The Automated Revolution

by Hamp Thomas on 07/07/16

The appraisers we need to keep consumers protected are the very ones being driven out of the business. They are being forced out by big banks and AMCs (who much too often provide zero benefits to consumers). Everyone seems to have forgotten that these services (provided by AMCs) used to be part of the bank’s responsibility for every loan.  It was just the cost of doing business. Then came the AMCs and banks’ profits had to go up. After all, they lost a whole department. Now they pass the expenses along, mostly on the backs of appraisers, who haven’t had a raise in over a decade. They have had fees lowered due to AMCs taking part of their fees (which are still undisclosed in settlement statements). Appraisers also have not had an increase in fees, but have had their work load more than doubled. Think about that, twice the work for less money. No other business would have been allowed to follow that path, yet it’s exactly what is happening to appraisers.

With bank profits up already since the invent of AMCs, now this has become “normal business” so banks need more. Along comes the automated valuation revolution. Now banks want to push the use of AVMs with more and more loans, which gives them even greater profits. This is not rocket science and it’s nothing more than the Golden Rule at work (the one with the gold makes the rules).

With Zillow® and RPR® pushing online valuations to consumers and agents, and banks pushing the same, it is all very bad for consumers. The hard, cold facts are – AVM’s are not accurate. But, they are a money making machine that is driving this revolution, and no one in the government seems to care about protecting home buyers from these valuation imposters. All these automated valuations are based on inaccurate sqft details listed in tax records (and flooding the MLS as agents have stopped measuring homes). Local tax values are typically more accurate than AVM’s, but there’s no profit in that.

So consumers will suffer once again, and so will the companies and people who invest their money in mortgage securities. It’s simply a matter of when, not if, another mortgage meltdown strikes. Someone needs to pay attention to the ‘big picture” here. In the next 10 years, if something doesn’t stop this current trend, we will be too far gone to correct. Write this down and mark my words –  appraisers (as we knew them) will be all but gone within the next ten years. I believe less than 20% of all loans will require a traditional appraisal if we continue on this current course. With the appraisers we need to train the next generation all gone (which is what big banks have wanted all along), it gives them total control over the loan process and no oversight. Appraisers are trained to be fair and lookout for consumers and mortgage investors. Everyone else has a motive in the process and is rewarded much greater than the lowly appraiser who got the brunt of criticism over the last mortgage crisis, when it’s beyond crystal clear that big banks were the problem so much greater than appraisers ever were. Big banking fines and penalties are still making news but no one cares. It certainly hasn’t impacted their profit statements.

These changes will take a heavy toll on the real estate industry. True equity values may be dependent on which AVM the banks use. And, they will have several at their disposal. People who are not trained in real estate values will be in charge of loans and collateral security. It’s like turning the hospital over to the pharmacists. They may be very good at their job, but they have no business treating patients and giving out medical advice. We need doctors, and we need appraisers. The train is rolling full steam ahead and appears unstoppable.

The next generation is doomed if all real estate pricing is dependent on home values created through online valuation services, most of which are not worth the paper they are printed on. It’s an ugly truth. Buyers beware…

The RPR® Epidemic

by Hamp Thomas on 07/07/16

Realtor Property Resource® is a private automated system just for Realtor® members. They are making great strides in promoting this service, and more and more agents are using this system to create their CMAs to present to owners. I recently reviewed a report provided by the listing agent which included sixty-nine pages of every imaginable piece of information. To an owner, this must look very impressive. However, to anyone who understands what a “Comparable” sale is, this report was downright frightening. To think that many of the newer agents are using this tool to develop home prices is a warning sign we are in for a new run on low appraisals. With the RPR®, chances are the agent will get over and under valuations. They might get a report with a close value in a large urban area, but only in limited areas. The reports with accurate values, in my opinion, would be no more than 20% nationwide. It’s a bad system, but with great advertising. And, much like the new Zillow® ads telling consumers they can feel better about what they are paying for their new home by checking the value on Zillow®, these warm, fuzzy commercials are geared for first-time home-buyers and they are trying to teach a whole new generation to trust in automated valuations. Consumer protection goes right out the door as consumers learn to trust these online valuations over a local, highly trained appraiser.

Let’s take a look at the comparable details from a “Seller’s Report.” First the subject property is listed with 3,436 sqft of finished living area. Per my measurements, based on the ANSI® standard, the home measured 2,923 sqft or GLA. A difference of 513 sqft. So, no matter what happens, this report (using the sqft details from local tax records) is going to be wayyyy off. Now, let’s look at their selection of so-called “comps.” This home should be priced somewhere between $425,000-$450,000. The list of sales used in this report ranged from $275,000 all the way up to $1,100,000. That’s an $825,000 spread. These comps were homes ranging in ages from 1913 to 2016. The total sqft range was from 1,240 sqft up to 6,388 sqft. Coming up with an average price-per-square-foot value, using this range of sales, is basically useless. These homes don’t even remotely resemble “comparable” properties. Any valuation based on such wide parameters is not a true indication of fair market value.

But, to a seller, they look very professional and the agent explains how they look at the “total market” to come up with a listing range of values. A seller may not understand, but an experienced real estate agent should know the difference and realize this is comparing apples to grapes and watermelons. What is a seller supposed to think? They may bring in two agents to interview for their listing. The first shows up with this 69-page report that has the Realtor® brand all over it, color graphs, and all the bells and whistles possible. The next agent shows up and suggests they get a prelisting appraisal to be sure about the fair market value. This agent comes in with an appraisal summary and a final value that is $80,000 lower than the number the first agent gave them. Guess who gets the listing?

Then what happens if they do get a contract? They get a low appraisal. They will be told it’s because the appraiser did a bad job. No one ever considers the home may have been over priced from the start. It’s a new twist on an old game and it is very bad for the public who has to trust in the real estate profession. The “one number” that really matters, the “final value,” is the most important element of any valuation and in online valuations, it’s far too often not worth the paper it’s printed on. It comes down to the “Trust Game” and for right now, online valuations are winning in dramatic fashion.

Real, Real Estate Reform Needed

by Hamp Thomas on 03/24/16

All this talk about “Big Data” and “Standardization” makes me want to scream! Enough is enough. Before we get to the appraisal process discussion, let’s talk about how real estate is priced all across this country. Realtors® price homes, period. No Big Data, no thoughts of mortgage risk, accuracy, consistency, transparency, and no one is looking over their shoulders asking “why” on every choice they make. No regression analysis, no quality or condition ratings, not too much of anything that resembles an appraisal these days. Yet, they are quick to point out they are best people to call to “know your home’s true market value.”

Competitive Market Analysis (CMAs) are easy to find and study. And, they are most often pretty simple. What do most Realtors® do to calculate home values? In the real world, in small offices all across America, Realtors® use the magical formula – price-per-square-foot. Most agents will take 3/4/5 sales which they deem the most “comparable” and calculate a price-per-sqft. They take the average price-per-sqft of their comps and then apply that average number to their listing’s square footage total. Where they get that number from is one of those “it depends.” Too many agents simply take the sqft number from the local tax office and do the math (Very few agents measure homes any more). Let’s just say we have a 2,200 sqft dwelling, and multiply that number times the average of $120.00 per-sqft, and they get a listing price of $264,000. The problem starts with the accuracy of the tax department’s sqft numbers. After over a decade of studying the tax records, these numbers are wrong far more often than they are right. With the exception of large urban markets where there are thousands of similar homes built in tract developments, the majority of sqft information in tax records is wrong; and in error enough to change home values anywhere from five to fifty grand. Think about that! (It’s not the tax department’s job to get precise sqft data. They don’t need it and never get to go inside any house-mission impossible).

Realtors® have the least amount of training of anyone who works in the home buying/selling process, and they typically get paid the most (anything wrong with that picture?). Most don’t get the training they need to really do a professional job of pricing homes. For the agents who say “we just don’t use a price-per-sqft formula,” I say let’s look at the last five CMA’s from your office and then we’ll talk.

After an agent prices a home and gets a contract, then the sky darkens and the world rumbles with changes. All of a sudden everybody wants to know every detail of how the home is valued. They want to know every choice an appraiser makes. They want things explained that take appraisers years to learn. So even if the appraiser explains it in great detail, they have no clue. It’s like the janitor insisting the doctor explain every move he/she makes. What a crazy system we have grown into since Dodd-Frank. Just imagine if we asked a few of these questions to real estate agents… silence would fill the air.

Appraisers get the blame for too many low appraisals, when the real problem started at the beginning of the process with the listing agent, who might have been swayed by Zillow® or the over-confident home-owner, or even the mailman who has a daughter that works in real estate in the next state over. In the big picture, our system is out of control and common sense has left the building. All this talk of standardization and big data is useless without accurate data, and MLS just doesn’t provide it anymore. Every property is unique in some aspect and appraisers are the best chance at finding out the fair value. Is the system perfect, no. However, it is far superior to any automated solution. Local expertise and a physical inspection are important parts of consumer protection. Without it, and without a living, human appraiser in the process, consumers will end up being cheated. All this technology is meant to help the appraiser, not to replace them. The automated revolution needs to be stopped in its tracks. It is NOT the answer to better appraisals.

It’s time to look a little closer at the home pricing system at the beginning stages of the process. And, to look closer at the MLS and how real estate agents are trained. It’s time to get off the appraisal reform bandwagon and look at Realtor® reform, which actually might make the system better. All banks see is the potential profits from an automated valuation system. If the government truly cared about consumer protection, the real estate pricing system needs a make-over. We need to reform real estate education, improve the “quality” in MLS, and get Realtors® to be more responsible for the real property information they provide.

Rising Markets – Proof or Not?

by Hamp Thomas on 03/22/16

Let’s talk about “Rising Markets.” We hear this term more and more often and many Realtors are claiming that appraisers just don’t understand what is happening and are flat out killing deals for no good reason. Pretty strong statements and many times, way off base.

In a true “rising market,” there has to be some evidence and history. Obviously, one sale doesn’t define a rising market. So, who defines a rising market and what data do they use to support that opinion? If they’ve seen multiple offers for the same house and this happens on every new listing in an area, there’s no doubt you have a rising market. In those cases, agents and appraisers should be able to point to the listings that have sold above list price, and be able to determine a percentage of rising values. If you have the last five houses that have sold at between five and six percent above the listing price, you have a pattern that can be documented on paper. It’s “proof” that an appraiser could use to show the rate of rising values and not have an issue with a low appraisal. Agents should be able to help appraisers in these circumstances and if it is truly a neighborhood with escalating values, there has to be some evidence of that growth. And, this kind of information should be reported in the Closed/Settled MLS data!

However, just because an agent convinces one client to pay more than list price does not equate to a rising market. True rising markets have real proof and appraisers deal in facts. Sometimes, the appraisers are not to blame for a low appraisal. They are simply trying to protect the home-buyer and the mortgage lender. As long as you are working with a local appraiser, you should not have a problem in true rising markets.

Zestimate Gone Wrong

by Hamp Thomas on 01/05/16

Once again the Zestimate has a home-owner up in arms. In a small town in North Carolina a home just sold for $20,000. It was listed at $55,000, then reduced to $45,000, and finally sold in 2015 for $20,000. Safe to say it needed a little TLC.

It was a shell in need of, well everything. But, we have to remember that automated valuation services don’t know anything about condition or circumstances. Before the house was listed for sale, the owner (from a different state) thought they had inherited a nice little nest egg. Not a fortune, but if it was close to the Zestimate, they would have quite a nice amount to play with.
The Zestimate in this case came in at – $139,973. Yes, you read that right. Almost $140 grand for a house, that even without the bad condition, was never worth anything close to that amount. Even the tax value was at $51,000.
Think this home-owner was unhappy with Zillow? That’s NOT a small error, it is huge and changes people’s hopes and expectations. They had a very hard reality check. And, this is not some rare example but an everyday occurrence.
As far off as most automated valuations are, big banks are still hard at work trying to convince the public (and the government) how accurate these electronic valuations tools are, and that real live appraisers are not needed any longer. It is frightening because they have to know the problems, but they choose to overlook them. Why? Simple answer, profits. The less appraisers are involved in the process, the more liberties they can take with the loans. “It’s all about the people.” I’ve heard that so many times and if they believe so much in the “people” they are loaning money too, why not keep the loans in-house? They don’t care about the home’s value because they are not holding the loan on their books. Same ole pre-crisis problems.
Big banking is at it again and this has been the plan since the HVCC started – get rid of appraisers. At the end of every discussion, it all comes down to money and profits. Banks are looking for new ways to add profits and the appraisal industry is on their radar. Don’t be fooled into thinking banks are pushing E-Valuations because they trust them or think they are good for consumers. E-Valuations are good for one thing – bank profits. Welcome to the new home loan with at least two appraisal charges – both an online service – and both not worth the paper they are printed on. When will the madness stop???

Why Does Square Footage Matter To Me?

by Hamp Thomas on 03/21/15

Many agents have asked; “Does this square footage stuff really matter to me? Isn’t it more of an appraisal issue? Fair questions. Let’s take a look at one sale where the agent now understands just how square footage affects a listing value. It was a hard lesson in the importance of square footage, and one they will not soon forget.

The house was listed at $259,900. The tax records showed the heated living area as 2,318. After completing a CMA, it appeared that most homes in the neighborhood were selling between $110.00 and $114.00 per-sqft. Taking an average of $112.00 and applying that to 2,318 sqft, the agent and owner agreed to list the house at $259,900. There was never a discussion of measuring the home, no talk of the square footage from the appraisal when they bought the home, there was never any discussion about square footage. It was simply assumed that the square footage in tax records was accurate. It is the “official record” according to many agent’s viewpoint. This was just the way it was done in their office, and the thought of any potential square footage problems never entered the thought process.

The home stayed on the market without an offer and, after six months, they decided to lower the price. They decided on $254,900 and felt they were offering a good deal too any potential buyer. At this price, they were listed at $109.97 per-square-foot and at the very low end of properties in that neighborhood. The agent was confident this would do the job and they waited. Sure enough, within three weeks after the price reduction they received an offer.

The first offer was $248,000 and after a great deal of conversation, they countered at $252,500 and thought that was their bottom line. For them, who paid $183,900 six years ago and had spent a great deal of time and money working on the house, they just knew the house was worth that amount. They didn’t want to lose the buyer, but also didn’t want to give the house away too cheaply. This time, the buyer said “YES” and the contracts were quickly signed. Feeling partly relieved and partly like they took less than they should have, they decided to focus on the future and find their new home.

They spent the next two weeks looking at every home available on the other side of the county and closer to the husband’s new job. They finally found “the one,” and worked out an agreement to purchase their dream house. The money was tight, but they had just enough for the down-payment with the proceeds they would receive from the sale of their home. Excited about their new home, they looked forward to the move.

Everything was starting to fall in place. The utilities were scheduled to be changed and the moving companies lined up. The home inspection had gone through without issue and as soon as the appraisal was finished, they were set to close. The day of the appraisal came and the appraiser walked through with note pad in hand, taking pictures and pulling a tape measure. The appraiser said thank you, good luck with your move, and he was gone. They thought that seemed pretty painless and felt good about everything coming together.

Three days later the phone rings and it’s their agent. He is in a panic. “Wait, slow down, what are you saying?” The agent tried his best to get it out; the house appraised at $239,000. The buyers are not willing to pay more than the appraised value and we’ve got to get together to talk about our options. Feeling overwhelmed, they agreed to meet the next morning. When the agent showed up, the home owners felt there was something more to the story and asked “how could this happen?” Is this appraiser an idiot? We priced it below where it should have been.

“That’s not it,” the agent told them. “We do seem to have lots of problems with low appraisals these days, but in this case we have an issue with the “size” of your house. I’ve never had this happen before and we have to get this re-checked, and fast. I’ve asked another appraiser to come out and measure your home, just to be sure. Then we’ll decide if we can fight this low appraisal. But, I have your home listed with 2,318 sqft and this appraiser came up with 2,146 square feet.”

The second appraiser came out and carefully measured the home. About two hours later they got the call. This time, the measurements came in at 2,148 sqft. In either case, that’s well below the tax department’s measurements of 2,318 sqft. 2,318 minus 2,148 equals a difference of 170 sqft. That is a huge difference. If you do the math, at $239,900, with 2,146 sqft, that comes out to $111.79 per-sqft. That’s really close to what we thought it should be, and the only difference is in the square footage total we used to calculate the price. I can’t believe the tax department has this large of a mistake. I’ve never seen anything like this before. But, at this point, the appraised value appears to be fair. I am so sorry this happened.

After all was said and done, the buyer was not happy about getting a smaller home than they had been told and were afraid there might be other problems, and they backed out of the deal. The seller could not move forward with the purchase of their dream home, and those sellers also lost a deal on the home they had under contract. When the dominoes stopped falling, six transactions had been killed or delayed. It took a lot of people a lot of time, and caused a great deal of stress all around. Talk about a bad day!
The original listing agent could have avoided all these problems by having the house measured, before they ever determined a listing price. One agent that didn’t think square footage was important, ended up causing a very bad series of events that influenced the lives, hopes and dreams of a large number of consumers (and other agents). So, the next time someone asks you if square footage “is really that big of a deal?” You might want to say that, like most of the real estate industry, “It Depends” can apply to almost every situation. This case might be an extreme, but it’s not as rare as you might think and deals are lost due to nothing more than the square footage number used to calculate the list price. Indeed, Size Matters!

The CU, Realtors & the Future of MLS

by Hamp Thomas on 01/23/15

For 10 years I have been screaming about sqft problems within MLS and tax records. The problems are real and happen in most states. Some counties are better than others, but without going inside the house, the tax assessor can only do a so-so job. It’s bad enough on two story homes but especially bad on homes with basements. If you’re lucky enough to live in an area without basements, count your blessings. For those of us where basements are common, the CU is going to expose the unprofessionalism in reporting square footage that agents get away with every day. Maybe then we can convince Realtors that “their” info does matter and sqft classes will be on the horizon for every real estate agent.  The “Machine” will never work because appraisal is an art (opinion) not a science. Big data is just dots and dashes without the ability to select the right info and analyze the data. A computer can’t do it, not accurately. The MLS (and the public records data that currently fills the MLS) is going to be uncovered for the information accuracy problem they have now, and that has been growing since the mid-nineties. Their magic price-per-square-foot formula doesn’t work with inaccurate data and if you don’t think agents use price-per-sqft, check out a few CMA’s. Also check out HGTV®. They teach consumers every day about that over simplified magic formula that prices the American dream. Get ready for the square footage revolution! The good fairy DOES NOT work for the local tax department and providing accurate sqft information should be the responsibility of the listing agent. If they want better appraisals, they need a better MLS. Time to turn attention away from appraisers and towards Realtors®. And yes, I am also a Realtor®. (:

Where Do You Get Your Square Footage Number From?

by Hamp Thomas on 11/25/14

This numbers matters more than you might imagine! Just this morning I found a large brick ranch that was reported “Closed” with 3,880 sqft. I had done an appraisal about a year ago and measured it at 3,511 sqft. Nothing really complicated, just a basic design. That’s a difference of 369 sqft. That works out to a difference of $9.86 per sqft. Doesn’t sound all that bad, but if the next house in that neighborhood sells with 3,000 sqft, that works out to a difference of $29,580. That thirty grand might be just enough to create a low appraisal and cost someone a sale.

This is a very real problem and the mistakes are often much larger, especially when the info is taken from the tax records. Remember, the Real Estate Commission specifically states that you should NOT use the sqft reported in tax records. The mistakes would shock you! The vast majority of your peers use price-per-square-foot in some manner to determine values. It influences listing prices, offer prices, appraised values, and it happens every day. Your best bet is to make one call to the appraiser who did the report for the buyer (unless you had a prelisting appraisal), and ask for the square footage total. Use that number to report to MLS. This can make our MLS better and make all of us better at our jobs.

Appraisal Adjustments, AMC’s and Talking to a Brick Wall

by Hamp Thomas on 08/21/14

The passion of many appraisers faded with the HVCC and completely went out when Dodd-Frank showed up. When you have to work for someone else (AMC’s) and work harder for less money just to make money for them, then any passion for the job is lost. Appraisers need to be concerned about protecting consumers (and lenders), but most of their reasons for doing so have been taken away. Nobody wants to hear their opinions of value. Banks only want a form to fit percentage guidelines so they can make their loans work. It’s sad to see the lenders that appraisers are trying to protect still don’t seem to want their protection. The true property value appears to concern no one but the appraisers.

The government took one problem and made it into five more to supposedly fix “it,” although the “it” in question is debatable. Did it really fix anything? If we read the news, the lending industry is full of fines and penalties (in the billions-17 Billion announced today for Bank of America), while they keep on making more. But, the little guys (appraisers) are still under the scrutiny of people who really know very little about the industry. It’s like Ambulance Drivers trying to tell Doctors how to do their jobs better.

“I love this profession but cannot stand the business. I am totally burned out. It is so stressful I get physically sick. It’s no longer worth it to me.”  Too many lines like this are posted in appraisal forums and blogs every day. Appraisers are being insulted and intimidated, and I have to ask “what has really changed?” A quality appraiser loves the challenge of creating a fair value and doing everything in their power to be the voice of reason in an emotional process. Everyone else is motivated by a paycheck. Agents and lenders only get paid if the loan goes through and that sometimes allow s them to overlook things they should not. Appraisers are unbiased voices in a very tough business.

In the current system, appraisers can’t do their jobs the way they were trained. Appraisal is an art not a science and it can be deciphered by a computer program. If it was possible to put everything in the real estate valuation process through a computer system, AVM’s would be more accurate and could replace the appraiser’s role all together. It can NEVER happen, because real estate is a complex business and there are things an appraiser learns over the years that simply don’t fit into any standardized form. There are dozens of adjustments or differences between properties that must fit into a few lines for a computer to read.

There are only so many line items on the mandatory appraisal form and many times the numbers are not “black and white.” Condition, quality, site, location, age, etc., there are numerous things that have to be considered in an appraiser’s adjustments. And, there is simply no room on the standardized form to adjust for such items. Without having room for far too many single line adjustments, the “condition” and “quality” adjustments are often a combination of a great many factors. It may be only a few things, or it can be a dozen items or more, on each comparable that have to be factored into the total adjustments somewhere.

And, try explaining the adjustments to an untrained or unlicensed AMC employee and it’s like talking to a brick wall. No matter how many explanations an appraiser writes, they don’t understand the language or logic and ask for more. For many appraisers, frustrating is an understatement.

There are many adjustment nuances in order to “fit” into the highly regulated appraisal underwriting guidelines. For instance: Differences in a yard, landscaping, the slope of the lot, the neighbor’s $30,000 landscaping view or lack of maintenance, the pond, the trailer through the woods, the horse farm across the street, the abandoned warehouse one block away, the park two blocks over, schools, employment, etc.; the difference between laminate and solid surfaces countertops, hardwood vs laminate flooring, smooth ceilings vs popcorn; the difference between a 10×10 deck or a 20×14 deck with Trex type materials, a fenced back yard with a 10×20 wired section vs a six-foot privacy fence surrounding the entire back yard; location within the street/neighborhood, views, privacy, etc. etc.; or what is known as enjoyment of ownership; which is based on the total value, not just a price-per-square-foot. Or, one of a hundred other scenarios that must be consolidated somehow into a standardized form. While some adjustments may not appear logical or mathematically feasible, there is a total logic behind them based on an appraiser’s experience in the local market. On the mandatory appraisal form there is a reason for each number. The appraiser understands the reasoning, but a computer never will.

You can see why it’s hard for appraisers to get excited about adjustments between a C3, C4, etc., when there are so many things that must be considered in a truly credible appraisal report. We have to decide if the appraiser should use their expertise to determine a fair value, or use their skills to fill out a form to make bankers happy. Appraisers solve valuation problems, and if you think earning an appraisal license is easy take a look at what is required. All the training that is required and then they are expected to earn a similar wage to an unskilled laborer? This system is destined for failure and death unless changes are made soon. And, consumers will pay the price for the downfall of the appraisal industry.

I say, train appraisers well and let them do their job. The more the government tries to fix the appraisal system the worse it gets. Bad appraisals account for only a small portion of the lending problems. Take the time spent trying to better appraisals and focus on the lending industry. And then, take a long hard look at the source of information that appraisers use. If you really want to uncover some problems, look to the MLS. The problems are easy to discover. It’s a nightmare that no one seems to want to talk about. Every appraiser knows of the mistakes and exaggerations in the MLS. Hec, most agents know about the problems. For me, after ten years of studying the MLS and square footage problems, many MLS systems are nothing more than advertising sites. The property details and descriptions are basically useless. Harsh, maybe. But very true.

Agents using inaccurate square footage data in their price-per-square-foot calculations cheats consumers out of millions every year. Appraisals are filled with mistakes that come directly from the MLS. There are lots of problems in the home selling/buying process that have nothing to do with the appraisal industry. Cumo got us on the appraisal bandwagon and it’s time to get off.

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Appraisal Adjustments, AMC’s and Talking to a Brick Wall

by Hamp Thomas on 08/21/14

The passion of many appraisers faded with the HVCC and completely went out when Dodd-Frank showed up. When you have to work for someone else (AMC’s) and work harder for less money just to make money for them, then any passion for the job is lost. Appraisers need to be concerned about protecting consumers (and lenders), but most of their reasons for doing so have been taken away. Nobody wants to hear their opinions of value. Banks only want a form to fit percentage guidelines so they can make their loans work. It’s sad to see the lenders that appraisers are trying to protect still don’t seem to want their protection. The true property value appears to concern no one but the appraisers.

The government took one problem and made it into five more to supposedly fix “it,” although the “it” in question is debatable. Did it really fix anything? If we read the news, the lending industry is full of fines and penalties (in the billions-17 Billion announced today for Bank of America), while they keep on making more. But, the little guys (appraisers) are still under the scrutiny of people who really know very little about the industry. It’s like Ambulance Drivers trying to tell Doctors how to do their jobs better.

“I love this profession but cannot stand the business. I am totally burned out. It is so stressful I get physically sick. It’s no longer worth it to me.”  Too many lines like this are posted in appraisal forums and blogs every day. Appraisers are being insulted and intimidated, and I have to ask “what has really changed?” A quality appraiser loves the challenge of creating a fair value and doing everything in their power to be the voice of reason in an emotional process. Everyone else is motivated by a paycheck. Agents and lenders only get paid if the loan goes through and that sometimes allow s them to overlook things they should not. Appraisers are unbiased voices in a very tough business.

In the current system, appraisers can’t do their jobs the way they were trained. Appraisal is an art not a science and it can be deciphered by a computer program. If it was possible to put everything in the real estate valuation process through a computer system, AVM’s would be more accurate and could replace the appraiser’s role all together. It can NEVER happen, because real estate is a complex business and there are things an appraiser learns over the years that simply don’t fit into any standardized form. There are dozens of adjustments or differences between properties that must fit into a few lines for a computer to read.

There are only so many line items on the mandatory appraisal form and many times the numbers are not “black and white.” Condition, quality, site, location, age, etc., there are numerous things that have to be considered in an appraiser’s adjustments. And, there is simply no room on the standardized form to adjust for such items. Without having room for far too many single line adjustments, the “condition” and “quality” adjustments are often a combination of a great many factors. It may be only a few things, or it can be a dozen items or more, on each comparable that have to be factored into the total adjustments somewhere.

And, try explaining the adjustments to an untrained or unlicensed AMC employee and it’s like talking to a brick wall. No matter how many explanations an appraiser writes, they don’t understand the language or logic and ask for more. For many appraisers, frustrating is an understatement.

There are many adjustment nuances in order to “fit” into the highly regulated appraisal underwriting guidelines. For instance: Differences in a yard, landscaping, the slope of the lot, the neighbor’s $30,000 landscaping view or lack of maintenance, the pond, the trailer through the woods, the horse farm across the street, the abandoned warehouse one block away, the park two blocks over, schools, employment, etc.; the difference between laminate and solid surfaces countertops, hardwood vs laminate flooring, smooth ceilings vs popcorn; the difference between a 10×10 deck or a 20×14 deck with Trex type materials, a fenced back yard with a 10×20 wired section vs a six-foot privacy fence surrounding the entire back yard; location within the street/neighborhood, views, privacy, etc. etc.; or what is known as enjoyment of ownership; which is based on the total value, not just a price-per-square-foot. Or, one of a hundred other scenarios that must be consolidated somehow into a standardized form. While some adjustments may not appear logical or mathematically feasible, there is a total logic behind them based on an appraiser’s experience in the local market. On the mandatory appraisal form there is a reason for each number. The appraiser understands the reasoning, but a computer never will.

You can see why it’s hard for appraisers to get excited about adjustments between a C3, C4, etc., when there are so many things that must be considered in a truly credible appraisal report. We have to decide if the appraiser should use their expertise to determine a fair value, or use their skills to fill out a form to make bankers happy. Appraisers solve valuation problems, and if you think earning an appraisal license is easy take a look at what is required. All the training that is required and then they are expected to earn a similar wage to an unskilled laborer? This system is destined for failure and death unless changes are made soon. And, consumers will pay the price for the downfall of the appraisal industry.

I say, train appraisers well and let them do their job. The more the government tries to fix the appraisal system the worse it gets. Bad appraisals account for only a small portion of the lending problems. Take the time spent trying to better appraisals and focus on the lending industry. And then, take a long hard look at the source of information that appraisers use. If you really want to uncover some problems, look to the MLS. The problems are easy to discover. It’s a nightmare that no one seems to want to talk about. Every appraiser knows of the mistakes and exaggerations in the MLS. Hec, most agents know about the problems. For me, after ten years of studying the MLS and square footage problems, many MLS systems are nothing more than advertising sites. The property details and descriptions are basically useless. Harsh, maybe. But very true.

Agents using inaccurate square footage data in their price-per-square-foot calculations cheats consumers out of millions every year. Appraisals are filled with mistakes that come directly from the MLS. There are lots of problems in the home selling/buying process that have nothing to do with the appraisal industry. Cumo got us on the appraisal bandwagon and it’s time to get off.

Appraisal Bullying, Still Going Strong!

by Hamp Thomas on 08/15/14

Even today there is undue pressure being put on appraisers to make loans work. All the new regulations in the appraisal industry did nothing for the bullies who work for AMC’s now. It’s sad to hear veteran appraisers talk about the way they were disrespected and treated unprofessionally, and how they are making plans to leave the industry. It happens every day in appraisal forms and blogs all across the country. The bullying and intimidation is as bad now as it ever was before.

This would never happen in any other industry and there is obviously a huge discrepancy between how appraisers are trained and what the mortgage industry expects from them. Appraisers are taught from day one; protect the buyer, lender, and mortgage investor. Make sure the value is fair to the best of your ability. 100% imbedded in every appraiser’s brain; be ethical and fair, you are there to protect the public and are influencing large financial investments. Then they discover this is NOT what lenders want. They might say they do in public, but their day to day business operations tell another story. The lenders and AMC’s (who pay the appraisers) often could care less if the loan is secure, not their problem. Make the loan, get paid, and let the next guy worry about it. Sound familiar?

So, what has really changed? It appears not much in the mortgage lending industry. Oh, except for the fact that prior to the HVCC each lender handled appraisal ordering and reviewing, and paid their own appraisal related expenses. Now, they pass that expense along to an AMC, who in turn takes it from the appraiser. Yet consumers are paying more than ever. Not because of appraisal fees, but due to AMC increases, which are conveniently listed under “appraisal fees” on a closing statement. I’m still amazed that lenders do not have to disclose AMC fees to consumers. If they are not trying to hide something, why would they care about having their fees disclosed on a closing statement? Every single fee related to the home buying process is listed on a HUD1. All except one; AMC fees. It’s a flat out deception of the home buying public.

Let’s call a lemon a lemon. AMC’s are not in the best interest of the public and basically add zero value to the mortgage lending process. Far too many AMC’s are all about getting appraisals done faster and cheaper. They force appraisers to complete work so fast it has to hurt quality. Then, the reports lay around on some lenders desk until the rest of the process catches up. Do we really think the lending process is any faster now than it was prior to the HVCC? No way, it’s slower than it ever was, and it is now obvious the appraisal has no bearing on the speed of the lending process. Getting appraisals done cheaper only helps AMC profits. Appraisers have to do more work for less money, so what do you think happens to the end product? Try this process at your job, more work for less pay. It’s a system doomed for problems. And, those problems only hurt the consumers who we have been led to believe they are designed to help. There’s no logic in this process. It’s all about profits and power, certainly not consumer protection.

Appraisers are being harassed and threatened by untrained and unlicensed people (often in another country), that understand little or nothing about the appraisal business. They only know forms, distances and percentages. They expect perfection from a system where perfection is not an option. Real estate will never be a form filler, computerized process. At least NOT if you want accurate results. The AMC’s goal is to find a way to force the appraiser to make the loans work, whatever it takes. There’s even appraiser’s being blacklisted for not accepting their low fees. AMC’s are bully appraisers by saying you will work for what we tell you, or we will make sure you don’t work for anyone. That’s absolute intimidation and it should be illegal. But wait, it is illegal, but no one enforces it! File a complaint and an appraiser will never work again.

How about an in-depth study by one of the television news shows looking into AMC practices? If the public knew what was happening and what they were paying more for, they would be outraged. And, they should be. The only ones being served by AMCs are AMCs (and big banking). Oh yea, remember the Golden Rule? This is a perfect example. The ones with the gold (big banks) are making all the rules.

Why teach appraisers to be so ethical and hold them to such high standards, when the people that pay them don’t want them to be that way. Talk about a communication gap! There needs to be an appraisal product that lenders actually want, that still protects consumers and mortgage investors, and that allows for some common sense back in the appraisal process.

For the appraisal industry, and most importantly for consumers, AMC’s don’t work as promised. The home buying public receives zero benefit from an AMC controlled appraisal industry. The only ones who win are the banks (who no longer have to pay for appraisal management), and the AMC’s (who literally got business dropped in their laps the day after the HVCC). They did NOT earn their place in the market, one government official gave it to them.

When will it stop? When one politician stands up and says enough is enough. Remove the HVCC and Dodd-Frank from the books. Good try, but didn’t work. We are no better today than we were prior to the HVCC. Focus on lending practices and let appraisers do what they have been trained to do, the right way. Give consumers an unbiased appraisal and give the appraisal industry back to the people who actually care about doing things fairly. After seeing all the fines and penalties placed on the banking industry the last year (in the BILLIONS), I think it’s clear that the focus needs to be on the banking system. And after that, we need to take a look at Realtor® quality.  Remember, appraisers are only as good as the data they rely on. The MLS is another story, but is also is a large player in appraisalquality. It’s time to stop appraisal bullying for good and put some teeth in any new law.