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Decoding the home appraisal process
A for sale sign is seen in front of a home in Miami, Fla.
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TESS VIGELAND: Remember that parlor game we used to play back in, oh, fall of '06 or so? It went something like this: You'd mention the house you'd just bought. I'd ask how much you paid and you'd tell me. And then we'd both blather on about how our homes were worth, like, 300 percent more than when we bought them! Well, in truth your house is only worth what someone else is willing to pay for it. And what an appraiser tells you it's worth. Home appraisers have taken a good chunk of the blame for the real estate bubble and their role in setting those inflated prices. New regulations are in effect as of this weekend that will theoretically make appraisals more independent than they were. Tamara Keith reports on exactly how appraisals work.
Tamara Keith: Jim Duncan is a realtor in Charlottesville, Va. and we're looking at a white vinyl-sided pseudo-Victorian he just helped his clients buy.
Jim Duncan: It was on the market for about $500,000 and ultimately closed for about 415.
As part of the loan process, the lender ordered up an appraisal to make sure the house was really worth that 415. And Duncan says the appraisal came back just about right, a couple thousand dollars more than the final sale price. He and other realtors say this happens all the time. Duncan finds the spot-on appraisals surprising since the ultimate purchase price is really the result of a negotiation and not just the hard data about the market.
Duncan: I'd like to think that we're all -- all realtors, especially me -- are so perfect in our analysis that we can so accurately determine what the right purchase price is, the right purchase price is. But frankly, it's more an art than it is a science.
Duncan says some of his realtor friends say it's odd that appraisers that are supposed to be objective get to see the sales contract.
Duncan: The perception is that they are given a target.
Because the appraisers see what number seals the sale. Appraisers are supposed to review the sales contract, but that isn't supposed to unduly influence their appraisal. But long-time appraiser Karen Pape says at the height of the housing boom, lenders sometimes pressured her to come up with a price close to the sales price. In other words, a price that wouldn't kill the deal.
Karen Pape: Hey wait a minute, you know, I've just spent hours working on this and I've developed an opinion of value that is valid. And you're telling me that I just have to, you know, change my number just so you can make the loan so I can get more business.
Yup. She says the conversation went something like this.
Pape: I am a big volume lender and when I say jump, I expect you to say how high.
Pape says she stopped working with certain lenders because as she puts it, they didn't respect her opinions. But some appraisers played along. That helped fuel the boom, led to the bust, and finally prompted the new Home Valuation Code of Conduct. Bill Garber represents the Appraisal Institute, an association of appraisers. He says during the boom, the appraisal process lost some of its independence and loan officers with financial stakes in the deal got the upper hand.
Bill Garber: The code of conduct attempts to make clear that there must be a firewall between loan production and risk management and the appraisal process.
So, how is the appraisal process supposed to work? It turns out appraisals aren't all that mysterious.
Betsey Critzer: So, this is an assignment. I'm working on an appraisal for a lender.
Betsey Critzer works at Pape and Company in Charlottesville. She's several hours into an appraisal for a house refinance. Under the new code of conduct, she won't interact with loan officers. Instead an appraisal management company, one step removed, or the bank's risk management division hires appraisers.
Critzer: This is just a sketch showing the dimensions, the exterior dimensions of the home.
She's already been to the house, measured each room, noted the counter tops in the kitchen and other improvements. Sometimes she says homeowners have a number in mind, and they'll tell her their target price.
Critzer: We have to try and ignore that because we can't let that influence us.
Appraisals mostly involve just crunching numbers. Critzer pulls up data on recently sold houses in the neighborhood and she adjusts their sale prices to match the features in the home she's appraising. And then, after staring at her monitor for a while, Eureka.
Critzer: So, given that, I'm probably going to come in right here at 316.
So, why do those appraisal numbers so often exactly match the sales price? Critzer swears sometimes it just works out that way. And other times? The appraisal comes in too low or too high and kills the deal.
Critzer: You know we certainly aren't in a position where we have anything to gain one way or another anyhow, and our job ultimately is to serve our client, and that's the lender.
And, what's in the best interests of lenders? Making mortgage loans that are actually a good deal for everyone involved.
I'm Tamara Keith for Marketplace Money.
I have a proplem am paying my mortgage to a service co. Because the bank my house fin. with folded,so they are looking for a new lender the service co. Is suppose to be trying to help locate a lender to tranfer my home to them so they sent a appraisal agent out and the appraisal came nowhere near the price we are paying now. But the service said they can't accept it because the appraisal was to low, but it was someone they sent out to do the job. Now they won't return phone calls but they won't us to continue to send mortgage payments to them.
I find it interesting the appraiser in this story says the customer is the lender. The borrower is they customer - they pay for the appraisal and rely on it to accurately value the collateral for the loan.
Personally, I think they are a joke. Each appraiser asks for the sales documents, etc. before the appraisal and lo and behold that's what the value is. I would of thought appraisers would have been held to a higher standard since the housing bust. I guess not.
If a property has been exposed to the open market (i.e. listed in MLS) for a reasonable period of time, after which a buyer and seller agree to a sale price, an appraiser better have a compelling reason for concluding a Market Value that is NOT the same as the contract price! After "The Market" has spoken, appraisers have an obligation to provide documented support that explains the activity of The Market to the lender. It is ludicrous that an appraiser can kill a deal by concluding a value that is 5% below contract...NOBODY can be that accurate!
On the other hand, an appraisal is just ONE part of the under-writing process. Too many appraisers have been blamed for over-valuing properties, instead of laying the blame on unqualified borrowers who lack resources to maintain their houses properly.
Appraisals tend to lag in a down market because the main measuring tool is actual sales prices of comparable properties. In a down market, many sellers hold out for an outdated price, retarding sales, and causing that indicator to lag. That's also how tax assessments can still increase in a falling market.
Legitimate buyers that have searched the market are the best ones to determine what a certain property is worth, to them. Appraisals, by their very nature, are always a look in the rear view mirror. Buyers are looking at current listings available to purchase. There should be and will be a disconnect between market price and the appraisal. Appraisals should always acknowledge that and bend to reflect the buyer's knowledge.
--Dave--
Appraisers opinions are simply that, an opinion which is different than a fact. The factual price can only be determined in a transaction between a willing buyer and seller. Over reliance on appraisals is a weakness in the real estate business because in a stable market these opinions can seem to be in line with actual sale prices but when the market heaves up as it has in the past couple of years appraisals are less valuable. It would be better if actual sale prices were the basis for valuations. This presents some issues for the sales transactions but would eliminate uncertainty from the appraisal process.
