Defending the Scapegoats: What is ‘Wrong’ with the Appraisers?

by Alex Stenback on June 25, 2009

Of any party to a real estate transaction, the one I would least like to be right now is a residential appraiser. 

On top of the fact that their fees have effectively gone down (on both a relative and nominal basis) over the past ten years, they are quickly being cast as the scapegoats for everything that is wrong with the real estate market.

The biggest complaints?  The process is slow and the value comes in low.  The realtor and home builder community, for it’s part has been arguing for some time that foreclosures and short sales are by definition damaged goods, and should be given less (or no) weight as compared to traditional sales.

There’s also the issue of the Home Valuation Code of Conduct, or HVCC, which mostly divorced lenders from selecting appraisers.  The intent was to eliminate “upward bias” in appraisers as a result of pressure from lenders.  The unintended byproduct of this was to reduce the quality of the appraisal being delivered.  Now we have a low bias problem.

Anyway, I have been meaning to write on this topic since forever but before you read another word of mine, go read Jonathan Millers fabulous post on this issue from today.  He’s responding to recent press releases from the National Association of Realtors and the National Association of Home Builders that essentially blame the appraisers for the continued slide in home prices.  It is right here, but I excerpt the money quote:

“They basically want appraisers to ignore all foreclosure sales because they are “low” and be allowed to expand search guidelines to find higher sales…Their logic is a fall-back to credit boom reasoning which was all about finding the highest sales to make the deal happen”

Aside from all the infighting on how to properly calculate home values in a distessed market (I tend to side with the appraisers here) there are a number of other issues worth mentioning that are, at least in part, responsible for all the Appraisal Angst:

1.  Appraisals are simply harder right now than any time in recent memory.  A good, thorough, competent, experienced appraiser used to be able to turn out 2-4 quality reports per day.  With the market declining and a paucity of good comps, once the “field work” is done (inspection, photos, driving comps) it still takes (I am told) nearly a full day to build the appraisal and derive a value, and that is IF there are comparable sales, phone calls to listing agents on comparable sales are returned promptly, and the subject property is not in any way unique.
2.  Volumes are high.  Refi boomlet + spring market + uptick in activity in some market segments, which happen to be tough to comp because so much of the mix is FC/shortsale, etc.
3.  Short fused closings.  Many foreclosures and short sales close in 3 weeks or less once under contract.  Every home seller, after sitting the market for maybe 90-120 days, wants to close fast, or if they don’t want to close fast, they want a final approval really fast.  Most refinances close in 30 days or so.  I have closed more loans in 3 weeks or less in the last 6 months than in my first ten years in the business. 
When every file is a “rush” you expose all the little issues that normally fix themselves when things proceed normally. Scheduling mixups, borrower schedules, home inspections and the negotiations that often result, underwriter request for additional info or comps, second level “quality control” reviews that almost every bank has implemented on both the retail and broker/correspondent side, etc. etc. etc.
In other words, when you pressure test a system, you get to see where the leaks are, and small problems get magnified.

4.  HVCC has pushed a lot of the business to appraisal management firms – these firms take a chunk of the fee, and many of the appraisers have taken a sizeable pay cut as a result, and the best appraisers avoid management companies entirely.

5.  A decent number of appraisers have been forced out or left the business voluntarily - I would venture to guess that most of them that have another viable option (which tend to be the better ones in the first place) bolt at the first chance rather than subject themselves to the vagaries of the new world order for residential appraisers.

Update: Calculated Risk has hoisted on old post from Tanta, who was on this issue 5×5 over a year ago.

{ 1 comment… read it below or add one }

Chuck Heubach June 28, 2009 at 9:10 am

Whatever happened to the cost approach to value? I think we could figure out the difference between traditional resales and lender mitigated sales pretty quickly by taking a few thousand random appraisals of each, and track the depreciation used (the average effective age of each category).

In the post that your recommend, Jonathan Miller (in so many words) dismisses the cost approach out of hand. I cannot accept his conclusions because of that failure to give any weight to commonly accepted valuation theory.

Both the “cost” and “income” approaches, while commonly ignored by the public and industry, lend balance and stability to what appears to be an out of control “comparable sale” approach.

While I would agree that appraisers have a tough row to hoe, I will also point out that it should have always been that way. I personally let my appraisal license lapse several years ago (when business was great) after I realized that my highly analytical style would soon cause starvation for lack of production. I couldn’t do three a day…not with the research required! Yes, it is tough for them, but that is not reason to abdicate their core responsibilities.

My most recent appraisal nightmare occurred when an appraiser decided to go BEYOND the one mile radius to include foreclosures…while similar traditional resales (and no foreclosures) within the one mile limit were ignored. So yes…real estate agents & builders do have a concern about the recent tendency of appraisers to come in low, and we are willing to call them on it. Once again, it is for balance and stability. Think of it as a separation of power.

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