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EDITOR’S COMMENT: I understand that people need to make a living and how hard it is to do so. Many realtors work very hard and they went through a lot of training, education and the school of life to get to wherever they are now. But I have little compassion for those who would pressure appraisers into doing the wrong thing — just like the appraisers were pressured and even blackballed if they didn’t tow the line in the price run-up over the 2000-2007 period.

The mortgage mess occurred in large part because of two appraisal frauds — one at the level of ratings that the likes of S&P, Fitch and Moody’s gave to pure crap masquerading as investment grade securities and at the other end the “appraisals” that couldn’t withstand the test of 2 minutes time. If anyone knew that the prices were just plain wrong and would collapse it was the realtors who knew that property doesn’t increase in value by 10%-20% per month or per quarter without taking a nosedive when everyone wakes up.

Realtors liked the high appraisals because they made more money selling a $200,000 home for $500,000. And it was easy money because the market was flooded with money which is why they were selling payments instead of price and calling it an investment. It was realtors who gave the shove in the direction that prices always go up on homes — when they knew perfectly well that prices do go down, way down when the bad times roll in.

Now they are suddenly turning their attention to appraisals that are killing “their” deals. It’s not your deal and you don’t have to live with the consequences of the property going lower in value than the principal due on the mortgage. But I’m sure you will be right there offering a short sale when that does happen.

The appraisals are coming in low because the market is over-saturated with houses for sale that were virtually stolen from millions of people by banks who had no stake in the game. And realtors had a part in that too, convincing anyone who would listen that even a bad foreclosure was good for the economy because it keeps things moving — never mind the horrendous toll it takes on the occupants, the community, and the economy.

The appraisals are low because appraisers are afraid they might be sued over the appraisals they allowed to go to print during the mortgage meltdown. In 2005, as stated in an article here more than 2 years ago, 8,000 honest appraisers petitioned congress for action. They were concerned because the Banks and other mortgage originators were putting them up against the wall and insisting that if the appraisal didn’t come in $20,000 over contract price, they would never work again. With that constraint off, people were able to push prices through the roof in a grand movement that spread across the country lead by developers who were only too happy to raise prices every chance they had — raising “comparables” in self-justification of pure appraisal fraud.

There are another 8 million homes going into the pipeline which will drown the housing industry and realtors know it. The appraisers are looking at the real facts and applying them this time so they don’t get stuck under the gun of some lawyer’s examination as to what the appraiser was thinking when he put his name to that appraisal report. Realtors should learn a thing or two from the appraisers. There is no support for value in this market and there isn’t even a clear basis for asserting title.

Realtors should be using their knowledge and training to help people clear title — and then sell the property. There is probably a business model where realtors could make plenty of money on homes that have clouded title. Then a realtor could truly be proud of the work they put into the deal and get paid a proper amount of money for the help and the sale. Criticizing the appraisers won’t get you where you want to go. When the appraisers strike back it won’t be pretty.


The tiresome issue of the misunderstood appraisal

Raise your hand if you’re tired of hearing about low appraisals in the news.  Raise your other hand if you have no clue what the definition of a “faulty appraisal” even is.  If both of your hands are in the air, that’s awesome, mine were.

Let’s go back to class here for a second. An appraisal is an opinion of value, it determines how much a home is worth on a given day and time, based on age, size, condition, and several other factors. There are three methods on how this can be done – the income approach, for commercial or (duh) income producing properties, like multi-family homes, the cost approach, often used for manufactured homes, and occasionally for new construction – how much it literally costs to build or rebuild a home, and finally the most common, is the comparison approach, using active and sold comps in the neighborhood.

When done for a home purchase, an appraisal is done to protect the bank from lending more money on a home than it’s worth. It isn’t completed to meet the agreed upon price in the contract. It’s not there for the buyer’s peace of mind. It sure as heck isn’t there for the seller or Realtors involved. The lender is the client, they are the ones who are insuring their investment in the transaction by getting an appraisal ordered.

NAR and NAHB members claim lost deals

For nearly a year, between 10 and 18 percent of NAR members surveyed have reported at least one deal which has been delayed or killed due to appraisal issues. Usually the issue is that the appraisal is not meeting the contract price, and either the transaction falls apart completely, or the sales price needs to be renegotiated. Recently a report was released by the NAHB, wherein they are also reporting issues with appraisals. Within the last six months, of their surveyed members, roughly 60 percent said the appraisal was less than the contract price, and about half said the appraisal was less than the cost of building the home.

Both groups are trying to correct the problem of problem appraisals. In a NAHB statement on December 8th, they note they have been holding appraisal summits in Washington for several years with banking regulators in order to urge change of appraisal practices. One of their major concerns at this time is the use of distressed comps in new construction sales. NAR will be hosting a webinar in January with suggestions to make sure appraisers are qualified. Questions Realtors can ask when meeting an appraiser at a home, ensuring they know about upgrades, and providing neighborhood comps.

Not all appraisals are bad, but when they are…

This is all well and good. It never hurt anyone to be more informed about a property. However, to me, a crappy appraisal is one that isn’t up to standards, that is completed sloppily, inaccurately, one that doesn’t take all information into account, one in which data is falsified. Most appraisals are of quality, but when they are bad, they are really bad.

Not meeting contract price, for whatever reason; the home was overpriced to begin with, it was over-improved, the market is rapidly declining- possibly due to job loss or other economic issues, the market is driven by distressed properties, or even the condition of the home itself, this simply is not a reason to get into a huff. And I kind of have to say tuff tiddlywinks. The contract price, and sometimes even upgrades, don’t mean a whole lot, when the rest of the immediate area can’t support the value.


12 Responses

  1. The appraisal profession was handed to newby appraisers on a silver platter on May 1, 2009. Any experienced appraiser with half a brain left on or shortly after that date. THIS is why you are seeing poor quality appraisals. Since that date they have doubled the amount of work that goes into residential appraisals while cutting the appraisers pay by 50% or more. It really doesn’t take a genius to figure out that this is not the type of business that will help you to avoid bankruptcy. Believe it or not some of the new guys are beginning to figure it out (better late than never).

    If you are an angry appraiser or a homeowner who has finally figured out that the bank is charging you $500 for an appraisal & paying your fresh out of school appraiser $200 there is hope. Visit http://www.BankRape.com and let the world know you’ve had enough of it.

  2. “An opinion of value at a certain place and time” is NOT the total consideration in making a value determination this is absloute BS.

    Completely missed by most in this and ignored by real estate agents and appraisers alike is they were and are supposed to appraise “absent any undue market influence.” False appreciation at 16-21%+ per year was undue market influence and routinely ignored in order to make a buck and to keep from being black balled by greedy mortgage brokers (who is fiduciary to whom?) banks and originators. You don’t need a crystal ball to know this.

    I can’t tell you the number of arguments I had with other agents attempting to “cooperate” on a deal when I was representing buyers about prices being too high and over-inflated but they didn’t care…they were making too much money and found justification blaming or placing the responsibility on someone else.

    That being said, it was their job as listing agents to get the maximum price possible for the listings (and I as an exclusive buyer’s broker, to get it for the lowest price possible for the buyer…the other half of the transaction again, routinely ignored by greedy agents).

    The let down was in valuing the property properly taking into account the total number of appropriate and required USPAP and other determining factors of value, which were routinely ignored. The stop-gap measures related to value were systematically and routinely ignored by appraisers; mortgage underwriters and review appraisers (yes, even the appraisers had back-up appraisers under the direct employment of the “banks”; or “originators” even if the appraiser was an “independent contractor”).

    Comparable sales do not completely control “market” or “actual” values which was/is justified in the statement that value is what someone is willing to pay and the other willing to sell. “An opinion of value at a certain point in time” is NOT all there is to a proper appraisal.

  3. @Pat1,

    My ever going song: WE paid forward the day banks and servicers got the first bailout.

    Had they been honest (honest banks? Oxymoron if I ever saw one…), they would have put the money back where it belonged: into the trusts. They would have given it back to the investors, the pension plans, the savings accounts, etc. Instead, they paid themselves royally and, by irresponsible behavior and their constant breaches of duty, they ran down neighborhood upon neighborhood.

    You’re right, Pat1: the culprits got their money. Plus ours. Plus ours. Plus ours. And given the fact that we now have to fork up the cost of legal defense for Fannie and Freddie’s executives DeMarco is going after, we’ll keep paying and paying and paying… Now, assuming that those guys do get convicted and must pay restitution, we’ll pay to house them in jail and we’ll pay for the restitutions. Isn’t that amazing how money keeps on sprouting everywhere? Money seems to reproduce faster than rats! How come it doesn’t reproduce FOR US?

  4. Neil and Chris I could not agree the honest Realtors who have made real estate their life’s work knew something was wrong but did not know how to fix it. If the appraisal comes in low and it is from a local appraiser then no problem deal with it but if it if from an appraiser that is driving 90 miles into an area they do not know this is a problem. Real Estate is hyper local and as we have seen what we do not know can hurt people.

    I know many who have lost their homes I know for my family we could not sell our home knowing what we learned about our title we could loose myhusband’s licence and since we are in non-judicial we have been fighting to move this forward in the courts. I agree with Neil I would like to see Realtors help people understand the Title issues and help them clear title start with their past buyers and then have those folks refer others. The word would get out fast that there is a problem.

    After watch 60 minutes last night and to see whole neighborhoods being tore down because the bank foreclosed but never actually took responsibility for the home shows they have already been paid. Otherwise it would have been better to receive partial payment then none at all. They got paid somehow!

    Supreme Court here I come!

    Keep fighting..

  5. I have a 25 lbs (400 oz) paper weight.
    Appraisers using the “comparables” approach, without much investigation or influenced by a paper weight collector, give it a market value of $25!
    However, wikipedia [and other sources ] say “If the appraiser’s opinion is based on Market Value, then it must also be based on the Highest and Best Use (HABU) of the real property.”
    My paper weight turns out to be a gold bar (who knew) and the HABU (material value as of this morning) is about $1,600 per oz. or $640,000! WTF are they crooks or just stupid?

  6. People made money all the way up and down the chain when a house was purchased–appraisers, title companies, lawyers, sellers, mortgage brokers, mortgage bankers, lender/banks, etc. Part of the reason that this nightmare has been continuing this long is that there are so many people involved. The more of the low hanging fruit gets prosecuted, i.e., robosigners and notaries, they will sing like the proverbial canary and, finally, we will start to see some of the upper level people get charged with the crimes they committed.

  7. I am a avid reader of your material Mr. Garfield. I will have to say on this one you are delusional. No Realtor I knew had a Chrystal Ball and could not have known that prices would drop like they have. The appraisal accusation is absurd. I would look toward the home builder if we want to point fingers. In Las Vegas it was no unusual to see a Pulte or a Toll Brothers home go up $ 50,000 – $ 100,000 from Friday to Monday morning. The prices fell the same as they went up. A client closed a home for $ 500,000 on Friday and on Monday that same home was on the market for $ 400,000. I would strongly suggest that you are way off base on this commentary. Most Realtor’s have been used to accomplish the wall street fraudsters agenda. I don’ t know about the rest of the Realtor’s out ther but I don’t have any All-Seeing Powers into wall street lair or Future. This commentary by Mr. Garfield was very disappointing to me. I am on your site everyday. In fact this site is where I start my day everyday. I try to help homeowners and get good information to them.

    Respectfully Submitted
    Dave F
    Las Vegas

  8. Just my opinion: but realtors need to be focused on good titles. Selling a deficient product is a problem and they will be in the middle of the next “crash and burn” segment of the housing bust. Anyone who knowingly sells a property for a check, will be knee deep in the next round!

  9. The article is ok but the editorial commentary is off base. Suggesting that appraisals were wrong or improper because they should have known the prices would fall is simply erroneous. Appraisal is a quantification of value/price for that given moment in time, period. And part of that equation is what people would pay at that given moment in time. Money was freely available, obviously too freely, and prices were rising based on supply and demand. So much effort and wasted time pointing fingers…

  10. i work in a small market in Payson, Arizona as a Realtor. Our problem is not low appraisals, it has to do with “out of area” appraisers. The pool systems now in place, often has appraisers from the Phoenix, Tuscon or even as far away as Yuma being assigned appraisals in our market where they have NO market knowledge. Do not have access to local MLS systems and for the most part are coming from markets more seriously effected by the market downturn.

    With buyers spending $350.00 for home inspections, $110.00 for Termite Inspections and another $450.00 in appraisals, I feel a large responsibility for making sure that their offer is realistic and can be supported up with current comparables. If one of my clients has to walk away from a deal losing $800 to $900 due to an unsupportable offer, I should be fired.

    During the crazy run up years, some of us advised clients to walk away from multiple offer situations where prices were increasing 5 to 10% over listing prices. Most of my clients did listen to the advise. Others didn’t.

    During the run up years we all knew which appraisers would try to “appease the deal” and we knew who the appraisers with integrity were as well. When we did have input on appraiser selection those Realtors who had a modicum of integrity suggested the high integrity appraisers. In our market, for the most part they are the Realtors who are still in business today. Having survived the last few years with the help of referrals from satisfied buyers.

    Pointing the finger at all Realtors is unfair, as in all professions, we have the good, the bad and the ugly. Our’s is no different. However, unlike most professions the bad and ugly can still find employment somewhere. In Real Estate you have to be good to survive.

    In regards to appraisers, the pendulum has swung so far the other way, that honest appraisals are finding extreme difficulty finding acceptance with the lenders. Now they are rewarding the culprits who were known to “appease deals” when they supply low appraisals and hassling those appraisers that did not create the problem. This is very evident in our smaller market.

  11. As a Post Script…many appraisers did what the underwriters wanted to push through the loans as has already been uncovered and exposed through this and other sources. They were also greedy and got paid for their appraisals regardless of whether it was right or wrong. The Realtor only gets paid at the closing. So the hard work of the Realtors is not always rewarded…

  12. I will say that this is partly true but not the whole truth. Realtors are trained in doing comparable market analysis and opinions of value and have been doing this for years…their license requires they have a working knowledge of this. It was a few years ago that the MAI started to promote itself for appraisers and the Broker training always include the section on appraisal as the first requirement part of the appraisal’s training.

    Seasoned Realtors know the market sometimes better than the appraisals and many appraisals in the past depended on the knowledge of the trained Realtor pricing the home right. The Realtor is trained to not price the house out of the market or to undervalue it and their records have to be kept for a required number of year on every transaction they close upon or received any escrow deposit on.

    Many Realtors were also caught up in the sub prime loan ponzi schemes and also lost their homes as they also must depend on what the mortgage brokers and banks said…Realtors can only present themselves as what their license require and cannot misrepresent themselves as bankers, mortgage brokers (unless they also carry a license for that) or accountants , attorneys,etc unless again they again are licensed in those areas but then they also need to disclose those prior to entering into a fiduciary relationship with their customers/clients.

    Not because an appraiser has a licensed does that make him a qualified appraisal for what he is doing or for the area he is working in…they tend to depend on sales in the computer without checking out the actually property whereas the Realtor has to check out the property to do a proper CMA…and today we are hearing how the title companies or some of the sellers that don’t use a Realtor record their sales in such a way to increase the assessed value of their properties so they can flip them for a high price. Realtors also must depend on what is recorded in the public records but they, and I repeat, have first hand knowledge of the local properties they market.
    Sadly, all this has affected the majority of Realtors and only a few are now making money in this market albeit at a great risk to future title issues and misrepresentations.

    Your thoughts.

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