & the Power of Price-Per-Square-Foot; Understanding ANSI, and numerous other real estate courses, webinars, videos, and blogs. Hamp also authored the Professional’s Dictionary of Real Estate Terms; Home Measurement Basics; Realtors and Square Footage; and his latest book Death of an Industry-Real Estate Appraisal.

Image credit flickr - alyssalaurel
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5 Responses

  1. bill johnson says:

    To take this a step further Mr. Thomas, why does our client the lender give power to others who are not the intended user of the appraisal the ability to appeal our reports / value? Why are the owners, borrowers, buyers agent, listing agent, the loan officer, etc., given the power to in essence force the appraiser to be the educator of all at the cost of hours of our time (reconsideration of value) for NO PAY? How can the Better Business Bureau establish the borrower as our customer and give them the ability to freely post negative comments for the public to view when they are clearly not our customer and NOT OUR CLIENT. We at times seem to have the most power for the least pay while our clients offer little to no protection for us.

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  2. Retired Appraiser Retired Appraiser says:

    Hamp,

    I value every article that you’ve ever written on appraising since 2009 because you are dead on every single time. The current state of the “profession” can be described in one word: PATHETIC

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  3. KenQ says:

    Great minds think alike. Great article Hamp!

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  4. clint says:

    Here’s a scenario for you. My subject was 672 square feet listed for 200,000. There are two competing listings in the neighborhood, each around 1000 square feet with accepted offers, listed at 189,000 and 194,900 in similar condition. There were 2 sales in the neighborhood also in inferior condition, sold in July and June, an 896 square foot for 170,000 and a 672 square foot for 160,000. Then there was a recent sale closed in March 2016 in a nearby competitive neighborhood for 215,000 with 896 square feet. There is a contract on the subject for 200,000. The contract price per square foot is not bracketed by any sales or listings, its too small of a home, but according to the listing agent there were multiple offers. This market is Showing an 8% increase in values over the past year because of low inventories and low interest rates. Since there are no sales or active listings that bracket the price per square foot, most Appraisers will conclude that the value is below the contract price. Even, after making adjustments for time of sale and condition, the buyer is still paying more than is logically supported on a price per square foot basis. In this scenario, I concluded the opinion of value would be no greater than 194,900 based upon the principle of Substitution. So you have to wonder who is deciding what this property should be selling for, the Realtor or the market? It seems the market chooses without making educated decisions. How else can you explain why anyone would pay more for a 672 square foot home than a 1000 square foot home on an identical site with equal utility and amenities? In general, buyers do research before they buy something. From the purchase of a camera to the purchase of a car, they do research before they buy. Then when it comes to buying a house, they put their trust in the Realtor, without doing any research themselves, or relying on garbage like Zillow or some other websites with no verification of data. Then when the appraisal comes in under contract they complain to their lender. Then the lender gets an earful from the Realtor who put the deal together. Then the Realtor contacts the Appraiser and gives the Appraiser a handful of sales to consider. Then the Appraiser looks up the sales, and has to explain why each one is garbage and was selected based upon the selling price; not the salient features. So now all that time of the appraiser’s is wasted without any additional pay for his/her expertise in the matter. And after it is all done, there is no Thank you from the lender for saving us money on a bad deal, instead, they might stop sending orders. It is still a flawed system.

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Real, Real Estate Reform Needed

by AppraisersBlogs time to read: 4 min
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