July 14, 2009
When Arms Length Appraisals Are "Too Far" Away
"Major real estate groups are pushing for a moratorium on new appraisal standards that they say are scuttling sales, hampering refinancings and depressing prices at a time when the sector desperately needs a boost."
∙ Bill would suspend new home appraisal standards [SFGate]
∙ Loan Officers Forced To Play The Field Rather Than Pick Their Horse [SocketSite]
∙ Fannie And Freddie
Forced Aim To Help Fix Appraisal Fraud [SocketSite]
First Published: July 14, 2009 7:45 AM
Comments from "Plugged In" Readers
Realtors and mortgage brokers say the new procedures tend to produce below-market valuations that can delay or kill pending deals.
Shameless. An appraiser should be an arms length relationship. They had a good thing going for a while there but like any unchecked free-for-all -- things got out of hand and now it doesn't feel good when the party is over. It's unfortunate for all those that did buy in the last few years as they got burned on the way up, and burned on the way down.
Posted by: eddy at July 14, 2009 8:15 AM
Wait wait wait... so let's introduce legislation that helps fudge the numbers on home values because they've depreciated rapidly yet people are still buying over valuation? Sounds smart.
Why isn't this heralded as smarter banking, providing an additional angle of "risk" lenders can look when granting loans? And claiming costs are passed on the consumer is just ridiculous. Finally someone in this industry is looking out for the buyer. If my bank appraises my contingent home so far below my offer amount that they don't want to secure my loan, that SHOULD make me think twice about even attempting a purchase. I'm willing to pay a few hundred more up front to save myself the risk of loosing thousands.
It's sad to see people get burned as prices fall, but inflating the market though means like this will never allow for a sustainable industry.
Posted by: nottimhawko at July 14, 2009 8:28 AM
i actually think they should suspend it until the "arms-length" process is worked out. basically, the way the new appraisal process works is as such:
1. lender contacts 3rd party to set up appraisal
2. 3rd party contacts appraiser
3. appraiser conducts appraisal
the negatives of the process are as such:
1. the appraisal is now more expensive, because you have to pay the 3rd party, as well as the actual appraiser
2. and the worst part of the new process is that the 3rd party has no incentive to complete its service in a timely manner. i just closed on a property this month, and we fell out of contract for a week because the 3rd party was slow getting some changes done to the appraisal (e.g., spelling my husband's name correctly). stupid minor comments to the appraisal that don't affect valuation, but need to be correct for the lender. also the 3rd party took 7 DAYS to schedule the appraisal in the first place. it should've been scheduled day 1.
in the end, we were lucky that the sellers didn't walk, but still, the delay in the appraisal process cost us real money (details which don't need to be discussed here).
there is nothing wrong with arms-length, the problem though is that the new appraisal process just doesn't work yet. they need to work out those kinks before implement the policy. it is actually seriously costing people their properties.
Posted by: anon at July 14, 2009 8:38 AM
I've seen this happen. We applied for a nice 4.5% fixed rate, and the appraisal came back with so many quantitative and qualitative errors that it was painful. Among them were the fact that about 200 square feet were missing due to shoddy measurements, wrong room count (yes, the building has 13 rooms, they listed 10 on the report), and a few other things that are somewhat important but not "uhm, how on earth did you miss that?" important.
Qualitatively, our house was compared to a building on Folsom St. by the Rainbow grocery (where the crime levels are nearly 3X higher, and not a single residential building is in sight), a YEAR OLD SALE, and finally, a building that sold recently, but was of "superior finish and location" that they took a good chunk of value adjustments on it. I don't argue that the building was nicer, but the fact that after the value adjustments, the comp building was 25% more on a per square footage basis.
Of course, the arms-lengths folks and the bank all stood by their appraisal when we asked for some consideration. It's funny to talk to an appraiser that's familiar with the area I live in, and to hear that as a ballpark figure our building is worth 25% more than what the appraisal the bank and their arms-length folks came back with.
It really did feel like someone told them "come up with this number, and massage everything to make it work".
Posted by: Brian at July 14, 2009 8:45 AM
key paragraph from the article for me ...
It's difficult to substantiate negative impacts from the changes. For one, the "true" value of a property is a subjective matter, one upon which sellers, buyers and appraisers often disagree.
In addition, among 10 local brokers and appraisers contacted by The Chronicle, none could point to a verifiable deal that fell apart, only ones that were delayed. In fact, recent data indicate housing sales are actually rising, by 4.3 percent month-over-month in May, according to San Diego research firm MDA DataQuick.
I personally don't think a delay in discovering the true value of a home through an arms length appraiser is justification to suspend these rules.
Posted by: badlydrawnbear at July 14, 2009 8:46 AM
The "True Value" of a home is what someone will pay for it.
Posted by: Mystery Realtor at July 14, 2009 9:27 AM
There is an intense lobbying campaign by industry trade groups. The point behind the fight by these lobbying trade groups is that appraisals too often come out as too low.
In short, some industry trade groups are fighting for ultimately higher appraisal prices.
A simple rule of thumb:
Everyone should do his own job and all professions should be separated. Appraisers should be separate from Lenders, Mortgage brokers should be separate from RE salesmen, and so on. The minute you bring a symbiotic relationship between professions into this market you're bound to have an imbalance where the interest of the buyer is secondary to trade industry interests.
Posted by: San FronziScheme at July 14, 2009 9:29 AM
in the end, we were lucky that the sellers didn't walk
Is this a joke? Really? Unless they have a true all cash buyer on the line -- the seller would have the same problem with any buyer/appraiser. Frankly some of these "pro" posts sound shillish to me.
"True Value" is far more complicated than what someone will pay for it. Price is what you pay, value is what you get. I believe it was Buffet who made that statement. Whoever, it applies here. And any Buyer Agent who tell you Price = Value should be abandoned at once.
Posted by: eddy at July 14, 2009 9:38 AM
I agree that of course abuses happened. Like all bureaucratic response to abuses, the fixes are draconian. There are basically three horror stories actually happening. The first is that the appraiser is unfamiliar with the area. I do not care what the guy in the story says, this is happening and I've seen it firsthand.
The second is that they've created too many links in the chain, and it has caused a very significant time lag. For this one, the worst case scenario horror story here is that an appraisal company will even occasionally pass on doing an appraisal. That's without duly informing anybody because the contacts are middle men! Too much red tape, too new of a process. We've all seen that in other walks of life when it comes to bureacracy. So 2-3weeks later .... "Oh gee, sorry about that." HUH?
The third thing happening is that FHA loans are requiring second appraisals, by completely different companies than the first. This is in turn increasing the risk of horror one and horror two. All said, again, abuses happened. But this current solve isn't the best.
Posted by: anonn at July 14, 2009 9:42 AM
it seems that there are different issues being combined here.
The first issue:
should there be a working relationship between the lender and the appraisor. It would seem that this failed miserably during the runup as we had enormous pressure on appraisors to "hit the number". These laws try to avoid that.
The second issue:
People are complaining about
I see no reason why we can't have the appraisal intermediary use competent appraisors for an area, or do so in a timely manner. Clearly, the changeover is causing some issues, but presumably with time there will be increased competition in the appraisor intermediary business which will smooth some of this out?
what is clear: these big banks have TAXPAYER gaurantees now. Thus, we can no longer allow the previous system where banks hire appraisal shills to hit the number.
in the end, the appraisal is for the BANKS to make sure the BANKS don't lose money. In a "normal" world the banks would be responsible and would want conservative numbers. Unfortunately we live in bizarro world where the banks only want quick appraisals to hit the number so that they can then offload the crap into Federally insured vehicles and then get big bonuses... and then keep their spoils when the new loans go bad.
Posted by: ex SF-er at July 14, 2009 10:00 AM
"The "True Value" of a home is what someone will pay for it."
Accurate for cash buyers. But in most cases, someone is asking a bank to pay for it. And the bank wants a valid appraisal. Don't want to deal with an appraisal? Pay cash.
I'm thinking the true issue here isn't timing or red tape. It's value perception. In a rising market, nobody complained when appraisals came about above the negotiated price. Now that we're in a declining market, isn't it logical that they come out below the negotiated price? Like in the story, the $570K place that first appraised at $500K until a "local appraiser" was brought in to hit the mark. What are the odds that place is now worth $500K or less, or will be soon?
Posted by: Legacy Dude at July 14, 2009 10:01 AM
I'm sure that getting an appraiser in SF Prime that is unfamiliar with a micro location could in fact be a big problem when it comes to getting a fair / accurate appraisal. But once you're out of the city limits those issues largely go away and any professional should be able to come up with fair number. As for the time lag, unless there is an all cash buyer competing for the home in question, the time lag should be neutral to all parties and the process should become more efficient over time. Corrective action was needed, implemented and needs to be refined. But until we have substantial evidence that the new system is worse than the previous alternative, which significantly aided in creating massive valuation / loan issues, it's too soon to talk about suspending these new requirements.
Posted by: eddy at July 14, 2009 10:01 AM
It's amazing to me that so many people think they know exactly what an appraiser does as well as what appraisers have been doing in the past couple years when most people are ridiculously far off. The result is appraiser gets vilified in the whole process. Here's the real scenario - residential appraising is a lot of work with a lot of liability for substandard pay. You might as well be complaining about minimum wage people at the Kinkos counter who don't want to work hard for $15 an hour because it's pretty much the same thing except with the liability that someone can take away all your assets if you make a single serious mistake. The large de-regulated banks have been calling the shots over the last 15 years with the end game as you see it now - they don't want a reliable appraisal anymore as it gets in the way of their profits. All the risk after they make their upfront fees are shipped downstream to other investors so the more fee income they make on loans up front is their primary goal here. Why did they go along with the HVCC legislation where the appraisal is handled by a third party AMC (Appraisal Management Company)? Because that is EXACTLY what they wanted - I was at a lecture by the Chief Appraiser of Bank of America a few years ago and that is exactly what he said. They don't want to have to deal with dealing with numerous pesky appraisals who are somewhat independent, but instead, now they have one big company that is 100% beholden to them for their business that they can more easily push around. Independence my eye - it went from bad to worse. An appraiser was typically getting $400 for each house appraisal which after paying office overhead, data, education costs, your health care, etc., you could squeak out roughly $50K if you were decently good and worked your a** off. Yes, you could make more if you were unscrupulous but eventually your crappy work would likely lead to a lawsuit and you lose it all. So now, the HVCC requires Appraisal Management Companies between the appraiser and the bank - sounds great, except the appraisal fee is still only $400 (as it has been for the last 20 years) and now the Appraisal Management Company takes half of that. So really, is it any wonder why quality went down the toilet? Really, if your boss came in and told you your salary was going to be cut in half for doing the exact same job, you tell me exactly how motivated you would be to do your job properly. And we're not talking about high income earners to start with, so now this throws most house appraisers under the bus financially which the public actually relishes I'm sure. I think the banks and mortgage companies realize they went too far this time as it's only been in effect for 2 months and it's already blowing up. Turning back HVCC would be a good idea - but the whole process is so out of whack it's going to take a lot more than changing that legislation to getting any credibility back into the mortgage process of the financial system.
Posted by: Appraiser at July 14, 2009 10:04 AM
The "True Value" of a home is what someone will pay for it.
The market value of assets linked to debt is interesting because it may be necessary to get someone else to pay for it. Getting someone else to pay some amount is completely different from simply noting a high offer, much as buying with other people's money is different from using only your own cash. This mistaken belief that offers of the moment represent enduring valuations is one of the mistakes that resulted in the current mayhem.
Posted by: Mole Man at July 14, 2009 10:11 AM
Kinkos is hiring I think. :)
In all seriousness, 'appraiser' raises some good points, but I'm not convinced that reverting to the old system is the solution. In a free market, appraisers may decide that kinkos is a better option. But it does sound like AMC is taking too big a cut for playing an intermediary role. So long as there is an arms length distance between all parties I don't really care what the solution looks like. Frankly, it's good to see real valuations impacting the market. No one said it was going to be easy on the way down.
Posted by: eddy at July 14, 2009 10:16 AM
Mystery Realtor wrote:
> The "True Value" of a home is what someone will pay for it.
It is unfair that Lenders don’t want to let Realtors ® and Mortgage Brokers use their own Appraisers since as Mystery Realtor says if a Buyer wants to pay $1mm for a home in an area of $750K homes the “True Value” is $1mm (and the Buyer, Realtor ® Seller, Appraiser and Mortgage Broker get to split up the extra $250K in “Free Money” from the Lender)…
Posted by: FormerAptBroker at July 14, 2009 10:51 AM
i support regulation so that banks and real estate agents have little (or less, or no) influence on the appraised value of a home, but, things are a wreck right now and there are too many kinks in the system.
my client just got kicked out of escrow because it took over a month to find out the appraisals wouldn't work (that's right, the bank required 2!)! there was nothing wrong with the appraisals and in fact, they came back at a value that both buyer and seller were happy with. The process is currently cumbersome and nobody seems to be able to figure out the best solution.
we set up a survey to determine what the public thinks a house should be worth:
Posted by: garrett at July 14, 2009 10:53 AM
@garrett, your story doesn't make any sense. Please elaborate on the situation. Did your client lose the property, gone forever? Or just kicked out of escrow due to a delay. It sounds like the appraisal 'value' actually worked here in this scenario, but the process was too long.
Also, your survey is overly simplistic and no insight could be derived from its results. I voted for "what the seller is asking". That has to be the right answer, obviously :-) The question you pose is a valid one and an ensuing discussion would be a good one.
For me, a home price/value is derived based on concepts used by appraisers/appraisals and I tend to take average Price Per Sq Ft. on similar homes in the area within the past 12mo and apply some discount / premium factors like fit/finish/location/parking/views/etc... I also think it is appropriate to apply a discount or premium based on where the market trend is heading in the next 5 years. These are the factors I use when advising or making an estimate of current market price. These have nothing to do with seller asking price, the highest bidder, or the output of a random appraiser.
I'll also add that any real valuation should also start with the basis that the home is in line with long term home trending. Recently, home "prices" have gotten over "valued" so even though it is possible to derive a current market value, based on the principles I note above, that doesn't necessarily make it a good long term investment as there are clearly multitudes of external factors that go into the calculation of long terms home prices. Many people are learning this the hard way.
Posted by: eddy at July 14, 2009 11:33 AM
the problem was the length of time it took to get the appraisals done. it took 2 weeks to get the first appraisal submitted. from that point, it took another 2 weeks for the bank to decide that they needed a 2nd appraisal. the seller was kind enough to grant us more time, but once the 6th week came around and we couldn't remove our finance contingencies, they kicked us out of escrow. so, yes, we were kicked out due to a delay.
as far as the survey goes, i know it's overly simplistic, but we have trouble getting folks to participate if it's too detailed, so we KISS. i'd LOVE to make it more detailed/accurate... any ideas?
Posted by: garrett at July 14, 2009 11:45 AM
This is hilarious. Using appraisers is akin to asking someone to evaluate every purchase on a credit card or making sure the car dealership is pricing that ugly-ass smugnificant Prius for you correctly before you sign on the dotted line.
Posted by: Toady at July 14, 2009 11:45 AM
To everyone who thinks value is whatever you are willing to pay or thinks the appraisal is a useless part of the equation, you are welcome to avoid an appraisal by paying all cash for your purchase. However, if a bank that is backstopped by the federal government is paying 80% plus of the purchase price via their loan, well, they get to evaluate your purchase decision as well via an appraisal.
Posted by: Appraiser at July 14, 2009 12:22 PM
... I also think it is appropriate to apply a discount or premium based on where the market trend is heading in the next 5 years.
Here is where it gets subjective because we really don't know. And why 5 years? Why not 10 or for 30 years, the life of the typical mortgage? And is this not what caused the bubble in the first place, the idea that real-estate prices were rising? A condo in soma would appraise 20% less than any deal that is agreed to today based on that thinking, if the appriaser has a socketsite bear mentality.
Appraiser, can you please provide some feedback on this? I'm currently both a seller and a buyer and would appreciate your perspective.
Posted by: viewlover at July 14, 2009 12:29 PM
As someone who is not a professional in the RE or Mortgage industries, I've often wondered why the appraisals come so close to the end of the process when they can have such a dramatic impact on the eventual outcome. When you're selling a $1M property in SF why wouldn't you get a professional $400 independant appraisal before you even list the place. This does not seem to be an outrageous price for the potential value of the information.
Posted by: OneEyedMan at July 14, 2009 1:21 PM
My point is this is an unintended consequence of forcing the use of appraisers in general. Eventually it becomes a crutch or gets corrupted (which is, by the way, anything mandated by government). Reminds me about the whole thing around the rating agencies. Whooo -- S&P complicit? Duh.
Force people to live by the consequences of stupid purchases, and voila, people get smarter about doing their own pricing and THINKING.
Now we just get bandaid regulation on top of bandaid regulation. And everything gets screwed up.
Posted by: Toady at July 14, 2009 1:32 PM
The purpose of an appraisal is to estimate value as of a specific date, typically the current value as of the date of appraisal inspection. Theoretically, current market data incorporates future expectations - some people think it's going to go up, some people think it's going to go down, some people think it's about right currently. With a house appraisal, you cannot make an additional discount/premium for where you forecast the market to go in 6 months, 1 year, 5 years, 10 years etc. because this is pure speculation at this point.
Posted by: Appraiser at July 14, 2009 1:35 PM
"A condo in soma would appraise 20% less than any deal that is agreed to today based on that thinking"
A lot of people have performed this analysis. There is a technical term for them too: Renters.
Posted by: eddy at July 14, 2009 1:36 PM
Other adjectives describing such people would include "correct" and "accurate." But no sense in arguing over semantics.
Posted by: Legacy Dude at July 14, 2009 2:15 PM
yes, but that "analysis" is not an appraisal, it's just speculation resulting in a personal choice.
Posted by: viewlover at July 14, 2009 2:44 PM
Viewlover, the point you raise about accounting for market direction is not an appraisal issue but an underwriting issue. Appraiser is right that his/her job is to estimate the current value. However, I disagree with his/her point that accounting for market direction cannot be done because it is "pure speculation." That is part of the underwriting process (if done properly). For example, jumbo lenders are currently requiring large down payments (30%-plus) because of the high likelihood of further significant price declines. They are not "speculating" but are protecting themselves against the quite apparent risk of declines. Underwriters take this into account along with other risk factors, such as income and credit scores. Of course, in the conforming market, the GSEs dictate the risk factor by designating such things as LTVs, minimum credit scores, condo occupancy rates, etc.
Posted by: Trip at July 14, 2009 3:06 PM
yes, but that "analysis" is not an appraisal
Correct, but we're responding to garrett's question about what is a home worth. I think we've all concluded that appraisals are there to make sure that lenders are not getting scammed. It serves absolutely no protection to the buyer or seller. It's generally view as an inconvenience and burden. If anything, it gives an incredibly false sense of security to the buyer who feels good when their appraisal comes in at the right number. Homes are speculative and subject to an infinite number of external valuation factors. If an appraiser will not provide a value in line with what you, the buyer, are offering; you ought to stop and ask some serious questions about your perception of value versus a neutral / impartial observer. Which gets back to the original point of having an "arms length" appraisal.
Question: Do appraisals become part of the disclosure package once obtained?
@garrett, you never really were fully clear on whether your clients lost the property entirely as a result of the appraisal situation. That is, the sellers decided to move on and are In Escrow with a new buyer? Getting kicked out of escrow and losing a property outright is one thing, but getting 'kicked out' as a matter of procedure or strategy is another. Could you please clarify?
Posted by: eddy at July 14, 2009 3:22 PM
we were bumped out of escrow and the sellers are back in escrow with another buyer. in other words, my client will no longer be purchasing that house.
Posted by: garrett at July 14, 2009 3:42 PM
@garrett, that sucks! Thanks for the clarification and good luck finding them another home.
Posted by: eddy at July 14, 2009 4:08 PM
trip, I don't disagree with what you've said, but is the bank underwriting the buyer or the property and what happens when they try and do both? Every underwriter wants to avoid bad risk but that's easier said than done, you've got to compete for the good stuff. Down payment requirements and buyer financials help with that, the appraisal dictates to what extent the bank is willing to go along.
Eddy, I was not responding to Garrett, you were. I was asked appraiser a specific question as to what the future direction, speculative or not, would have on him or others in the same field.
Posted by: viewlover at July 14, 2009 5:28 PM
I said this before but let me expand.
If a buyer is paying cash they can pay whatever they want, regardless of what the appraisal says. It's only if they want a loan that the appraisal matters.
A bank can loan out however much of their own money they want, regardless of what the appraisal says. It's only if they want to sell the loan on to the taxpayers that the appraisal matters.
Posted by: diemos at July 14, 2009 5:46 PM
As far as the comment about a home is worth as much as a person is willing to pay for goes.
How many times have you bought a product that ended up being crap? I know I have on some cheap stuff because I didn't bother to do the research. Now granted a home is a much more serious investment that is why I would want my appraiser to price the home accurately for my own good. An appraiser looks at homes every day and can spot things that a first home buyer will look over.
Posted by: anon at July 15, 2009 2:48 AM
"In addition, among 10 local brokers and appraisers contacted by The Chronicle, none could point to a verifiable deal that fell apart, only ones that were delayed."
Have the Chronicle, Call or e-mail me, I just had a deal that fell apart because an appraiser from Livermore appraisd a property in Sunnyvile and used the "lot size" Sq.Ft as the Sq.Ft of the interior of the condo on two of the comps used, resulting in a -$28,000 error, wasan't allowed to contact him to point out the error resulting in a below market appraisal compaired to recent sold and pendings. Buyers walked.
Posted by: Alexander J Wilkas at July 23, 2009 9:36 AM
We made an offer on a property in Marin County and the appraiser came from the East Bay. At this point the appraisal has blown the deal. It came in for 60,000 grand under our offer and all the comps were foreclosures or short sales. We moved here from out of state 4 years ago and we thought this would be the opportunity to finally get into a house. My husband and I are beyond angry at this point.We were pre-qualified and make the income required. There is something very wrong with what is going on with the 'new rules' Sellers need to get out. Buyers want the house...
Posted by: Susan at August 10, 2009 3:54 PM
Susan, why not place a link to the home and your offer details, or at least give us the percentage that 60k equals in terms of the appraisal value or your offer. Is it 60k on 600k (i.e., 10%) or 60k on $1.6M. It just so happens that the market in Marin County in many places is made up entirely of Short Sale and Foreclosure so its possible that the appraiser did you and your husband a favor?
Just get another appraisal or offer less to the seller. What if your offer was 100k over the appraisal, 150k, 200k, or 250k? At what point or percentage difference should the bank stop things and say, 'No'. Maybe the bank sees 60k difference today, 200k tomorrow = underwater buyers defaulting on loan and bank stuck with bad home because they didn't listen to their professional appraiser. East bay, it's not like they got someone from East LA.
The party is over, and I for one am glad to see it end.
Posted by: eddy at August 10, 2009 4:59 PM
A friend who bought a foreclosure in Hayward saw the appraisal under foreclosure price. Price was reduced to close financing. End of story. The market spoke.
Posted by: San FronziScheme at August 10, 2009 7:09 PM
Susan, you're a fool.
Lower your offer by $60K and get the deal done at the lower price. Tell the seller you're terribly sorry but your hands are tied and any subsequent appraisal is likely to be lower, so they should take your new, lower offer so that you can close.
Then mail me the $60K you are so eager to get rid of.
Posted by: tipster at August 10, 2009 9:39 PM
It's incredible how ignorant/stupid some of the people are in this discussion. It defies all logic.
Why should a bank lend to you 80% of the cost of a house just because YOU believe it is worth X? If you pay $500K for a place that you can later sell for $300K, then the bank is screwed.
If you don't like the steps banks take to protect themselves, then here's a novel concept -- don't do business with them. Pay all cash or rent.
Posted by: Dave94107 at August 27, 2009 12:15 PM
Dave, why don't you research what is going on with the appraisal process at present prior to calling everyone ignorant and stupid.
Posted by: auden at August 27, 2009 2:56 PM