Observations of a Review Appraiser
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Adjustments appeared to come from some List or Automated…
Recently I had the opportunity to work on a Class Action case. The case settled, and there are confidentiality agreements for both sides, so I cannot reveal any details. I will summarize the allegations and findings, as well as the scope of work performed.
I should say also that before being hired, I was interviewed, and vetted. Every reference provided, was contacted, as well as a records check and background check. What they were looking for was a combination of a clean reputation for being unbiased, as well as depth of experience at review appraising. I worked on this case for about 18 months.
The result of my work came down to the following:
Los Angeles Metropolitan Statistical Area (MSA):
Of 198 appraisals, 5 were undervalued, and 165 were overvalued by 5% or more. The highest was overstated by 45%
San Bernardino/Riverside MSA:
Of 77 appraisals, 1 was undervalued, and 74 were overvalued by 5% or more. The highest was overstated by 39%
The way the reviews were approached was to read the report, then check the accuracy and veracity of the Neighborhood, Site and Improvements for each Subject, from Value Trend, Supply/Demand, Exposure/Marketing Time. Then, Site characteristics were checked based on a combination of on-line information including the MLS, Realist, NDC, Google Earth, etc. Next were the Improvements, using the same databases.
In the majority of instances we found that the Neighborhood factors were not reported correctly, and that that section of the report was almost universally misleading.
Similar things were found in the Site and Improvements sections. Often, negative factors were omitted or whitewashed.
When it came to the Market Data section, we searched for data by Location, Site, and Improvement characteristics, making a List of Market Data or Market Data Array. That would represent the most retrievable, most similar properties.
Next, we looked to see if the data used in the report was on the list. If not, then we looked to see why they may have been picked, often by Price.
Whether or not the data presented was appropriate, the next step was to check the reasonableness of the Adjustments.
Universally, there were no Time adjustments. Every market in every report was Stable in 2007 according to these reports. Sadly, it was very easy to check the value trends and document the direction and magnitudes of the declining values.
Many of the sales were 100% financed, often with an 80%-20% loan. Often the 80% loan was shown, but the appraisers omitted the 20% loan. It has been my experience from the time I started making loans on houses in the late 1960’s, to selling them in the 1970’s, to appraising them, that the Low Equity Buyer will typically pay more than those who saved up a down payment. Sub Prime borrowers with no down payment, are particularly subject to being Preyed Upon by the agents and loan agents, essentially Packed Into Property.
There had been no published articles in any appraisal related journal or magazines warning appraisers about this Low Equity Buyer, issue. There had been in the past recessions, articles on Cash Equivalency which means if the seller gave the buyer cash back or personal property or allowances, we needed to make a downward adjustment to the Sales Price. I was once involved in an $8,500,000 sale that included $5,000,000 in personal property in the form of furnishings, original art work, antiquities, etc.
When Sales Prices are being Propped Up by the Stilts of Concessions, appraisers are supposed to make adjustments for Cash Equivalency. This was not done
Location adjustments, though sometimes warranted, were usually woefully inadequate, or not made at all. Sometimes the Market Data came from a Country Club or superior location that was not adjusted or mentioned at all. Other times it was that the Subject had a negative location factor that was omitted or under adjusted.
Pretty much universally, the other adjustments appeared to come from some List or Automated, as there was little if any relevant written analysis. None that indicated the appraiser did anything to develop the adjustment from the Marketplace.
In other words, there would be comments like Site adjustments were made at $5.00, SF adjustments at $50, Pools at $10,000, etc. I know when I was trained I was given a List of Adjustments. I questioned them the first day, because I had just come from selling real estate and knew they were woefully inadequate or just wrong. And, yet, there seems to be a large number of appraisers who use a List, that they may not even know where it came from or when it was created. And they use it in every Location, Price Range, Size Range, Quality, etc.
Granted, using a List and then automating it in a forms program, makes things go faster. But it has nothing to do with the Marketplace.
The lawsuit was against the partners of a failed lender, which included a title company and AMC. The allegations were that they either pressured appraisers to inflate value or used appraisers who would.
The settlement was in the millions of dollars. I can imagine now, that they are going to be looking at suing the same appraisers that their people had pressured to inflate values and write misleading reports.
Many of those whose reports were reviewed, may not have had any idea there was actual liability that comes from being licensed. Most civil lawsuits against appraisers for their work product, comes down the lender pipeline. We should always think of the Stream of Commerce through which our reports might flow, and who down the line, will be the entity that relies upon it. It might be the investor or mortgage insurer. Under Tort Law, we are responsible to those who, in the normal course of business, come to rely upon our report. Which is separate from Certification 23.
Working fast and cheap, is not a good thing for a licensed appraiser. Slowing down, and charging for more time to research, verify and analyze the Market and the Market Data, as well as the Subject, is a goal I set for myself many years ago. Even though I was trained to do 3 per day. I can’t do 3 per week now even with more experience and course work. And I don’t want to. I would rather do one report for $4,000 and not have time pressure, than to do 10 as fast as humanly possible. But, then, that is just me.