Tuesday, March 11, 2008

Pushy Appraisals Could Be No More

I have been in the real estate business long enough to see some iffy appraisals come across my desk for my clients. No more was this so then during the housing boom. Appraisers seemed pressured to "make it happen". And needless to say, some home owners and real estate agents, not to mention the banks, placed this burden to "sell, sell, sell" fully on the backs of the appraisal industry. Fearing retribution via "blacklisting", many appraisers felt the need to push value in order just to stay in business.

Pushy Seller : Take for instance one case where I represented the buyer for a home they loved. The home was listed for $140,000 and the bank appraisal came in at $131,000. The seller was furious when he heard the news and demanded a new appraisal. We granted him one, using an appraiser of his choice, but made sure to sign an agreement that the buyer's were not bound to the new evaluation. Well, you can imagine what happened. The new appraiser was told about the situation and low and behold, the new value comes in at $160,000. Ummm, I might be mistaken but a $29,000 difference in appraisals starts to smell of bad fish. The comparable adjustments were obviously pushed beyond normal market and the bank refused to accept it. The sellers ended up selling at $131,000.

Pushy Builder : Or how about the builder who offers incentives if you go with their preferred mortgage lender. Many times I have seen them use in-house appraisers, who do a drive-by analysis, and give the value the builders are looking for. In the down turning market, I have seen some appraisals that appeared to have been pushed. The home we recently bought, for instance, had a fourth comparable that dated a year back. The appraisers notes mentioned this was not part of the original appraisal due to sale date, but added it at the request of the lender (who was the in-house lender for the builder). The notes stated this helped show the value. Well, any idiot can see that...but the market was still doing well a year ago, and since then, prices have come down and that home would no longer sell at the same value. So that "value" is now a false value, and should not have been used at all. That home "pushed" the value up on our home and I feel the appraiser should never allowed the builder to influence her judgement.

NEW RULES WILL CHANGE ALL OF THIS

Starting in 2009, some new rules are taking effect:
  1. Lenders will no longer be allowed to use in-house staff for initial appraisals
  2. Lenders are prohibited from using appraisals from companies they own or have an interest in
  3. More stringent appraisal review process to weed out junk appraisals

Of course there are many people screaming that this will hurt the appraisal industry. Yes, it will...by weeding out the bad apples that plague the industry, just like is happening in the real estate industry. But it will be a good thing for consumers, who might have paid too much for a home because the appraiser didn't have the guts to stand up to the bank.

I for one would like one more little piece added to the new rules:

  • appraisers should not know the purchase price of the home when they do the appraisal. I believe this gives them a mark to shoot for and unfairly influences the appraisal.

3 comments:

Alex Stenback said...

Great to see appraiser independence getting some support from the real estate side.

Though be careful what you wish for with that bit about the appraiser not having the purchase agreement. It sounds good at face value, but there are a couple of problems with doing this:

1. There may be other material elements in the purchase agreement that impact the appraisers opinion of value of the subject property and/or comparable sales - seller concessions, as an example.

2. With these new rules, lenders (or any other interested party) cannot influence the value in any way - the value is what it is, no questions. Absent a purchase agreement, this would mean that an appraisal that comes in $2,000 low (which even the most conservative appraiser would agree is a meaningless distinction - that level of precision is just not possible given the variables) may kill the sale.

A lot of people would have a problem with that, including the buyers.

Within the context of this discussion, it is also useful to note that the appraisers are not the ultimate arbiters of value - The market (buyers and sellers)establish value/price, the apprasiers job is to determine whether any particular transaction can be supported by similar comparable sales, so that if the lender gets the property back, they have a reasonable expectation of recovery - but you knew this already.

Jennifer Kirby said...

Thanks Alex,

You make a good point about needing to know about seller concessions, etc. Would it be feasible to give this information, but still not know the contract price? It just seems like we are giving them a number to shoot for by providing it.

I have actually made purchase agreements contingent on the appraisal so that no matter where it comes out, high or low, the buyer can walk if they are not happy with it.

Minnesota Investment Property said...

Jennifer-
Great post. I absolutely agree that the appraisers have pushed some properties to unrealistic prices and subsequently may have resulted in some of the foreclosure problems we are experiencing today.

In fact, I have already seen some of the appraisers going the opposite direction and being more conservative than necessary! But, it is a start!