Appraisers estimate the market value of property. They are supposed to provide independent, unbiased opinions of value based on their research and analysis of the market and property that they are evaluating. Appraisers are used by lenders to assure that the property that they are lending on is worth enough to secure the loan if the borrower defaults. Appraisals are also used for estate purposes, eminent domain and any other reason someone wants to know the value of a property.
A residential appraisal primarily involves surveying sold properties, then selecting the properties that are nearest, most recently sold and most similar to the property being appraised. Those properties are called “comparable sales” or “comps”. They are placed on a grid with details like size, condition, number of baths, parking, updates, etc. Appraisers makes adjustments to the sale prices of comps approximating the dollar value that the average buyer would pay for those features or subtract for missing features. For example, let’s say that a condo without parking is being appraised and a comparable condo with parking sold nearby. If parking is worth $10,000, that amount is subtracted from the sale price of the comp to arrive at the estimated value of the condo being appraised.
There are two ways to appraise property. The correct way is to do research and analysis, then figure out the value. The other way is to know the desired value and find recent sales to support it. Which one do you think takes less time and is more profitable?
I was an appraiser for 9 years, managing and training 40 appraisers and signing off on their appraisals as review appraiser. When property could not appraise for the sale price or the amount needed to refinance, some lenders questioned if we missed something in the process, usually because the owner, seller, or listing agent thought that the property was worth more than it appraised for. Sometimes the mortgage officer or lender was motivated by potential profit. Unscrupulous lenders would not order appraisal for a while after a property failed to appraise. Since I did not appraise to targeted values, eventually those lenders went elsewhere. Fortunately, there were lenders that wanted accurate appraisals and they became long term clients.
Some banks hired staff appraisers and others formed appraisal management companies (AMC) to have more control over the appraisal process. Some of them pressured appraisers for values, others did not.
On May 1, the Home Valuation Code of Conduct (HVCC) becomes effective. The main intent is to relieve appraisers of the pressure that some mortgage officers place on them to hit target values, so that appraisals can become more reliable across the industry. Contact between mortgage officers and appraisers will be eliminated because appraisals will be ordered by another party or outsourced to AMCs. It may also eliminate the quality control that some lenders relied on to secure their loans by working with a handful of select, accurate appraisers that they could trust.
There are some readers who blame our current problems on appraisers, lenders, and agents instead of irresponsible borrowers that eagerly availed themselves of the opportunities that a poorly regulated system presented. Rather than play the blame game, let’s hear what you think of the pros and cons of new HVCC.
Will it help keep us out of trouble as we go forward or will it compromise lenders that demanded a level of appraisal quality that they may no longer be able to control?
Appraisers, here is your chance. Let’s hear from you this week.
Home owners thinking of refinancing; let’s hear from you, too.
The author is solely responsible for the content.