Realtors® Giving Too Much Power to RPR®

“Since then, we’ve become RPR’s biggest fans. It has helped grow our business because it has given us more credibility.” A recent article talks about the benefits of using the Realtor® edition of online home valuations. This growing trend is frightening for home owners as more and more agents rely on computers to price real instead; instead of using their time, skill, and research to calculate home values the right way. When it comes to determining the price of most people’s single, largest, lifetime investment, shorts cuts are NOT a good idea. Money matters, and getting a suggested listing price based on a computer and not a licensed professional’s skill, is the new trend and it is very bad for consumers.

“That first phone call is critical, I’ll immediately pull up RPR on my tablet and start researching the seller’s home while asking questions at the same time. I quizz the seller to confirm the home’s basic facts such as number of bedrooms, baths, square footage, etc.

Stop the presses! This is a licensed real estate professional, responsible for pricing people’s homes and financial futures, that proudly announces to the world that she accepts whatever information she can find online, or better yet, that the seller provides her. Just WOW! The square footage totals agents rely on are one of the most important items when it comes to pricing a home. Tax records are notoriously inaccurate, and how are the owners supposed to know what size their house is? Most know what is in tax records. The “Official Record” for square footage is a myth started by an agent that didn’t want to be responsible for measuring a house. I actually don’t think agents should measure houses. They can’t be experts at everything. However, finding the correct square footage is a vital part of pricing the house and providing that data has always been part of the real estate agent’s duties. Ask 100 home owners where their agent gets their square footage total and they will tell you – that’s part of the agent’s job.

gents say square footage is not that important and so they can use tax records to get close enough. On the one hand, they say square footage is not that big of a deal. But, then you look at every CMA they create and there you have it – a price-per-square-foot formula used to price the home. You just can’t have it both ways. It’s either important or it’s not. The fact is – if you change the square footage total used in the price-per-square-foot formula, you change the listing price. Often, by tens of thousands and much more. It absolutely changes home values and this is not just a number, it’s real money from real home buyers and sellers.

If Realtors® want to use RPR, more power to them. The graphs are wonderful. But, if you (or your computer) is going to use a price-per-square-foot formula – then have each listing measured BEFORE you give the owners a suggested listing price. If you don’t, you’re cheating consumers every day. Not an opinion, a fact of the real estate business. Size does matter!

Fannie and Freddie, Still Stealing Data

No matter how you sugar coat it, Fannie Mae and Freddie Mac have been stealing data from independent appraisers for years. The information gathered by licensed appraisers and delivered to their clients, is sold to one of these two GSE’s, who then store all the data under the auspices of appraisal quality review. Appraisers are not even allowed to see the info because it’s only for the lenders who hire the appraisers in the first place.

Now armed with years of appraisal data (which I firmly believe is gathered illegally and an entire industry is virtually blackmailed into having no control over the data they create/own?), now this data is being used to put the very people out of work who provided the data in the first place.

Fannie and Freddie are upping the stakes as they increase their appraisal waiver programs to allow the use of more automated valuations (they say only 50,000 less appraisals next year), whenever they have a previous appraisal report in their database. In one place they state the program is a no cost service to consumers and in another, this no-cost service can be provided for only a $50.00 fee. Hmm… So, they get to use the appraiser’s report twice for only one fee? Think about this – appraisers get paid for their opinions of value – not for the individual data they collect in the process of determining that opinion of value. The GSE’s are using appraiser’s own data to take work directly away from them.

There’s something downright Un-American about this whole system and the appraisal industry has been punished long enough for sins they never committed. Big Banks started the problems and, once again, the system is being driven by the “Golden Rule.” As for Big Data, it will never accurately price real estate. It simply isn’t possible using the information in public records. I am hopeful the new administration will stop the bleeding and restore some integrity to the appraisal regulation industry. No industry in history has been subjected to the turmoil imposed on the appraisal industry, that all started with the HVCC and went downhill from there. It’s time to bring back sanity to the mortgage lending process.

 

Big Data, A Bold Lie

With Fannie Mae and Freddie Mac’s new appraisal waiver programs, these GSE’s are pushing to use less appraisals and more AVMs. “Big Data” is pushing appraisers out of the lending process. But, just like Zestimates®, all AVMs mislead homeowners with inaccurate home values. They are an equal opportunity offender and the values may just as likely be too low as too high. Homeowners are often far too trusting in this systems, as they believe they are similar to an appraisal and any differences are only listed in the very fine print. However, any computerized valuation is based in part on public records. Regardless of how elaborate their algorithms or formulas, they far too often depend on a price-per-square-foot formula. This over simplified formula only considers two numbers – the sales price and the square footage. If the square footage data is taken from public records (which many people believe is the “official record” for square footage – another myth), when you rely on only two numbers and one of those numbers is wrong the majority of the time, then any home values they create are also in error. It’s just the facts of life. The tax department does not need precise square footage data and does a great job gathering the data they need. The data they need has nothing to do with the data the real estate industry needs and Realtors® stopped measuring homes in the mid-nineties when tax records first started being available online. While some agents still measure or have their listings measured, there is a very large percentage that take the square footage numbers from tax records and both MLS and tax records have wrong data. Big data has zero to do with quality. The bottom line is that AVMs, by design, are not capable of providing accurate or consistent home valuations. However, their use continues to grow, not because of their quality, but simply because of their potential profits.

Appraisers are the only unbiased party in any real estate transaction and without them, be prepared for what comes next-real estate crisis-act II. This is real money to real people and the myth of “quality” automated home values is a bold lie being force fed to a nation by big banks, simply trying to take the only true consumer protection (appraisers), out of their lending process. All the time, with plans to add appraisal profits to their own books. With appraisers out of the way in more and more home loans, lenders are free to “bend the rules,” and this will lead to another lending frenzy with catastrophic results inevitable. Don’t fall for the hype. Big Data is NOT the answer to appraisal quality. More information does not solve the big problem and more bad data just furthers the errors in home valuations. “Better Data” is the real answer, and it starts with each individually owned MLS system and more educated Realtors®. Until the MLS is improved any home valuations are at risk. If you’re sick, don’t go online-call a living, breathing, licensed, highly trained doctor. If you need to know the true value of a home-don’t go online – call a living, breathing, licensed, highly trained appraiser. Your money is too important!

The Most Overlooked Reason for Low Appraisals?

Bad Agents. That’s right – bad real estate agents. Too many who don’t understand how to properly price real estate or those who allow the seller to guide the value. It never makes the lists going around when written by Realtors or lenders and is overlooked so often, most people never even consider the possibility. Unfortunately, it is the case far more often than is the case for a simply bad appraiser. If a home is overpriced, it never has a chance of making it through the appraisal process. It doesn’t matter which appraiser does the job, you can’t just make up numbers, although many agents seem to do just that. That price just “felt right.” Real estate agents are supposed to be trained in how to price real estate, just like they are supposed to be trained in how to measure a house. They use the over-simplified formula of price-per-square-foot. The problem is they take the sqft details from public records who never go inside any house, and the sqft information is wrong more often than it is right. The myth of tax departments having the “Official Record” of square footage is simply false. There’s no such thing. Maybe it’s only 80, 90, or in too many cases between 200-500 sqft off. With the prices of real estate these days we are talking about huge differences. I have a ton of examples where a home is overpriced between $60-90,000 based on nothing more than using the wrong sqft data. When they take the accurate sqft info, and then input that information into their all powerful PPSf formula, guess what – the value comes in pretty darn close to the appraisals.

 But, the public never hears about that part. There is an unwritten rule in the real estate industry – we don’t talk about square footage. But maybe they should, because they cheat homeowners out of time and money every day, all across the country. Yes, size does matter. Ask your agent if they measured your house and why it matters…

 Appraisers are still getting a bad rap when it should be a little better known that starting with a fair value gives you a much better chance of not having to worry about the appraisal process. If the value is done fairly, you’ll never have a problem with an appraisal. Imagine that!

 Whether the culprit is using bad square footage data or one of a dozen other problems with the real estate education process, sooner or later someone needs to scream REAL ESTATE REFORM! Not appraisal reform, real estate agent reform. The problem starts far too often at the beginning of the process, not at the end. Every valuation, at least in part, is based on personal opinion. Appraisers have to use facts to prove their opinion – agents do not. That is a problem waiting to happen. Maybe agents should have to provide lenders with the process they used to price every home. That would be interesting!

  

When Brokers use the Square Footage Numbers in Tax Records

Here’s one example of the real money difference when a broker reports a square footage total taken directly from the local tax records; rather than from a sketch in their work file or by obtaining the accurate number from an appraisal completed for the property. Each listing Agent is responsible for ensuring the finished living area is reported correctly. Even though we all know the Realtor® Code of Ethics talks about protecting clients, this unnecessary error happens every day all across the country. It costs real buyers and sellers real money.

Example #1

6 Sandpiper Dr. Whispering Pines, NC

Finished Square Footage report in MLS        = 1,780

Square Footage Total listed in Tax Records = 1,780

Square Footage Total reported in the appraisal = 1,863

Sold Price = $209,500

Price-Per-SqFt per MLS = $117.70

Price-Per-SqFt per Appraisal = $112.45

Difference of $5.25 per-sqft

 

Based on a similar home with 1,800 sqft of finished living area, potential difference in listing price:

 1,800 x $117.70 = $211,860

1,800 x $112.45 = $202,410

Difference of $9,450.00

 

This is a basic, rectangular home that was easy to measure. The next agent (or appraiser) that uses this home as a comparable sale will have their calculations misguided by apx. $10,000. It’s not just a small clerical error. These intentional mistakes turn into real dollars, and for something as simple as the accurate finished square footage details. This is only a small difference in a non-complex property and it could easily equate to almost ten grand. That’s real money coming out of someone’s pocket. It also influences appraisals and CMAs every time this sale is used as a comp. In this case, the next homes will be overpriced, based on the misinformation of this one sale. If this happens in numerous sales, it can alter appraisals and CMAs for many transactions in the future. Too many times, low appraisals can be tracked back to nothing more than inaccurate square footage numbers (but appraisers still get the blame). There is a great deal of power in the square footage numbers brokers report to the MLS. Even if it’s only $5-6,000. Don’t think that’s a big deal? Get out your checkbook! We work with people’s single, largest, lifetime investments and their financial futures. They deserve better! It’s time for Realtor® reform!!!

 

 

 

 

 

Dismantling the Appraisal System?

Dismantling the Appraisal System. Really? Appraisers are the only ones who care about a home’s true value anymore. What a sad state of affairs for the home-buying public. The bankers and GSE’s only care about getting deals done. That mentality got us into the last housing crisis. Now there’s all this talk about doing away with appraisers and letting automated valuations take over the system for all loans up to $500K. The day that happens, you can start the countdown to the meltdown!

I have studied AVMs and public records for almost 15 years now. Automated valuation products rely on public records and they never visit any property. That’s a recipe for disaster! First, the square footage details contained in public records are wrong more often than they are right. And, not by a few square feet, but enough of a difference to change property values. AVM’s rely on the mystical, all-powerful “price-per-square-foot” formula. If those sqft numbers are off, even by 10% (and many times they are off 4-500%), it flat out changes values and cheats consumers out of money. I have collected lots of examples over the years so no opinion here, just the facts.

The appraisal system would not delay any closing if the lenders would order the appraisal at the time the contract is signed. Why is it they wait until the last week, or last few days, and then order the appraisal? Perhaps because if they need someone to blame a delay on, the appraiser makes the perfect scapegoat. It’s a crazy system! Order the appraisal at the start of the transaction and it’ll be completed in plenty of time. Then, if there are any delays, look to the bankers.

The motivation behind all this talk of appraiser reform comes down to the most powerful motivation around – MONEY! If there was no chance of anyone else profiting from the appraisal portion of a loan, all this talk would disappear overnight. It simply comes down to trying to find new ways to make a profit and with all this talk of appraisal reform, lenders see appraisers as an easy target. But, if you want to learn the truth, all you have to do is talk to the local lenders, the people that meet and deal with consumers and the AVM products being used in place of appraisals. They are quick to tell you most AVM’s are not worth the paper they are printed on. That’s a huge statement and guess what – it’s the absolute truth! Why is it the GSEs want to use them more? It simply comes down to more profits. Now, they can charge for the appraisal fees and if they don’t get the value they need from one AVM, there will be lots to choose from, all competing to take over the new appraisal windfall, and all without any training or education about the real estate system. A computer simply cannot replace a skilled appraiser.

So, if they truly want to move forward with more appraisal reforms, I say go right ahead. But don’t try and blame it on appraisers for causing problems in the mortgage lending process. Appraisers are the last line of defense for the American homebuyer and if they leave the process it will leave the foxes in charge of the henhouse. After all, we know big banks have consumer’s best interests at heart, right! If the government officials decide that automated valuations are reliable enough to loan hundreds of thousands of dollars, then I say “here’s your sign.”

Consumers Beware!!! Big banks will continue to grow bigger and make more profits while consumers lose money when they buy or sell or refinance. Please stop this now!

WASHINGTON – “When it comes to the regulatory regime surrounding appraisals, it seems we’re stuck in 1989.” said Subcommittee Chairman Blaine Luetkemeyer (R-MO).  “Ultimately, our nation’s appraisal system is unnecessarily complicated and outdated. That complexity impacts homeowners and is, in part, responsible for delayed closings and increased consumer costs.”

Read that last line. Wow! Increased costs in the appraisal industry comes from appraisal management companies, who I believe add no benefit to the lending process. Ged rid of AMCs and the appraisal fees will decrease. Give them a larger role and add AVM’s in the mix, and I guarantee a new mortgage meltdown. Right that down! If this change is made, it cannot be undone. Stop AVM’s in mortgage lending NOW!!!

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.