Decoding the home appraisal process

Marketplace Staff May 1, 2009

Decoding the home appraisal process

Marketplace Staff May 1, 2009


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.

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