Bottled Water and AVM – Sold on a Lie
How about bottled water?
Advertising is a powerful tool and very smart people will do some very dumb things, if they are properly motivated. There are many examples of how advertising creates an illusion and how we all fall victim (at least for a while) to smooth ad campaigns. One great example is automobile insurance rates. “Switch and Save. Every insurance company ran ads promising savings over their competition. Well, of course, they all can’t be true, but for over a year there was a massive switch in policies by consumers. The ads worked.
How about bottled water? News shows and undercover reports show us time and time again, that much of the high priced water we buy, thinking we are getting a cleaner or safer product, is nothing more than tap water from a large city system. In many cases, the water we buy is less pure than the water from our home taps. Yet, the buying frenzy continues. Bottled water is the in thing. People have seen the ads and get a feeling they are doing something good for themselves and their health when they shell out their hard earned money to buy well packaged tap water.
If advertising didn’t work, mega companies wouldn’t spend billions a year on advertising. Put out a message enough and many people will believe it. Such is the case with automated valuation services or AVM.
Automated Valuation Models or AVM have been advertised as a “technology based” home valuation product that sorts through massive amounts of data to arrive at a fair price for your home. They sell consumers, and in this case government officials, on the quantity of information at their disposal, and therefore their products must be a higher quality service than a traditional appraiser can offer. They promote the use of statistics over opinion and give the impression that these products are dependable, and actually preferable over local appraisal services. As with most things in life, when something sounds too good to be true, it usually is. Such is the case with AVM.
Along with all the hype about the new and improved computerized home valuation services, is the full media blitz with stories about “inaccurate appraisals” and how they are killing the real estate industry. Low appraisals are made out to be the villains in the home value battle and consumers are being told to trust computers over conventional appraisals. The word “inaccurate” may actually be appropriate in about 5% of the cases, but more often than not the problem has nothing to do with the appraiser or the appraisal. It has more to do with the MLS, the comps that are actually available, and excessively restrictive underwriting guidelines. Many times appraisers may think the value should be higher, but they cannot prove it within percentage guidelines that fit current banking rules. Where the appraiser used to offer their opinion and logically make a case for a specific value, those days are long gone and this problem continues to push home prices lower. Until appraisers are allowed to do their job again, without interference from unlicensed and untrained reviewers at Appraisal Management Companies, and bank underwriters who know little about the real estate or appraisal business, this problem is going to get worse.
These reviewers only know percentage guidelines and how to make a report fit a tidy form. Their definition of a “quality” appraisal has little to do with an educated opinion of value, only a report that fits percentage guidelines. Real estate is simply not that perfect and requires opinion. In many cases, deals are lost simply because the bank will not take the appraiser’s opinion. Fit the form, forget the true value. Banks want perfect comparables from a real estate market that does not produce such comparables, except in about 20% of the country. Banks no longer want to know the true value of the property like they did when they held all their loans in-house. They only want to know they have a form that will fit the guidelines so they can sell the loan in the secondary mortgage market, make their profit and move on to the next loan. That’s what got us in this trouble in the first place.
Think we’re seeing inaccurate appraisals now? Let Zillow® or Trulia® take over. Then, you will see the collapse of the entire real estate system. The appraisal and home valuation system is far from perfect. However, it is the very best method of determining home prices, bar none. No computerized system will ever be better at this job than a real, live, licensed appraiser.
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Hamp, great article! At first I thought it was out of date due to references about percentage guidelines. Then I remembered just last week an AMC telling me its lender clients chief appraiser said appraisers should still try to follow FNMAs old percentage guidelines when they can! Seriously! Apparently he missed the FNMA admission that such ‘guidelines’ lead to misleading reports for decades. The same guidelines that render their current proprietary, technologically superior CU system and database useless for its intended purpose.
Databases are merely information depositories (or suppositories depending on how they are used). Your views on advertising are spot on; though in our profession’s case it is coupled with that other form of influence; lobbying. Not ‘all’ of it is honest. OK, very little of it is. The whores that do the lobbying only want single issues; not complex solutions. They tell us Congress and Senate members are too feeble minded to deal with complex issues. Really? Maybe they just want to prolong the lobbying fees as long as they can.
In any case, the appraisal profession does not have a single unified voice speaking for it. We have disparate interest professional associations and state coalitions, but no one sending Congress a single unified message that protects ALL appraisers. Each has their own sacred cows to be promoted. The Appraisal Institute greedily adopted appraiser assisted AVMs almost as soon as they were announced. How’s THAT working out for their members, and lenders? Promoted as a new source of revenue to augment existing income streams in tough times, it merely provided cover for lenders to reduce our primary income stream and replace full appraisals with computerized garbage no better than a ‘comp check’ even when “appraiser assisted.” By the way appraiser assisted in many cases is really secretary or other non appraiser clerk-performed and appraisers signed.
Lets top nibbling around the edges of known solutions. We don’t only need appraiser and AMC fees separated on settlement disclosure statements. we need complete pricing and fee collection autonomy. A practice that current FNMA guidelines prohibit!
As long as Good Faith Estimates are allowed that permit LOAN OFFICERS to make initial appraisal fee quotes to borrowers, we will never be able to set fees in accordance with the anticipated assignment difficulty. These brokers use their own good faith ‘judgment’ of what is customary based on the suppressed AMC fees they see most often. They tell the borrower his or her appraisal fee should be ‘around’ $450.00. OK, most of us would agree that’s reasonable for a non complex conforming limits SFR, but that fee ALSO includes the AMCs $150 cut! NOW we are stuck with $300 OR not accepting the work.
The very FIRST thing we need to do is set MINIMUM fees for non complex assignments across the nation plus variable state multipliers consistent with Federal Civil Service Pay multipliers.
For example California could be $650 which includes California high cost of living bonus of 27%. This is derived from federal GS pay scales (GS1131-7 to GS 1131-9) and time it takes to complete excellent quality appraisals plus costs of overhead and business. A GOOD appraiser doing three SFRs a week (8 hour days, 5 days a week) would gross about $1,950 a week or $7,800 a month. Netting somewhere between $5,000 to $6,000 for a home office single person fee shop. About $4,000 to $5,000 for small professional commercial office space in average locations.
More complex assignments requiring more than five years experience and a certified level appraiser would be higher. A 20 year mixed residential and commercial appraiser would earn (gross) somewhere in the range of $80,000 to $110,000 with supervised trainees.
Additionally there are many abuses to be resolved at the same time. Stronger, meaningful CRIMINAL penalties against either AMCs of their lender owners for intimidation. Differentiation between relatively non significant technical errors in state investigated reports versus fraudulent or truly ethical violations involving outright dishonesty rather than the “pile on” compounded system of “offenses” that currently is used. USPA are principles. They are NOT always black and white facts found in the marketplace. CE training should cover at least 50% NEW MATERIAL rather than the same regurgitated courses taken repetitively due to cost and time considerations. USPAP does NOT need and should not be modified every two years. Real principles don’t change with business whims or regulatory trends.
They are CORE principles that should have long term consideration of consequences before they are changed.
Lets acknowledge that AMC use by lenders and FNMA has NOTHIGN to do with appraiser independence. Lets admit is purely to enable large institutions to do away with having many regional and local appraisal departments staffed by qualified people. That’s OK. AMCs can still be used. Just cut out the dishonesty in their justification. Many smaller ones are run by hard working appraisers now and have informed staff on hand to do review. Others are merely profit centers for huge corporations (lenders or title companies)where stand alone bottom line profit is the prime consideration…coupled with making the corporate client ‘happy’.
JOIN ME in the American Guild of Appraisers (AGA) of the OPEIU AFL-CIO. We are a new kind of Professional Guild. We will work WITH business to seek and find win-win solutions that meet all our needs. After all, we are professionals and business owners ourselves. We KNOW profit is a requirement of ALL businesses – even ours!
Mike Ford, SCREA, AGA, GAA, RAA, Realtor
California General Certified R.E. Appraiser
Chairman, Appraisers Guild National; Peer Review Committee
http://www.appraisersguild.org
It’s not that banks mind appraisers still asking for a portion of the appraisal fee; it’s that they can’t figure out a way to control the final value of the appraisal report. Hijacking the fee was a piece of cake for the banking lobby. Taking control of the entire appraisal process is proving to be a bit more difficult however.
“And so we keep on tweaking…”
~ Jocelyn Wildenstein
Tweaking Consultant For The U.S. Banking Lobby
i think your numbers are dead on Mike and i agree 100%. we are PROFESSIONALS, and we should be paid like any other professional in a business that requires the same amount of qualifications and knowledge, carries the same amount of liability, etc. as we do. we should be paid very well everything considered, and we are not at all, largely in part because we arent allowed to freely set our own fees, and are instead told what we will get paid by someone else whos profits are based off of how little they can get away with paying us. if we arent allowed to set our own fees soon, and earn what we are truly worth, in the next 5-10 years max, there will be no appraisers left, because financially it just wont be worth running an appraisal business any more.
you failed to mention one more example of why fees are not inline right now Mike, and thats the training of trainees. if a mentor is training a trainee, and they are being paid $300 for a 1004, and then are having to split that fee 50/50, they are both making $150 for that report. nobody in their right mind would do an appraisal for $150! what are they both left with after all expenses (taxes, insurance, electricity, heat, car wear and tear, e&o, etc) – $120?! $120 for six hours worth of work? there are plenty of other jobs out there that pay at least that, and dont carry all the BS like we have to deal with right now. this is how we attract people into the appraisal profession? this is how we expect to retain good people? this is how we make appraising attractive to future generations? really?
like you said, if an appraisal was billed at $650, and both parties made $325 each on a 1004, that would actually make it worth training someone. but i absolutely REFUSE to do it for $150, and i highly doubt anyone else in their right mind would either. and until that changes . . . . .
the bleeding continues . . . . .
The whole thing is a shell game, because the rate is manipulated. What is important, is to remember that our liberties revolve around effective applications of the checks and balances systems. Never should we as consumers be willing to consume a product, without such effective checks and balances systems in place. If lenders find a way to eliminate the human appraiser, I’ll immediately launch a flyer which shows how Skynet is now in charge of your financial security.