By: Ilyce Glink and Samuel Tamkin
The housing crisis has left buyers, sellers and homeowners facing some difficult moments wondering whether the home they want to buy, sell or refinance will appraise out in value. We’ve answered a number of questions about appraisers and how appraisals are constructed. And then we received this one:
Q: My experience with appraisers is they sometimes use very sketchy information. My first experience involved an appraisal prior to getting a home improvement loan. No homes in my very stable neighborhood had sold in the last three years so the appraisal was based on a similar home in a much less desirable part of town.
It came in very low, barely enough to get the loan approved. Fortunately, I was dealing with a local bank and the loan officer recognized the problem. In today’s world, I wonder if I would have gotten that loan.
Years later, a friend became an appraiser after retirement. I know from his conversations that he was often flying by the seat of his pants.
The point is don’t be afraid to challenge a low appraisal, including getting your own experts to counter the appraisal.
A: According to Jonathan Miller, co-founder of the appraisal firm MillerSamuel (millersamuel.com), it’s unlikely that our correspondent would get his loan in today wacky world of real estate.
According to Miller, “credit conditions remain at historically tight levels and lenders rarely take action on any appraisal quality complaints, whether the appraisal report is flawed or not.
“The appraisal business is the opinion business. The problem with the appraising today has been a reduced emphasis on local market knowledge by lenders – as incredible as that sounds – so the problem with quality is far worse than 10 to 20 years ago. While you can’t judge the quality of an entire industry by interacting with one or two people – there are many terrific appraisers out there – you do need to consider changes that have occurred.
Miller points to the credit collapse in 2007 to 2008, the introduction of Dodd-Frank and the agreement between Fannie Mae and then NY State Attorney General Cuomo known as the Home Valuation Code of Conduct (HVCC) as the beginning of the today’s trouble for appraisers. These pieces of legislation opened the door for the proliferation of an institution known as appraisal management companies (AMCs).
“Think of them as large third party conveyor belts that pump out requests to appraisers qualified largely by only having a license in a particular state and willing to work for 50 percent of the market rate for appraisal fees (they keep the other 50 percent for managing the appraisers),” Miller explained.
Banks embraced the ideas of AMCs because it allowed them to outsource in-house staff, reducing associated overhead. “As a result, quality appraisers have been largely driven out of the business, moved to non-banking clients or switched careers. Most quality appraisal firms can’t afford to work at the AMC fees and the turn time demands without damaging their reputations,” Miller noted.
Miller’s company survived by making a three-year transition in business strategy away from retail banks and toward private banks and legal support work. “It’s been terrific to have clients that aren’t 19 year olds chewing gum, wondering when they were getting their report and who probably don’t even know what a mortgage is,” he said.
“Appraising is basically the development of a personal opinion of what the value is. It’s something that you can explain and defend in court. It’s not a number to be filled in on a form, which is essentially what the AMC industry has turned it into which is a disservice to the consumer,” he observed, noting that the AMC phenomenon is “one of the most damaging changes to the appraisal industry that few outside of it seem to know about.”
And if one needs a true market value from a neutral local market source, the only way to go is through an appraisal. But if your appraiser doesn’t have true local market knowledge, and isn’t willing to do the work because he or she isn’t being paid enough to spend the required amount of time, you’ll have issues.
As Miller puts it, “Throw in rapidly rising prices, tight credit conditions and a shortage of inventory and it becomes problematic.”