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.

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