The gift of a real estate appraisal
Tonight you’ll probably hear the tap tap tap of reindeer hooves on your roof and maybe even get a glimpse of the big guy himself. What you won’t see is a home appraiser spreading a lot of holiday cheer, probably because he’s not too happy.
The job of home appraisers is to advise bankers, brokers and ultimately investors whether a house is a sound investment. However, appraisers are increasingly being pressured from lenders, mortgage bankers and real estate agents to hit their number when appraising property. This means that rather than coming up with an independent estimate of the property’s value, they are being asked to fit their appraisal into a predetermined value.
Appraiser valuations can make or break a deal and also make or break a commission for loan officers, as well as real estate agents, and kill a sale for sellers. As we all know, appraisals that come in below the sale price cannot be accepted by lenders unless lower prices are negotiated or more cash put down.
According to the Association of Realtors, 24 percent of real estate agents surveyed in March 2014 reported that low appraisals resulted in sales contracts being affected. However, this number has gone down and in March 2013, 29 percent of agents reported this issue and in March 2012, 31 percent, showing a possible trend of inflated appraisals. In addition, according to Allterra Group, a for-profit appraiser advocacy firm, almost 40 percent of appraisers surveyed reported pressure to inflate values with much of this pressure being applied in a very subtle way. Last year, that number was 37 percent. Also, the Wall Street Journal reported that an estimated one in seven appraisals conducted from 2011 through early 2014 inflated home values by 20 percent or more.
The pressure to get home loans approved has escalated since the housing market is not as hot as hoped, resulting in fewer transactions being processed through lenders affecting their bottom line. Banks should be interested in making good loans based on accurate appraisals, however, the practice of selling off loans on the secondary market, including Fannie Mae and Freddie Mac, for the purpose of packaging and selling as investment instruments takes away much the lender’s responsibility. In fact, the higher the value of the property the better even though the Mortgage Bankers Association could hold the lender accountable if it knew the appraisal was inaccurate.
Appraisers maintain they are the only independent unbiased party in a real estate transaction. While they admit there is a conflict, since their employer has a vested interest in the loan being approved, they are still able to maintain their integrity. Lenders frequently hire appraisers through an appraisal management company in an effort to keep a distance between loan offers and appraisers. The only problem here is that if enough appraisals come in short the appraisal management companies are at risk of losing the lender’s business, thus putting their own pressure on appraisers.
The poor misunderstood appraiser can’t seem to make anyone happy – not his employer, not the home seller and certainly not the real estate broker. The only person in the transaction that may thank him for a non-inflated appraisal is the home buyer, who may have been saved from overpaying for a home.
I’ve always felt that the profession of home appraisals is more of an art than a science. Yes, you have to provide hard and accurate facts, but those facts can be spun in a variety of ways. Let’s hope that this new blip in the housing radar does not result in another major blow to the real estate market.
In the meantime, enjoy your holiday and welcome the big guy. At least you can always depend on him. Happy holidays.