I ran across this Q&A at MarketWatch: How fair are appraisers who already know home price? and I got very annoyed at the assumption made by the person posing the question, stirring up an already healthy dose of irritation at the predicament my industry is in.
Q: One of my pet peeves for years has been how appraisers are given the house contract before they appraise the house. Why is that, other than the fact he needs to make sure that his valuation comes in close to the contract price, otherwise the deal is off and he won’t get any more business from that real estate and/or mortgage company? Appraisers should be above this. -Timothy Murray, certified financial planner, Chantilly Va
He further proposes to make it illegal to allow the appraiser to have contractual information about the sale.
Do you think that the appraiser can’t find out what the sales price is without viewing the contract? Duh. Ok, make it illegal to provide the contract. Boy, that will really prevent appraisers from being pressured by their clients. Do you think a bank or mortgage broker, who is trying to make the deal, would feel the same way this questioner does? How about the real estate broker who has a commission riding on it? Of course not. In a mortgage related transactions, the appraiser usually only interacts with people who have a stake in the outcome.
Here are some thoughts:
We are mandated by law – its part of our licensing requirement – to review the sales contract. Why? To understand the terms of the sale. Its not all about the price. What is the actual asset being delivered to the buyer? Are their concessions provided by the seller in lieu of a lower price? Is the proposed new kitchen part of the price? and on and on.
We need to understand who the parties are – Fannie Mae has made this a top priority in their quality requirements and revised their appraisal forms a few years back to address this specific concern. They want the appraiser to have an understanding of what the transaction is about. If its a flip, the lender wants to know. In other words, does the seller name match with the owner on record? What and when was the prior sale and does it correlate to the current sales price?
We do not need to know the loan amount – That’s definitely a heads up from the lender that tells the appraiser what they need to come in at without actually telling them. This is prevalent in refinance assignments where there is no sales price to guide the unscrupulous or incompetent appraiser. The appraiser can safely assume that as long as the mortgage amount is 80% of the appraised value, there won’t be any problems with the deal.
The level of precision possible in valuation is not always practical in a blind scenario. – For example: A property sells for $1,001,000 and the “blinded” appraiser estimates the value at $1,000,000. Could the value be $1,001,000? Of course it can. At that level, there is not that type of precision. That’s 0.1% accuracy. I think the best we can hope for as a profession, is 3% unless you get lucky and nail it. The value could be $998,000, $1,010,000, etc. The empirical evidence used to estimate value is not the granular. Yet the loan to value ratio may require it and in the process, invalidate the transaction because of a variance of 0.1%.
So is the issue resolved by hiding the price from the appraiser? Of course not. It may make you think that you have made the appraiser unbiased. But that’s incredibly naive.
So to figure out the solution, we need to understand why this happens.
Because, in real world lending practice, the appraisal profession has been shredded into nothing more than an army of form-fillers.
Appraisers have to play ball. Its all about making the number. Instead of window dressing the problem, how about protecting the appraiser’s independence so we can provide a real service to the lending industry and the consumer? Not fear for our income because we didn’t make the loan work?
The good appraisers want this to happen, to be protected, because for those who haven’t sold their soul (there are only a few of us left who haven’t), its a losing battle. Just look at firms that specialize or base their practice nearly all on mortgage broker business. Lenders haven’t been incentivised to change their standpoint on understanding the value of their collateral for so long because values have been rising for a long period of time. With the fallout from the sub-prime mess, this may change, but it will take a long time.
Instead of lumping us in with used car salesman (sorry guys), lets try to be a little smarter.
I hope Timothy Murray gets the message, because while it bugs me just as much as it does him, lets try to effect change on the actual problem, instead of simply using a band-aid to feel better about the whole issue.