Non-Local Appraisers Killing Deals

By
Real Estate Broker Owner with Northern Virginia Homes - FRANKLY REAL ESTATE Inc

I hate the new appraisal system and non-local appraisers. (see video below)

Let me explain. The government came up with a brilliant idea to curb another housing meltdown!

Assuming (you know what they say: It makes an "Ass out of you and Ming") most lenders and appraisers were fraudulent, they decided to put a great wall of china in between the lender and appraiser. So instead of having a "reliable" and experienced local appraiser, they instead farmed out the process (and sometimes to a company they own) to a company that would then find an "independent" appraiser. 1 problem is, the appraiser has no accountability.

Also problem #2 is now another middle man has to make a cut, but the cost to consumer is the same. The result? The cost to the appraiser goes down. The result? NON-LOCAL APPRAISERS.

You know you are in trouble in Northern Virginia if your appraiser gets out of the car with a cowboy hat & boots. So if you (Mr. Appraiser) don't know the area, what are you going to do? Pick the wrong houses and appraiser more conservatively (they can only get in trouble if they appraise a place too high, so why not just make it come in lower. It also takes more work to come in higher). An appraiser's job is not to be conservative or aggressive, but to be as correct as possible. Recently we had a listing where a bank promised that they used local appraisers.

The appraiser came from Purceville! Over 50 miles away! The appraisal made comments about Ballston and Rosslyn being where the jobs were. As if Clarendon was 2nd fiddle and not desirable. (If you aren't from the area, like the appraiser, you wouldn't know that Clarendon is the most expensive and nicest place in Arlington, see Arlington Rap )

Even before the appraisal system was mixed up, I would always warn my buyers "hey if it comes in higher than what you paid, don't really celebrate. Sometimes appraisers like to come in higher, just to make you feel good, and oftentimes they aren't really "real" in my book." Why would I burst their happy dance? Because I warn them that the flip side (a low appraisal) is also possible. Just because an "appraiser" says something has a value of X, that doesn't mean it is the "true" value. While some might argue there is no "true value" or "it is worth what somebody is willing to pay for it", I'm referring to the other problems with appraisals.

APPRAISAL PROBLEMS:

1) BANK SALES IN COMPS Appraisers usually include bank sales on the MLS. These are homes that are oftentimes underpriced, they get 7-20 offers and the all cash offer wins. NOT THE HIGHEST OFFER. So a $400,000 bank listing might get bid up to $415,000 with an "all cash" buyer, and 3 other buyers had offers in for $435,000. What is it "worth?" Well the appraiser says $415,000, but the market says $435,000. And this isn't even going into whether a regular, properly marketed identical listing would sell for $450,000. So what is the "value?" of this $415,000 closed home? For some people this means NEVER being able to buy a home. They live in areas that are full of investors buying with all cash (like WOodbridge). Those sales then drive down the price of a regular listing but not enough. The appraisal will still be low, and the 3% down FHA buyer doesn't have the money to make the difference (yes, I got emails on this).

2) SHORT SALES Similar to the above, but the seller has NO interest in trying to get full market price. Actually the banks expects to sell them for 5-15% off market price. The seller just wants a patient buyer, oftentimes an investor. And as I have written in all my other Short Sale posts, these deals will go 3-6 months and oftentimes never pan out. So yes they have to sell for less, to compensate the buyer for the hassle and high chance of never closing. Many buyers will not even look at short sales. So are these good comparable for an appraisal? I think not.

3) MARKET UPSWING? Oh my! Could it be? Could it be possible that homes and condos in Arlington are actually selling for more than the low in June 2009? Yes. In reality they are (this is the first time I have said anything about the market going up), yet the appraiser is more likely to call the market "steady." All you need is a small 1-3% increase for a $500,000 place to now be selling for $515,000, yet the appraiser won't adjust for that.

4) LOW INVENTORY Rarely will an appraiser adjust for low inventory. IE, Ain't nothing else out there to buy in this price bracket. Good appraisers will see this and understand supply and demand.

SOLUTIONS TO LOW APPRAISALS?

So this is what I see happening. When a low appraisal comes in, the buyer oftentimes freaks out. It is the buyer agent's job to warn them about this (see post above) and then discuss what they want to do. About 1/3rd of the time the buyer will walk (until it happens to the next property!), 1/3rd of the time the seller will just drop their price and the last 1/3rd get new appraisers or work it out.

1) DEMAND A LOCAL APPRAISER Put it in the contract (as the lister) that you will only entertain a local appraiser. Maybe give it a 15 mile range. If the lender can't do this, make the buyer get a new lender and new appraisal if somebody non-local does the appraisal.

2) GET A NEW APPRAISAL. CHALLENGE IT. Either the buyer or seller can get a new appraisal. Yes, my buyers have hired new reliable and local appraisals. Why? Because the buyers have been to each home in the area for the last 3 months and they know the value. While a bank won't flat out accept the new appraiser, it can be used to challenge the first appraisal.

3) PAY THE DIFFERENCE While it might be painful, it might be the only way. Especially if you have gone through it a few times, if you start all over, it will likely happen again (unless you are willing to wait 3 months for a short sale to MAYBE close).

Appraisals falling short is occurring in about 50% of transaction. IT EVEN HAPPENED TO ME! The home I bought did NOT appraise. Yes, I paid well over the "appraisal" price. (yep soon that will be a good post, make sure to subscribe to the blog).

Thanks for hearing me out. Now I can warn my clients with a link to this post instead of giving a limited explanation to the appraisal problem. The goal is not to pressure a buyer to increase their price. I really hope this didn't come off that way. Instead the goal is to explain the process and for buyers to not ignore their own perceived "value" and ignore their Realtor, when some $20 an hour newbie appraiser from West Virginia says otherwise.

Written by Frank Borges LL0SA- Broker Owner FranklyRealty.com and FranklyMLS.com

UPDATE: Paul Todd, has a brilliant comment. You are brilliant! Paul says, when the appraiser calls, ask exactly where they are from. If they aren't local, then refuse access and make the lender pick another appraiser. Wow, great idea.

Map image from Scott Wall of China photo from jaaron Cowboy shot by imdan Freak out by agnes

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Re-Bloggged 6 times:

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Topic:
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Rainer
143,953
Matthew Bartlett
Century 21 Masters/Lic. #01353034

Great post Frank. This is a prime example that government is not the solution. Give them a chance to step in fix the problem, they only make it worse. But I agree the process we have now is a mess and an even bigger problem has now become a reality with these new rules wiping out many businesses for many appraisers accross the country.

February 08, 2010 11:03 PM
Ambassador
1,305,410
Jon Zolsky
Selling Daytona paradise for heavenly good prices
Daytona Condo Realty, 386-405-4408

Frank,

I enjoyed watching your video and listening to common sense. The problem of the appraisal system is that they are trying to create an absolute system for the industry that can't be homogenous. If real estate is local, and the values in one place mean nothing to values of similar size-age-quality constructed real estate in another place, how can you automate the appraisal process?

Just no common sense

February 13, 2010 04:02 PM
Anonymous
Katherine
I have to say I take some exception to your commentary. "most lenders and appraisers were fraudulent" is a very, very unfair statement. I have met my fair share of LOs whome have made illegal and improper requests in a an appraisal assignment. "Value must met $xxx,xxx or stop work and call the lender immediately." This is clearly on the shoulders of the brokers and loan officers whom initated the assignment. It was up to the appraiser to tell them to go pound salt. Those types of appraisals are barred per USPAP, FNMA FHA guidelines and regulations. When LOs were told it was a violation, they simply replied, "well I have other appraisers who do it all the time"! Look, I understand your frustration with sales being killed because the appraisal does not support the purchase price. I get it. What you all must understand is that our fiduciary responsibility is to the client, the funding lender. Not the broker, not the buyer, not the seller and not the real estate agent. It is to the guy writing the check and taking the monetary risk. All of this brew-ha-ha about "out of area appraisers" is nothing more than a mechinism. A way for the lender/broker to cry foul if the appraisal does not meet their expectations. It is also the ONLY way to get a sceond appraisal. The bottom line is that the data does not change. I do not care if the appraiser lives on the subject street or comes from 50 miles away the data does not change. As appraisers we pull comps in a radius around the house. We are to match apples to apples. 20% within the GLA, similar room utility, view , locational influence, amenities, age, style, site - you get the picture. An experienced appraiser will be able to recognize a variance in sales range from a base builder to an upscale builder. If model match or similar sales all sell for $250k and are similar in size quality etc- how preytell does one expand the radius to support a purchase price of $295k? How do you legitimately do that and keep your license? Answer: You don't. I have had more than one Real Estate broker submit sales that are dated, superior , distant or all three in an effort to support an agressive purchase price. An investor ranch flip with a $3500 Home Depot, white melamine kitchen, vinyl floors and very basic baths and they hand me comps that are 3/4 of a mile away, 6 months old and completely remodeled with granite counters, custom kitchen cabs and stainless steal GE profile high end appliances. They totally neglect to print out the model match comps that are flips on the subject street that sold 8 weeks ago for $80k less. After I submit the appraisal they are incensed that their sales were not used. They even go as far as to sumbit the sales to the lender - they don't make it bast the review appraiser who now sits between the appraiser and the LO at the AMC. Before the requirement of a firewall, LOs, Realtors and the like could beat the hell out of the appraiser who didn't meet the desired value. As far as using REOs for arms length transactions, EVERY market is different FNMA requires a complete analysis of the subject neighborhood and the types of sales that are being transacted. That is, determine what is driving the market; find out if there is a two tier or multi-tier market. If it is multi-tier and there are sufficient sales of arms length transactions to support the analysis of a two/multi tier market, then the REOs can be left out and the proper commentary regarding the analysis must be included in the report along with the supporting data. Conversely, if you go into a tract neighborhood and there are 19 sales and 15 are REOs, Then you have a neighborhood driven by REOs and they are tough to legitimately discount them. Arms length sellers will typically have to compete with these homes. I am speaking of tract homes with similar appointments, mind you. An appraiser simply cannot and must not expand the radius by which comparables are yielded simply to find perhaps a farther or dated sale that supports the price that they are after. It is simply a violation of of our Standards. I can guarantee if it is done, it will be caught on a review and certainly during due diligence by the UW. Most certainly an addendum will be sent by the UW requesting commentary as to why sales A, B and C were not used on the subject street that support a LOWER value. If the report is not credibile the appraiser has risked their license, legal action or worse. Lenders have access to all the data they need. They can pull all the sales in an area and certainly see at a minimum, a range of sales for the area. A purchase price that sits above that range with the only supporting sales sitting a mile or more away is a HUGE red flag. While I am positive that there are either untrained, inexperienced or unscrupulous appraisers more than willing to hit the mark, experienced appraisers whom value their license will not and should not play this game. In my humble opinion, I personally believe that it would benefit every Realtor to learn how to properly develop a CMA and or BPO and perhaps apply some minimal appraisal techniques in terms of comparable selection. Rather than focus on giving the seller the number that they want, give them a number that is well supported with data and will withstand the appraisal analysis. This would or could lessen the chance of a property being overvalued in the first place. As I said before, - the data doesn't change. A good valuation relies squarely on the shoulders of a good analyst albeit an appraiser or a Realtor; someone who can recognize trends, variances and market reactions and apply that data to develop a supported value. A supported value that is compiled by relevant and verified data is unshakable.
March 09, 2010 10:21 PM
Rainmaker
205,928
Ellie Shorb
CRS, Realtor DC, MD & VA Luxury Home Expert
Coldwell Banker, Ellie@CBmove.com

Wow, you struck a nerve and for good reason! No kidding!!!

April 27, 2010 11:56 AM
Rainmaker
572,843
DeeDee Riley
Realtor - El Dorado Hills & the Surrounding Areas
Lyon Real Estate - El Dorado Hills CA

Hi Frank,

I think it is easier for the listing agent to present comps for the appraiser in advance verses trying to get them to adjust their appraisal after the fact.  Of course, in our area, listing agents on bank owned properties don't even communicate with the selling agents much less take time to meet the appraisers. 

Thanks for your excellent post!

June 13, 2010 12:06 AM
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Rainmaker
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FRANK LL0SA Esq.- Northern Virginia Broker .:. FranklyRealty.com

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