Being Liberal with Values Hurts Homeowners
- Be Nice or Be Quiet - July 2, 2021
- Being Liberal with Values Hurts Homeowners - June 28, 2021
- Why Are Appraisers Banned? - April 15, 2021
Why can’t it just be accurate instead of “conservative” or “liberal?” Just be precise in the way you do your job…
Some people might say a public forum isn’t the place to air this dirty laundry, but this is not really a public forum. Of my thousands of readers, very few of them are not in real estate appraisal. Right now, I’m talking to the bad apples.
Maybe you’re in a situation where you want a lot of volume and want to be the go-to person for the local mortgage company or local bank, and you want to keep them happy. There’s an implication that the higher you come in, the more volume they’ll send you.
In the long run, you’re hurting yourself, you’re hurting the business, you’re hurting your colleagues, and you’re hurting the valuation profession. It’s going to come back on you.
Here is a real-life scenario: I just got done with an unofficial review of a report. I was hired to do an appraisal for a local bank. I went out and did the inspection, chose the comparables accordingly, and turned in the appraisal. Let us say I came in at $150,000. Within an hour of turning this in, my office got a call from the lender asking what was going on. There had been an appraisal about a year ago for $250,000. That is a 40% difference.
My assistant said if we can get permission from the client then we can talk value and if you want to share information about the prior report, we can take a look at it and see where the differences are. This was not an official review.
I opened the report, and at first it looked like a really good report. I thought maybe I had screwed up. I started from scratch again and went into the MLS system, looked at comparables, and tried to figure out the discrepancy. I wondered if perhaps the market had shifted 40%, since this report was almost a year old. No, that was not it. Was it because the comps were different between then and now? Maybe.
I took a deep dive using photos, Google Maps, calling real estate agents for information, and keeping an eye on the MLS sheets for verbiage and information about relevant updates. This deep dive is what separates the professionals from the checkbox monkeys. Are you the type of appraiser who wants to figure things out?
Looking at the comparables on the higher end, I saw a lot of them were either next to a university (which adds a lot of value), and/or had been completely remodeled. Seeing that, I felt a lot better about the comparables we had chosen for our report. I again looked at the comparables the previous appraiser had used. Most of them were the aforementioned high-value scenarios.
This appraiser used sales he should not have used and ignored sales he should have used. I won’t speculate as to why. You wouldn’t see the problems with the appraisal until you really dug into the market, but there are some huge problems.
Nine months ago, when this appraisal was done, the people who lived in this property (the same people who live there now), thought their house was worth $250,000. They made financial decisions based on that $250,000. It’s possible they’ve now spent money they didn’t have, because (possibly) an appraiser was trying to get in good with a lender.
Being liberal with values hurts the homeowner. Being liberal with values hurts the homeowner. This couple is wanting to refinance again, thinking it will at least come in as much as it was before, and the value is just not there. It’s not because the market has changed 40%, it’s because the appraiser from almost a year ago messed up. Buybacks happen, and appraisers can get themselves in trouble if they can’t support what they did years prior to the buyback.
There are a couple local banks I can think of off the top of my head who will not use Dustin Harris for real estate appraisal. Both of them have told me it’s because my numbers are too conservative. Is that even possible? Why can’t it just be accurate instead of “conservative” or “liberal?” Just be precise in the way you do your job.
For more information on this subject, please download and listen to The Appraiser Coach Podcast Episode: Stop Playing Games With Values
An appraisers our job is to provide a well supported value conclusion based on facts and market interactions (supply, demand, geographic variables within the subject market and appeal of the subject etc.) We are not here to make a deal “work” for a client. If our work product is found to be less than credible we are not only hurting ourselves but the consumer. Lenders do not have any skin in the game these days as most loans are sold on the secondary market to 3rd parties. As a result, the lender is only concerned with making the deal work. This has been a problem for over a decade. The appraisers who focus on hitting unsupported numbers eventually get jammed-up and either loose their credentials and/or find themselves out of work.
I had this situation a couple of months ago. I was handed last years report unsolicited when I arrived at the inspection. I didn’t look at it until after the angry voicemails and texts started pouring in. The report more than 150k higher and it was a literal disgrace to the profession. All comps had huge, unsupported positive adjustments. The opinion of value was higher than the unadjusted value of ANY of the comps. There was much more wrong with it but the value problem alone should have stopped it in QC. The homeowners were out for my blood threatening to file a complaint because they were misled by an incompetent appraiser.
You’re lucky the homeowners weren’t black. Otherwise, you would have been labeled as “racist” and the other appraiser deemed competent.
Why is it when a value estimate comes in below the selling price, everyone calls it a “Low” or “Bad” appraisal. Realtors tell buyers, they need to have more money available just in case they get a “bad” appraisal. I wonder what the same people will call our “Bad” appraisals when this inflated market goes belly up. Oh, that’s right, we will still get sued for our over-inflated “Bad” appraisals!
This happens more than you think in my market, which is why I don’t do field reviews anymore, too much liability and work, as well as being a review and an appraisal, but every time I’ve done one, 9 out of 10, value was significantly too high w/sales which shouldn’t have been used and good comps in the neighborhood simply ignored w/no explanation.
I just had a situation similar, my report was 150k less than the appraisal done the year before, when lender asked why and sent the old report, I said he used all sales in a completely different town and didn’t even say why, I cited 3 sales in the same town which were all similar early to mid 2000’s tear built colonials. I shouldn’t have to waste my time dealing w/that stuff as the prior report was garbage.
Since the Day1 Certainty program and FNMA CU system rolled out, field reviews now function as a second appraisal figure in manual underwriting and red flag auto review scenarios. They don’t really care to apply the traditional model of the field review to vet an individual appraiser to remain on or be removed from individual panels anymore. The new game is to use the fastest cheapest, and then when the occasional report does not cut it, back it all up with a field review. As the field review comes after the fact, you basically accept all liability for a lessor fee, get to complete value all over again and bear the final liability holding signature, and review someone elses work. Origination on the front line is just more straight forward and simple. It feels good to think that appraisers whom do not provide great service will eventually be removed, but sadly the opposite is true. As panel managers are not required to have appraisers licenses themselves, basically anything goes. The majority of people the appraiser deals with are not individually licensed and not individually accountable. I vote to rescind the separation from mortgage loan production rule, to bring back one on one licensed vs licensed accountability. Or at least force panel managers to have appraisers licenses themselves. There is nobody to call and nobody to complain to regarding industry pressure placed on appraisers.
Remember, the fault of this activity is not squarely on the appraiser, over valuation and the continued promotion of that happens because the federal reserve prints money out of thin air, and lenders are first receivers of this money. It’s all backed by the taxpayer so controls are typically lax. When it comes to lending fraud on the lender side, nobody goes to jail and everybody knows that. The lender whom pushed those loans is also at fault for allowing them to originate in the first place. Comp searching prior to acceptance will help keep you away from some of this sort of activity but not all.
Betcha a pepsi that despite all factual data, the appraiser that comes in low one single time gets axed from the panel, not the appraiser that placed a hundred borrowers upside down repeatedly. The things I have heard and the pressure I’ve dealt with from unlicensed panel managers. Lenders hire unlicensed managers with a specific reason, so the pressure flows one direction and only one direction. You can know a lot about your lender clients based on the one simple point, if the panel manager has an active appraisers license or not. If that person does not hold an active appraisers license, well, you know everything you need to know.
Baggins, very well said! I could not agree more.