Slamming the Appraisal Industry
A Rebuttal to Real Estate Agent Slamming the Appraisal Industry…
Forbes recently published an opinion article that attacked the appraisal industry and placed all the blame on appraisers for real estate transactions falling through due to a “low” opinion of value. The article was written by a real estate agent out of Arizona. While he raises some good points, he is conflating a lot of issues together.
1) He does point out that there are bad appraisals. We all know that. There are bad appraisers just like there are bad agents who have clients list a property far above any connection to market reality. So, yes, there are some appraisers who do ignore relevant market factors and may have an opinion of value too low as a result. But where is the discussion of agents who do no market analysis whatsoever and pull numbers out of an area usually covered?
2) He then jumps the shark by stating that if a borrower is putting a lot of money down, the appraisal should be irrelevant. In some cases, that is true. We’ve all done appraisals where even if your opinion of value were egregiously 100k below “true” market value, the loan could still go through. However, in cases like that where there is a bad appraisal and it is low but the LTV works out, it does not “kill the deal.” So, what the author is really gripping about are those cases where the borrower is putting a lot down AND the opinion of value is too low to make LTV considerations work out. Yeah, I would be upset in that case too if I were an agent. But again, there is no discussion about whether or not the appraiser is indeed correct. You can’t ALWAYS assume the appraiser is wrong.
3) He talks about millions being wasted for low appraisals. Again, he is automatically assuming the appraisal is “low.” The value may be fully market-supported and be just right. In that case, he should be singing the praises of appraisers who save lending institutions—and ultimately the tax payers—billions in avoiding bad loans.
4) He comes up with his own homecooked “algorithm” to wash out the effects of a single appraisal report. He is conflating underwriting AND credit risk issues with appraisal issues. If underwriters want to use his formula then go ahead. Maybe he has a million-dollar idea and can patent it.
5) He talks about an appraisal being an opinion. Does he not realize that AVMs and “algorithms” are just glorified mathematical opinions? Real estate is not physics where we derive laws of universal gravitation and the warpage of space and time to 20 decimal places. Real estate, at its core, involves human beings with emotions, capricious and ever-changing tastes, and externalities no AVM can fully account for. What happens when lava starts washing over your backyard like in Hawaii? They do have lava zones and maps, but sometimes the lava forgets to read those maps and heed the lanes marked out for it. Any AVM involves the subjective opinions of the programmer. What is his remedy for when a deal gets “crushed by subjective opinion” of an AVM? Some AVMs may be more objective if properly programmed, but it would be a fallacy to believe they are 100% objective. The more complex the AVM the more entry points there are for the programmer’s subjective opinion of how the market works. Those assumptions can be notoriously off the mark. This is something rarely pointed out in articles like these.
6) I am fine with two appraisals being ordered for each sale. (More work for all of us! Yay!)
7) He doesn’t define the “reputable real estate group” that would review any appraisal. It would have to be loaded up with appraisers because appraisers are the only parties in a sale that are supposed to be completely neutral and unbiased during a valuation process and are trained on deriving adjustments. Some agents are also pretty good at this, but they are not required to obtain specific training in that regard.
8) He shows no awareness of why the AMC may have sent a chowderhead appraiser out to his deal in the first place. Again, articles like these do not point out that the AMC industry (as a whole) has largely decimated the appraisal industry by stripping most of the profits out and soliciting appraisals to appraisers many hours away from the subject property in the hopes of getting the lowest bidder. (I am on the west coast and have gotten solicitations for homes in New York State.) Sometimes desperate and underqualified appraisers do accept the assignment, and, yes, you can get some pretty nasty outcomes as a result. AMC reform should be at the top of his agenda to make sure only the most qualified appraisers are offered an assignment. AMCs should solicit to appraisers based on quality and not based on how cheap and how fast.
appraiser shows up to an assignment with a 10-year old Toyota Corolla…while the agent rolls up in a sleek BMW… 9) He states that “the only person who actually benefits is the person writing the report. Go figure.” Okay, let’s figure. The appraiser may have gotten as little as $225 for the report. Is probably working for peanuts on an hourly basis. May have his report sanctioned by the state board if turned in and may be subject to lawsuits. No one benefits from a bad report, not even the appraiser writing it. As has been stated before: an appraiser shows up to an assignment with a 10-year old Toyota Corolla that needs new tires while the agent rolls up in a sleek BMW. While that is a generalization, I have been on enough assignments to see the truth in that aphorism…