The World of Residential Square Footage
HomeArticles & InfoBooksBlogCoursesYouTube Videos


  Institute of Housing Technologies
Improving the Real Estate Information Network

The World of Residential Square Footage

Bifurcated - Another Nail in the Appraisal Industry’s Coffin

by Hamp Thomas on 05/19/19

Bifurcated appraisals are just one more step in a master plan to eliminate appraisers from the mortgage lending process. At the end of all the discussions, any changes to the appraisal industry are not about improving the process but about who profits from that process. It still comes down to money and profits. Banks want more and they decided the easiest place to bring in massive new revenue is from the appraisal industry. The motivation is simple - it’s the Golden Rule alive and well in 2019.

Let’s think about this logically. If you thought it was a good idea to have someone other than the actual appraiser complete the home inspection part of the appraisal, would you want to make sure that part was done as accurately as possible? If you are worried at all about quality, the answer would have to be yes. And, the people most qualified to complete appraisal inspections have been in the system for a very long time, they are called Trainees. They have taken advanced classes and spent time being properly trained by an appraiser. They would be the logical choice to complete inspections, if not done by the appraiser. But, for several years lenders have almost totally rejected Trainees. Just as a note here – I personally don’t believe there is any way to separate the appraisal process and retain true quality. Part of an appraiser’s knowledge base comes from doing inspections. If you remove that part of their ever changing market education, you lessen their ability to understand the total market. However, back to the Bifurcated process.

Consumer protection appears to be missing from this thought process. Now, Fannie Mae, Freddie Mac, and the VA still don’t want Trainees, but they will allow anyone (without any formal training) to perform these important inspections. This is nothing more than an attempt to weaken the already hammered appraisal industry and sadly, it all comes down to profits. The so-called “quality” big banks talk so much about is a myth. Big Banking Lobbyist have sold Fannie/Freddie/HUD/VA on a new and improved appraisal system, all designed to increase their control and lessen the hard-core truth and honest valuations the appraisal industry delivers. Is the appraisal system perfect? Certainly not and we can always increase appraiser education. But, the appraisal industry is not the only player in the mortgage lending process that could stand some extra education.  If we want true quality and consumer protection, we should ensure every lender has at least a 25% investment (or more) in every loan. It’s just like home buyers. With no skin in the game, they are likely to walk away from a loan and have little incentive to make the best decisions. With nothing to lose, why not roll the dice?  The same is true of lenders. Without any skin in the game, they make their money off the loan and move on to the next loan. Without any investment or risk in the loan, they have little incentive to make sure the collateral is solid and the loan secure. They’ve got nothing to lose and only more profits to gain. The whole lending system has gotten way off base and logic has left the system. From Wall Street to Main Street, they are so far removed, they have lost sight of the true definition of quality and the role of an appraiser in the home buying process. If they were invested in each loan, they would be working harder to increase appraiser training and Realtor® education. After all, Realtors® price homes with minimal education requirements. Then lenders expect appraisers to “prove” every adjustment (in a subjective business) where a Realtor® could flip a coin or just check Zillow® to come up with the price and no one questions their values at all. That’s a problem. And, since the appraisal is paid for by the buyer, lenders should only want to protect their clients by providing them the best product possible.

This Bifurcated process eliminates one of an appraiser’s main jobs and is one of the most important steps in the appraisal process. Then, it steps right past the most logical people to complete the inspection (if not the appraisers). It moves past Trainees to any person off the street they can get to do the job the cheapest. Not because they want to lower costs to consumers, but simply a method that allows them to make more money off of the appraisal fee for themselves. Consumers will pay no less for appraisals, yet get an inferior product and no one seems to care. It’s a sad process and one hard to understand from any perspective of wanting a quality appraisal product and protecting the home-buying public. It’s especially hard to understand how government agencies could be convinced this is all good for consumers.

However, if you follow the money and think about this entire process, it all makes sense, at least from the lender’s perspectives. They have convinced Fannie and Freddie it’s good for the process, helping to bring faster appraisal services. It’s all a smoke screen and a sales job. This new change is just another nail in the appraisal industry’s coffin. Using Bifurcated appraisals lessens the number of necessary appraisers, further reduces the number of appraisal Trainees, and if this trend continues, big banks will argue there are just not enough qualified appraisers. So they will make their case for using all automated valuations in mortgage lending. Consumers will pay more, get useless valuations, and banks will have achieved their final objective – eliminating those pesky appraisers from their lending process. A huge victory for big banks and a huge loss for appraisers, and especially consumers. It’s all happening right before our eyes.

I hope appraisers will just say “NO.” These appraisals have to have an appraiser’s signature to make this new process work. So, appraisers your future is up to you. It’s your choice to participate in the Bifurcated appraisal process. It’s never been more important to voice our opinions and stand up for our industry. Tick tock, tick tock…

 

 

 

 

The Great Square Footage Debate

by Hamp Thomas on 05/03/19

When it comes to measuring and reporting square footage, we have left brained people, we have right brained people, and we have a lot of differing (and very strong) opinions. And, like so much of the real estate industry, “it depends” can certainly apply to the square footage issue. Inaccurate square footage details are a major problem in MLS systems and in public records systems all across the country. These errored details change home values and harm consumers. It is way beyond time for the real estate industry to join the rest of the standardized world. For an industry who touts their strong commitment to ethics and consumer protection, they can’t even agree on how to measure a house, which is their main commodity. Realtors® work in a price-per-square-foot world, yet far too many are not concerned with getting square footage numbers accurate. It simply can’t work both ways. Either square footage is extremely important, or they should NOT be using their magical price-per-square-foot formula to price homes. And, when it comes to pricing errors, we are not talking about a few hundred dollars. We are talking about tens of thousands, and often much, much more.

So, who is responsible for providing accurate sqft details? Too many people have been taught that public records provide the “Official Record” when it comes to sqft. The truth is – the tax department doesn’t need precise sqft. And, no one in the real estate industry has ever met with anyone from the tax assessor’s office to let them know that agents and some appraisers rely on the sqft totals from the tax department. The assessor has no liability or responsibility when it comes to calculating sqft. For their intended purpose, local tax departments do an excellent job. If you ask them, they will be the first to tell you these numbers are only estimates.

In 1908, when the MLS and Realtor® organization was first formed, one of the main concerns was the accuracy of their data, especially the sqft information being used by agents. For over eight decades, Realtors® were responsible for measuring every home and making sure the sqft details reported in MLS were accurate. Then came the internet explosion and agents had access to free online sqft details. Like a gift from heaven (so they thought), the tax department provided them with a sketch and specific number. It was assumed they could simply make a disclosure and all their responsibly was gone. Like the Good Fairy dropped a magical gift down on the Realtor® organization, agents were easy to convince they should trust the numbers in tax records. They trusted that info and taught the public to also trust it. Now, inaccurate square footage information spirals out of control and no one is stepping up to help protect consumers. It is a shame on the real estate industry!

This problem is very real and we should not ignore it any more. With the automated valuation revolution in full force and the much heralded power of computers and the price-per-square-foot estimates they believe provide the “easiest method” to calculate real estate prices, real estate pricing is being provided to unsuspecting consumers by someone who really doesn’t understand the power of what they are doing. They are not taught the importance of these numers and the consumer is the real loser in this battle. Plug in a few “comps” and presto – easy to know the current market value. One problem comes in with the “comp.” Who gets to decide what is the most similar and fair comparable property? What an appraiser will choose, what an agent would select, and what a computer would choose, are often three very different properties. Then add inaccurate square footage to those comps and you’ve got a totally unreliable pricing system.

The technology gurus claim AVMs can price houses just as efficiently as appraisers. It’s just not true. That’s not my opinion, it is simply the facts of the business, at least for anyone who cares enough to look closely at the numbers. It comes down to their favorite word – information. They proclaim to have access to massive amounts of data, so they argue their values must be better. Right? Wrong!!!

More does not mean better. For a formula that relies on only two numbers, when one of those numbers is wrong over half the time (by enough to change the home’s value), you get over and under priced homes. Consumers trust agents who price their homes based on a simple formula that is based on inaccurate information. The word “information” is misleading. Real estate will always be a partially subjective business, and one that demands accurate square footage details to get the value right.

Real estate is at a crossroads. Either we truly care about consumer protection or we only care about making money. Where should we fall on the list of most trusted professions when we don’t even have an industrywide measurement standard? For now, where we belong - near the bottom on that list. It’s time to step up and take some responsibility, and help consumers trust us once again. We are in a battle for our future and we need to adopt one nationally mandated measurement standard…

The Three Biggest Problems with Real Estate Pricing

by Hamp Thomas on 04/06/19

Problem number one - People trust the values in public records. Over the years, far too many real estate agents have explained to home buyers and sellers that the local tax department provides the “Official Record” for square footage. Consumers have learned to trust the information listed by local tax departments. Let’s see how this can be a problem.

There was a retired certified public accountant who purchased his home at a very good price and then spent about $50,000 updating the property. He recently received his 2019 revaluation notice and immediately became angry. He went straight to the Tax Department carrying a list of improvements and insisting his tax value be raised. The tax assessor happily agreed.  

He had received all the permits from the county for his remodeling, but none of that was caught by the assessor. The new revaluation didn’t include any improvements and the county quickly agreed to raise his assessed value. And, of course, raised his taxes accordingly. He is quite happy now and so is the tax department. Why would anyone be happy to have their taxes raised? He said if he decides to sell the property in two or three years, he didn't want the tax value to be the reason the sales price was low. He made the assumption that the tax value and the sales price would automatically be very close together. Why? Because at some point in time, a real estate agent had told him that it always worked that way. Why do people continue to share this misinformation (one value has little to do with the other)? It is because Realtors®, much too often, do not understand the difference between a tax assessment and a market value.

In another case, I had just completed an appraisal on a property and the owner asked me if he could take my appraisal and turn it into the tax department. I said sure you can, but told him I was curious as to why he would want to do that. He told me that he needed his tax value raised because they were thinking about selling the property in the next year and they needed a higher value. When I asked him who told him that, he said a friend of his was a Realtor® and suggested it would be the best way to increase their sales price.

Bottom line is that consumers believe their tax values and market values are closely linked. They have been taught that you always want your tax value to be as high as possible if you’re thinking about selling in the next few years. Otherwise, leave it as low as possible so you don’t have to pay unnecessary taxes. The truth is, one should have no bearing on the other.

Problem number two – the “Official Record.” A local agent had a new listing and asked me to measure the property. I measured the house at 2,201 square feet. The tax assessment listed the home with 1,640 square feet. The difference was 561 sqft and the owner had made no additions to the dwelling. The house was listed for sale in the MLS and within twenty-four hours an agent who lived in the neighborhood called the listing agent. He called to explain that her square footage information was incorrect and the house was way over-priced (he may have been upset his neighbor listed their home with a different agent). He told her the tax records had the square footage listed as 1,640 and that she had made a mistake, and needed to change her listing information. He was adamant that the tax department was always accurate (within a very small margin of error, he said). She explained to him that she had the property measured by an appraiser, and per the North Carolina Real Estate Commission Guidelines, the property was 2,201 square feet.

The agent didn’t trust her answer and took it upon himself to call the local tax department and ask them to verify the square footage information. The tax department came out to the house and remeasured. The square footage was raised to 2,201 square feet. At that time, they also raised the homeowner’s taxes accordingly. The homeowner was furious that this agent, who had no ownership interest in the house and no real interest other than being a nosey neighbor (and wanted to be smarter than his agent), decided to call the tax department. The owner eventually sold the house and the new owner could thank the neighbor for having their taxes raised. Just imagine if this owner had used his neighbor as his agent. That agent would not have measured or had it measured, would have used 1,640 sqft from tax records, and priced this home way below what the fair market should have been. With the eventual sales price and the difference in sqft, the owner could have lost $69,000. WOW! This happens all the time and is real money being lost based on nothing more than a difference in the size of the home, because the listing agent trusts the tax department’s square footage numbers.

To be fair, the tax department would have probably caught the change when the property sold. The real problem comes in with the agent who was absolutely positive the listing agent got the square footage wrong and that the tax department had it right. Anyone who studies tax records for very long understands that sqft errors are a normal part of the tax records. Tax departments measure from the exterior only. Without going inside each house, they have to guesstimate many measurements. Especially in homes with upper and lower levels, they are forced to guess at what’s inside and how it is finished.

Why do some agents believe so strongly in the accuracy of tax records? Because a few agents, who didn’t want to be responsible for measuring square footage or the fear of liability, decided to tell everyone that tax records contained the “Official Record” for square footage. Agents all across the country, who were eager to avoid the square footage issue, jumped on the bandwagon and spread the news of the “Official Record” for square footage. It’s still happening today all across America. However, it is not now, nor has it ever been, the tax department’s job to get precise square footage details. They do a very good job getting the information they need for assessment purposes, but the tax department has no interest or responsibility to the real estate industry.

Thus, the “Official Record” myth was born and from the late 1990’s, it has steadily increased. Today, it appears to be the norm among agents and homeowners. It is a sad state of reality in the real estate industry. Agents base listing prices on the square footage details contained in tax records. This creates property values that are either way too high, or way too low. Then, appraisals come in low and they wonder why there is a problem. Rarely do they figure out there is a problem with the square footage. The fact is we live in a price-per-square-foot world. If you change the square footage total you change the home’s value.

Problem number three - the Realtor® Price Fixers.

The third problem comes in with the real estate agents who believe they know better than everyone else. It becomes a game where each agent thinks they can get more than the next agent. Whatever one house sells for, the next house must be higher. Even if the house is bigger, newer, in a better location or better condition, but just because they want it to be higher. A small group of Realtors® in each area decides that they can control any specific market and they're the ones in charge of real estate values. Appraised values don't matter. Unfortunately, they have too much influence in our current system. They instruct home buyers that the appraisers can't keep up with the new rising values and that it's okay if the appraisal comes in low. They convince homebuyers that the prices are increasing and they need to buy now before the prices go up even higher. This small group can make prices rise 10 to 20% in an area or neighborhood. Within one year, they can dramatically change market values in a specific market, especially in certain neighborhoods. It really becomes a game of who can get the most and make the deal close, knowing they overpriced the home. It usually works, at least for a little while. But, it's more because of personal opinion and pride than the market’s reaction to current values. They think that they know better than every other real estate agent and every real estate appraiser, and they are convinced that they can get the homeowner more money for their home. What homeowner doesn't want to hear that their home is worth more money? Two weeks ago I listened to an agent with five-years experience explain to me that he could raise prices as much as twenty percent and find some appraiser to make the deal work. He said he has done it several times and was proudly telling me he knew much more about pricing than I did. “You have been doing this for so long (25 years +), you don’t recognize the current market as good as I do. Proving the value is what I do to a buyer,” the rest is not my problem.” That’s sad for other agents (where a good buyer’s agent might advise their client a home is over-priced), appraisers, and especially to the home buyer who overpays.  

There are also agents who want to push closing costs and down payment money. They convince buyers and sellers to agree on a price, and then they just add whatever money the buyer needs to close on top of the contract price and write a new contract. Then they fully expect appraisers to make the value cover the additional costs. That should be wishful thinking, but it’s just like the pricing game. Certain agents think they can convince the appraiser (or the lender to pressure the appraiser) that the higher value is fair. Then we end up with buyers who have no money invested in the house so they can simply walk away if anything changes. Sound familiar? It’s frightening and starting to happen again in many markets. New loan programs are starting to show up with little money down, stated incomes, etc. It’s like the past never happened. With banks wanting to increase loans (and profits) again, they are pushing the limits so they can boost profits, again. Profit – crisis – repeat…  Not a good plan for consumers.

So, we must teach consumers to stop putting so much faith in tax values and in Zestimates®. That is NOT the way to determine the fair value of your home. We must also educate agents (and home-buyers and sellers) that the square footage details listed in public records are not to be trusted; not to mention, that your tax value does NOT have a direct impact on the listing value of your home if you decide to sell. Before any home owner ever determines a price for their single, largest, lifetime investment, they need to invest in a home measurement first. Or, perhaps an agent who understands the true power of price-per-square-foot and has every home measured BEFORE they ever create a CMA. And, they create their own CMA, without relying on Zillow® or any online valuation program. True and fair real estate pricing requires a few old fashioned services; a home measurement and a selection of fair “comparable” sales, not the list of every home that sold in a two-mile radius and an average of all the numbers. Time to go back to some good old-fashioned real estate service, the way it was between 1908 to 1995. It’s also time for the real estate and appraisal industries to mandate one measurement standard, so homebuyers in all parts of the country can get their home measured the same way. Until the industry takes the guesswork out of measuring square footage, agents are not likely to focus more on square footage and take the risk. It’s time for the real estate industry to join the rest of the standardized world.

 If you want a fair home value, have it measured by the ANSI® Standard, and do NOT put your faith in automated valuations or tax records. 

The Impact of Square Footage on Hybrid Appraisals

by Hamp Thomas on 01/29/19

Let’s talk about walk through inspections, measuring homes, and completing all aspects of an appraisal assignment we put our signatures on. We can all see the ever growing wave of Hybrid Appraisal products. So, let’s talk about the one number at the start of every valuation. We live in a price-per-square-foot world. These numbers the new inspectors collect will be at the heart of every appraisal.  We can’t use a Licensed Trainee, that we know and have trained, but we should trust this unlicensed and barely trained person for the information which we will ultimately base our value and then sign? No matter how many disclaimers and disclosures we write, at some point any valuation problems will come back on the appraisers.

 And in these inspections, what about little things like functional utility (which most agents have never heard of), and will they understand the importance of things like room counts and above and below grade? How will they know which sun rooms should be included in the GLA? What about detached spaces? If you look through MLS you can find lots of interesting spaces listed as total finished square footage, and these are the people we are going to rely on to bring us accurate data?

If the inspectors get it wrong, who will it really hurt? Who do hybrids really help? Lots of opinions on those questions. We are being force fed a blind faith in big data that big banks think we can’t understand, the public can’t understand, and they can manipulate any way they want with no one the wiser. Hybrids ultimately give lenders more power and appraisers less. It gives consumers and mortgage investors more risk; unnecessary risk.


When most appraisers take pre-licensing classes, they learn the very basics of measuring square footage. Agent courses teach far less than appraisal courses and the topic of square footage is barely mentioned. In a business that focuses on price-per-square-foot, they don’t consider how to calculate a square foot a very important topic. I’m always amazed at the agent classes, even the advanced CMA classes, they hardly mention the topic of square footage. It’s as though they have accepted the myth that Public Records provides the “Official Record” for square footage. Absolutely wrong! AVMs rely heavily on this data knowing it is filled with errors.

 Learning to calculate living area is a learned skill. It only comes with experience and knowledge. Should I really trust a real estate agent who knows very little about square footage to provide me with a number I use to determine a value, and to which I will place my signature? Sure, I used to do some 2055 reports and used the sqft from tax records, and I cringed every time I sent one out. But, if a large margin of error was acceptable to the lender, then why should I not do the work? At that time, I charged $50.00 less to do a 2055 verses a 1004. Think about that. Time is money, right. Are appraisers being turned into an hourly paid service that anyone can do, or are we professionals with valued opinions? It certainly depend on who you ask these days.  

I have studied tax records, MLS systems, and the influence of sqft errors on home values for over 15 years now. I can tell you with absolute confidence that inaccurate sqft details harm home values and consumers. Just look at Zestimates® and every real estate professional having to explain why they are not reliable these days.

Are there times when a bank doesn’t need a full appraisal? Absolutely. If a 30-50K margin of error on the appraisal is okay then I say by all means allow lenders to use Hybrids or AVMs. However, if I am buying a home, regardless of whether it is $100,000 or $800,000, I deserve to know the fair value. If banks actually were required to service the loans they write, would they be more concerned with accurate values? Of course. A mortgage investor, just like a home buyer, deserves to know the real value and no computer can provide that. Its just the facts of the real estate business. It is NOT a data perfect business where a computer program can calculate precise values. Never has been and never will be.

At the end of all discussions, Hyrbid appraisals can never perform the same level of quality as a traditional appraiser. But, if that’s what lenders want, lets give it to them. So yes, please send your inspector out and provide me all the data you want. My opinion of value is worth a minimum of $350. To $400.00. I’ll be happy to reduce my fee. Computers have certainly stream lined the banking business, and every other business associated with a real estate closing, but I don’t see them reducing any fees. For my knowledge and skill, I deserve a fair fee, just like the attorney and title insurance company, among others. For less than that, I say hire someone who has not worked to earn and keep an appraisal license.

We could also have national AMC rules that every assignment must be placed within 24 hours. They want appraisers to do everything fast, but they don’t have to do the same. If they want to speed up the process, maybe there should be some new rules for someone outside the appraisal industry for a change.                                                                                                                

In home valuations, we live in a price-per-square-foot world and in every residential transaction, size does matter. Having a untrained person (after not allowing a licensed trainee) to inspect a home and measure square footage is not the answer to any appraisal problem.

 

Big Banks & the Fleecing of the Appraisal Industry

by Hamp Thomas on 12/17/18

Big Banks are tricking appraisers into providing the very information they perceive they need to put appraisers out of business. There are countless new programs coming out and made available to appraisers, so they can fine tune the formulas and help to make the programs better. These programs attempt to provide support or what banks like to call “Proof” of appraisal adjustments. Once appraisers figure out the best methods possible for doing this (although there are no exact formulas for a system that doesn’t provide exact adjustments, ever), then bankers think they will have just enough data to make their case for technology over traditional appraisals.

It’s a brilliant plan and they are getting away with it daily as appraisers, so anxious to stay in the process, play it anyway the big banks require. It’s the Golden Rule in play and once again, appraisers get the short end of the totem pole.

If you think about who is providing the majority of these new forms and programs designed to help support adjustments, many are owned by companies who also just happen to own automated valuation companies. Convenient right? It’s all smoke and mirrors, again, and the big banks convince government regulators, and they try to pass it on down the line, all the way to consumers. “Trust us and trust our technology. We’ve got your best interests at heart.” Said the wolves to the sheep.

The two biggest myths of our industry are that AVMs can provide accurate and consistent home valuations. Impossible task, regardless of technology. It’s easy to prove if you really want to see the answer. And second, that every appraisal adjustment can be “proven” by statistics. Again, impossible task. It’s like thinking we can replace all surgeons with technology. Some decisions have to be based on experience and cannot be performed by a computer or technology. It requires experience, guided by wisdom. There are some fields where a human brain is required to make subjective decisions and appraisal is one of those industries. That’s why appraisers are required to have so much education and training. It is not a math only business. You have to learn trends and patterns, and what “comparable” actually means. That’s the biggest problems with Realtors®, lenders, and AVMs. They don’t understand what homes are truly “comparable” sales and often end up being guided by the highest priced sales and owner’s opinions, rather than based on fair market data. AVMs select comparables based more on proximity rather than comparability and a computer may take forty sales in a certain area and average all the information. That is NOT the way to price real estate and it cheats consumers into lower or higher values. 

Appraisal is an art not a science and no computer can ever replace the human brain. No matter how many new programs or algorithms they come up with, it’s a task that has been tried for decades and failed miserably. You can’t make orange juice with lemons. Technology and real estate data just don’t mix.

Big banks want us to trust one of their employees to judge a home’s fair value. No training, no oversight, and talk about bias! Whatever value the bank wants is what they get. Where’s the danger in that? It’s time to let appraisers do their jobs and stop letting big banks try to eliminate appraisers from the mortgage lending process. The AVM and technology revolution is a scam with only one possible outcome. And, that outcome is only good for one group, and it’s NOT consumers.

Fannie Mae - Here’s Your Waiver – Here’s Your Sign

by Hamp Thomas on 12/10/18

Swim at your own risk. No life-guard on duty. That’s what Fannie Mae is telling consumers. This runaway train called Big Data looks like it will only be stopped by the next mortgage crisis and big banking bailout. How many billions of taxpayer money will it take, while a few scape goat bankers will pay small fines and then laugh all the way to the bank.

 Fannie Mae introduced the Uniform Data Set (UAD) which started the mass collection of appraisal files. This information, which is basically each appraiser’s professional opinion, is taken without their consent and without them having the ability to even see this data, and it is now being used against them to take work right out from under them. Have we really learned nothing from the past?

As someone who has studied the topics of public records, MLS, AVMs, and big data for the last fifteen years, I can confidently state that automated real estate valuations are horrible. Sure, they are fun to look at, but for providing accurate and consistent real estate prices, they are full of errors. Some advertise an eight percent margin of error and I read that and have to laugh. That may be true in a few select markets where there is massive amounts of data, but for the majority of America, a true accuracy rate is much more likely between 25-40% in error. And, in both directions. They are just as likely to be too high as too low. For anyone that understands the valuation process, they know that computers have an impossible task, most often with questionable data.

Big data works in fields that have perfect data, and real estate is NOT a business with perfect data. It takes a subjective, human mind with local knowledge, and no computer can ever understand how a house smells or feels, or the layout or neighborhood, etc., etc..

Commercial real estate valuations are even more complicated. It’s simply mission impossible for a computer program to analyse data that is subjective in nature. And now, they also want to try Hybrid appraisals where the appraiser never sees the property. It’s like a doctor having a nurse trainee and letting them perform the patient exam. Then the doctor reads their notes and writes the prescriptions. It’s a system designed for failure!  

Fannie Mae says they want to reduce the costs of appraisals. That comes from big banks talking in the background. Yes, this has to do with money, but certainly not saving consumers money. If you take away all the smoke and mirrors, it’s all about big banking profits. If they truly wanted to save home buyers money, they could use the tax assessments that are available for free. And, at least they have seen the house in person. Tax assessments are just as accurate as automated valuations, but they are free (not really, that’s your tax dollars at work). But, big banking will never go for that because they can’t make any money that way and, make no mistake, this is all about the money.

Banks get to select the appraiser and consumers have no say in the process. The only protection home buyers have is the government that mandates appraisals. Take that away and home buyers are left to swim with the sharks. The only reason Fannie Mae wants to do this is because big banking lobbyist have convinced them this is in the best interest of the consumers. I call BS! It’s like putting the wolf in the hen house and saying “be nice now.”

 

FDIC - Below $400,000 loans are not important?

by Hamp Thomas on 11/22/18

The Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the Board of Governors of the Federal Reserve are proposing to eliminate the appraisal requirement on certain home sales of $400,000 and below, increasing the appraisal threshold from $250,000 to $400,000. According to FDIC data, increasing the appraisal threshold would have exempted an additional 214,000 mortgages from the agencies’ appraisal requirement in 2017. 

The new proposal is not a big deal, only 214,000 additional mortgages exempt from appraisals, right? Perhaps people that buy homes under $250,000, and now up to $400,000, are not as important as those who can afford higher priced homes. I suppose their investments don’t deserve the FDIC’s protection? Is it because home prices have risen so dramatically in most urban markets (which is what they understand), now they can raise the threshold to $400,000? Who knows the motive or who is pushing to get this implemented.

What they are essentially saying is that, if you buy a home under $400,000, we don’t need to worry about protecting you. A slap in the face to the homebuyers all across the country in medium sized markets where there are A LOT of homes available under $400,000, and just forget rural markets. I live in a growing military market where for $300-$350,000 you can buy a brand new, 3,000 sqft house with all the bells and whistles. Guess these military home buyers are not that important.

In rural America, valuations are even harder than other locations and all the more reason to hire a professional appraiser. No computer can accurately calculate home values where there is limited comparables to choose from. Without large amounts of data, computers cannot provide consistent valuations. And remember, real estate is NOT a perfect information system where it’s easy to figure out the right dots and dashes to select, and to come up with a logical value. AVM errors are consistent. If $20,000, 30,000, 50,000, or even a few hundred thousand dollar errors are acceptable, by all means, let the AVMs have at it. For years I’ve said that local tax records are more accurate than most AVMs. But, there’s no profit in using free tax data. AVMs should be for fun, not for determining the value of people’s largest, lifetime investment, even if it falls below their magic number of $400,000.

The influences on a real estate transaction are host to an extremely wide set of factors. It is a people business where emotions are part of the process. I don’t know of any computer that can factor emotions and timing into the process. With computers and AVMs, they like to talk about BIG Data, like it’s the magic answer to all real estate pricing. In this industry, bigger isn’t better. The real estate industry will never provide the type of data that allows computers to accurately predict home values. Just check Zillow®.

Sure, this would be another slap in the face to the appraisal industry. But, perhaps more important, it’s a bold statement to all those with home values under $400,000 that we don’t care about you and your small purchase. Let the big banks have their way with you. They are always looking out for consumers, right? Big Data is not now, and never will be the answer to providing accurate home values. This is nothing more than the Golden Rule at work, again, with the appraisal industry and now consumers in their sites.  

 

 

The Measurement Standard Hypocrites

by Hamp Thomas on 11/05/18

Hypocrites, yes what else should we call them? There’s a great deal of talk about protecting the consumer, but home buyers are being cheated every day by the absence of a nationally mandated measurement standard. No opinion, it’s a fact. The National Association of Realtors® and the Appraisal Foundation both share similar ethic creeds, both vowing to work to enhance consumer protection and do everything in their power to ensure professionalism in their respected industries. What’s interesting, or perhaps more mystifying, is that for the industry leaders that profess their commitments to ethics and professionalism, they find no need to mandate a measurement standard that would protect American home buyers.

 

Homes can be measured in the same market by totally different methods, creating square footage numbers that can vary in the hundreds. This problem has been well documented over the last decade and it’s no secret that inaccurate square footage is rampart throughout MLS systems across the country. Not one national MLS system, but over 800 individually owned systems that often use different terminology as well as different methods for measuring square footage. Then the sites such as Zillow®, Trulia®, Realtor.com®, Redfin®, Homes.com®, or one of thousands of national real estate companies come in and they all show national statistics and square footage information that was not measured or reported the same way. It’s a system that was never planned out. It’s a happenstance system of information reporting, that in the world of big data and technology is archaic at best.

 

Real estate agent, Automated Valuation Models, and many other industries rely on the over-used price-per-square-foot formula to price homes. They trust this system and work as though there is some magic fairy that provides quality square footage information that they can use for free. Listing prices are developed based on inaccurate data and consumers are cheated. It happens every day. Even if it’s just in the measurement of stairs. Maybe the difference is only 40 or 50 sqft. If that variation in measurement methods works out to $4,000 to $6,000, does that amount of money just not matter? Get out your check book and repeat the question.

 

Just a for instance; House 123 ABC St., Anywhere USA was being listed by an agent that was taught to use tax records (what they were taught was the “Official Record” for square footage). Public records showed the house with 2,200 sqft. The agent developed a price-per-square-foot formula in the development and came up with $124.50 per-sqft. Listing price equals 2,200 sqft times $124.50 per-sqft, for a listing price of $273,900. The house hit the market and was placed under contract within three weeks. The appraiser came in and measured the house with 1,914 sqft. In this case they used almost the same price-per-sqft numbers and came up with an appraised value of $238,000. That’s a difference of $35,900.00. Come on - that’s over thirty-five grand on a simple mistake that happens every day. If that’s your $35,000 would it matter to you? Why is this acceptable in our industry?

 

How hard would it be for there to be one nationally mandated measurement standard for agents and appraisers, and to require every listing placed into the MLS be measured by that standard prior to listing the property for sale? It’s logical and doesn’t seem that hard to achieve. And, many of the so-called low appraisals are caused by agents who never took the time to measure a house before they list it for sale. Many times, there are different square footage totals reported in MLS. Some agents simply take the largest number to get the price as high as possible. They don’t care if it’s accurate or who might get shorted, only to make the commission as large as possible. Please explain to me how this is consumer protection.

 

And, what about the banks that are pushing Hybrid Appraisals? Not only are they willing to unleash an army of untrained agents on consumers, those agents will be measuring by a host of different methods. Where’s the consistency in that? For people that claim to be wanting to make the system better for their customers, they record does not reflect well against their actions.

 

I keep screaming about this subject the best I can, yet the powers that be remain silent on this issue. Until consumers start realizing how they are being cheated and start complaining, maybe nothing will happen. I can still keep hoping the NAR and Appraisal Foundation will do the right thing and find a way to create a nationally mandated measurement standard for residential properties. Then the NAR could make one new rule that all homes be measured prior to listing, and presto – problem gets 95% better overnight. What will it take to make this happen?

The New Army of Appraisal Inspectors

by Hamp Thomas on 10/24/18

Let loose an army of untrained real estate agents in the mortgage process? Who comes up with this stuff? Appraisal trainees aren’t good enough, but real estate agents are better? Hmmm…

 

The National Association of Realtors® has no mandated measurement standard and the over 800 MLS systems are a hodgepodge of measurements and methods, if the agents bother to measure at all. In getting a real estate license, measuring houses is a thirty minute exercise in calculating rectangle homes that haven’t been the style since the 60’s. For the real estate army that seems to calculate everything in price-per-square-foot numbers, they have no training on how to create a fair sqft total. It’s a subject they try to hold behind closed doors because they are afraid the public would be outraged if they knew all the sqft errors in MLS, and just how much money consumers get cheated out of by sqft errors. It’s simple math, but no one wants to talk about it.

 

Agents also have no training in why sqft is important in the first place. They don’t understand the very formula they use every single day to price real estate. That’s a problem!! All in all, for an industry that thinks learning how to calculate sqft is not very important to their education process, plus don’t see any need to have all agents across the country measure homes by the same method, it doesn’t seem like it’s a smart business practice to trust them to do home inspections for the appraisal industry. That’s just wrong on so many levels, it’s hard to keep my focus. It’s simply overwhelming to think an industry entrusted with people’s single, largest lifetime investment, cares only about making profits from the appraisal process, and couldn’t care less if the mortgage industry (sold off to Wall Street) has a problem or that the taxpayers will have to bail it out again. Appraisers are vital to homebuyers and mortgage investors. Big banks should NOT be in charge of how the appraisal industry operates. That’s like giving the fox the key to the henhouse.

 

I just can’t believe our government is going to allow these untrained agents loose on the mortgage industry. Have we learned nothing? And, don’t forget, it’s the bottom 10% of real estate agents that will be doing these inspections for Hyrbid Appraisals. No high paid real estate agent is going to spend their time doing thirty or forty dollar inspections. It’s not worth the gas. For MLS, lots of agents still use the information from tax records for sqft. Hopefully by now everyone has heard that tax records are inaccurate, in a bad way. Remember, this is not the tax department’s problem. They do a great job. The tax department doesn’t need precise square footage information, but the real estate industry does. A few lazy agents discovered tax records and were off to the races and it’s hard to get that runaway train back to the station. One of the main focuses of the NAR in the early 1900’s was to provide better property details, where square footage was vital to fair pricing. It seems we are moving backwards these days and bigger data does NOT mean better data, especially in the real estate business.

 

So, we are going to have the lowest end of real estate agents in charge of the information appraisers rely upon to calculate real estate values. That’s crazy and then some. If the info they provide is wrong, then so is the appraised value. The official government policy says “An evaluation should include sufficient information to identify the property and address the property’s actual physical condition.”  How will agents do that? Perhaps with pictures as well. But, have you ever been able to make a house look much better than it really is by changing the view in the pictures? Just check out MLS, it happens every day. Trusting agents to measure and to fully describe the property condition is a nightmare waiting to happen. Can someone say “Trainee” again…

 

Who loses? The consumer. Stop trying to fix the appraisal industry. It’s all the same smoke and mirrors about big banks wanting to help consumers. That’s absolutely false. It’s all about them taking the profit away from appraisers and giving it to themselves. Nothing complicated, and the Golden Rule at work. I keep harping on this one point – order the appraisal at the same time the contracts are signed. No delays ever. Not that complicated. But, if banks do that, then they can’t complain about the appraisal industry and will lose their best chance at a new billion dollar increase to their profits. Remember, appraisals come in at or above the contract price apx 97% + of the time. That sounds like our system works pretty well to me. What am I missing? Please, stop the appraisal madness. 

The 1 – 2 Punch - Ending the AMC Nightmare and starting the path to Realtor® Education

by Hamp Thomas on 08/20/18

The AMC dog and pony show has been going on for the better part of a decade. Appraisers have been called out for every problem associated with a real estate closing. Ever silent is any talk of better educating Realtors®. They are the ones with the most power in the pricing process, and the majority of so-called “appraisal problems” are because they say it’s a problem. That’s a LOT of power. But somehow, they manage to stay under the radar and no one seems to be challenging their integrity, as they constantly do with appraisers. Realtors® are the least educated people in the entire home buying process. It seems everyone, their brother, and their cousin has a real estate license. How many times do we hear about how easy it is to get a license and sell houses. “Oh, we love making a little part time money and it’s so easy.” Of course selling homes is not so easy, but getting a real estate license – that’s much easier. The Association of Real Estate License Law Officials (ARELLO) estimates that there are about 2 million active real estate licensees in the United States. According to the Appraisal Institute, as of December 31, 2017, the number of active real estate appraisers in the U.S. stood at 82,208. Let’s see – 2,000,000 vs 82,208?? Must be a little easier and that’s two million opinions based on the least required education in the entire home buying system.

Realtors® have always seemed to have some unwritten power. When it comes to home prices, it’s always assumed a “low appraisal” rather than an “over-priced listing.” Realtors® have a magical credibility that appraisers have not been afforded. AMCs and their underwriters seem to question every comment and adjustment appraisers make. But, no one questions how a Realtor® comes up with a listing price. There’s something wrong with that picture, but it seems to get lost in the smoke and mirrors of the cheaper and faster appraisal rush, a rush that no one except the AMCs have ever demanded. And, no one appears to have any interest in protecting consumers, only making money from the appraisal process. The entire “faster and cheaper” appraisal argument remains all about potential profits and consumer protection is totally lost.

AMCs were given their power overnight which was unearned and undeserved, and have now grown into billion dollar businesses (on the back of every appraiser). They are also playing hardball with their new-found wealth by promoting every policy that benefits only them, such as Hybrid Appraisals. These products benefit only the AMC. They are bad for the appraisal industry and especially for consumers. The AMC decade will leave a lasting impression on the appraisal industry that will not soon be forgotten. The appraisal industry has lost over 10% of the entire workforce with those who flat out refused to work for AMCs. That’s a large chunk of appraisers who did not need to be lost. And, what about fees? I won’t get into that too much here, but I still find it amazing that consumers are not allowed to see the breakdown of the fees paid for an appraisal. Who’s rule is that? Exactly, the AMCs. They seem to have lots of power these days.

Appraiser voices are being heard more and more often and the true value of an appraisal management companies is coming to light, but it may be too little too late. AMCs are touting record sales volumes and more power than ever, as they continue to drive the best appraisers out of the industry. They don’t want or need good appraisers. That’s not their goal. Only cheap, fill out the form to meet minimum requirements, and run to the bank with their profits. Appraisers were chartered to protect consumers and mortgage investors. That’s the exact opposite of an AMCs charter.  It is a business model that only grew with the force feeding of a government agency, not of the free market. Appraisers were not offered a choice the same as lenders were not offered a choice. Basically, overnight AMCs were handed the keys to the world of mortgage lending and appraisal ordering. Perhaps justice would also come with the stroke of a government pen, signing AMCs out of business just as quickly as they entered.

Of course, there are some very good management companies. But, the model that dictates any one service over another, without free choice in the market, is over-government control at a time in history when less government is the objective. AMCs have been offered a long and fair test in the market. They have failed miserably and can only blame delays caused by them on appraisers. Surprisingly, when lenders order directly from appraisers, with truly qualified underwriters reviewing the work, the speed rises dramatically. Faster appraisers would come with the total removal of the AMC system. The question is, will the powers that be, and all the talk of big data and big money, take control over reason and logic - and of course consumer protection.

I think in an open market the best AMCs would survive. They have changed and grown to work with appraisers, not as dictators but as partners. However, the majority survive because they are mandatory or the least expensive option under current government rules. From the HVCC to today, can we really say the mortgage lending system has improved due to AMCs? The short answer is NO, not even a little bit. A wasted decade with lots of evidence if anyone really wants to see the truth.

AMCs need to be removed from the mortgage system just like the 1004 MCA. AMCs failed miserably and it’s time to move back to sanity and move forward to focusing up Realtor® education about pricing real estate. Then we can talk of “low appraisals” vs “over-priced listings” and mortgage loans.


Consumer protection is lost in the rush to commissions

by Hamp Thomas on 08/04/18

We hear all about low appraisals, but we never seem to hear about homes that are flat-out over priced, often by an agent who wants to prove they are smarter than everyone else and will take advantage of any unusual feature or circumstance to push the value beyond any other homes in the local market.

 For example:

 A buyer finds a house in need of some updating. Medium sized market and things are selling between 90-120 days on average. The neighborhood is good and the house has a three level deck that cost twenty-grand and a $10,000 water garden running beside the deck.  These features are way above other things in the neighborhood, but they are still desirable. They buy the house for $220,000 and spend $45,000 on renovations; kitchen and bathrooms, paint and flooring, etc.. The agent tells them they can list the house at $394,900. The most expensive house in this area sold for $450,000. It was 1,418 sqft larger and sat on two lots, and had been totally remodeled. It was probably the best comp available. There were several other comps closer in size and age, but they all needed updating. They sold between $295,000 and $315,000. So, how much does remodeling add to a house? Of course, there are a lot of “it depends” with any real estate deal, but with an investment of $265,000, with a $394,900 list price, that could be a profit of around 50% in four months. We would all like to find a few of those investments! However…

 The house appraised at $346,000, which was still a great return for four months work. But, this agent chose to file a complaint against the appraiser for “killing her deal.” Two other appraisals were ordered later in this transaction. One came in at $349,000 and the second at $334,000. The agent still bad mouthed only the first appraiser and told every she knew what a idiot he was. She said he didn’t understand the local market and she was the expert. She didn’t care what other homes had sold for because she is the local expert. She set the price and found a buyer willing to pay it and that should be enough. She knows better than any appraiser and they should listen to her experience. Her Blog post said “All my hard work was wasted by a backwards appraiser.”

 They are too many examples of where agents push values just to see what they can get. The deal falls through and everyone involved is convinced the appraiser ruined everything for everyone. There are usually two agents involved in each transaction. One working for the seller and one for the buyer. The buyer’s agent is supposed to be watching out for their clients’ best interest, but far too often they only want to make the deal go through so they can get paid. They say the buyer is okay with the value and that’s all that matters. Consumer protection is lost in the rush to commissions.

Of course, every real estate valuation is partially subjective. But, most values can be logically developed with the experience and skill in the local market. No buyer should want to pay more for a property that it’s worth, but it happens every day, all across the country. And, Realtors® seem to push the pricing wheel higher and higher all the time. It’s like a numbers game about who can get the most. It’s very personal when you price a house. And, once you put that price out there, if someone comes along and says you were wrong about the value, well those are fighting words. “How dare you, I am the expert here.”

The listing agent is part of a much bigger problem no one seems to want to talk about. Realtor® education and responsibility should be a high priority in this day and time. After a decade of real estate problems, there are agents who still have not been properly trained and get into the business only to “make a little extra money.” A part-time agent is dangerous when it comes to most people’s single largest lifetime investment. I would think after all the discussion of appraisers and mortgages, and runaway real estate prices, this topic is something that should be on the radar. Blaming appraisers for every real estate problem is not the answer and it’s time to look at the heart of the problem – Realtors®!

 

The Missing "Standard"

by Hamp Thomas on 07/13/18

Every week I talk to appraisers in different parts of the country and the conversations are almost always the same. Square footage errors are a problem everywhere, some places worse than others. Every appraiser seems to understand the problem and many of them complain about the real estate agents, home-owners, and even underwriters who challenge them about their square footage totals. They rely on the “Official Record” they believe is listed by the local tax department. Who teaches them this stuff? How is it possible the general public doesn’t know how important a home’s size is to the total value. They all believe in price-per-square-foot, but for some reason think the square footage in that calculation is not important.

Yesterday I talked to an appraiser who told me about his discussion with a homeowner who was upset because his home was over 200 sqft smaller than when they bought it, he even showed the appraiser the MLS listing. The appraiser pulled up the tax records and sure enough, the square footage in MLS was the same number in tax records. And yes, it was wrong over 200 sqft.  

It seems like this topic is pretty frequently discussed so how can more people not understand the problem? Even in North Carolina, where the Real Estate Commission requires agents to have a sketch in every listing file, and to never rely on tax records, most weeks I can find new listings with the square footage totals that matches the tax records. It must be they just don’t care enough to change the method they have always used. For agents it is an absolute problem, but they always blame appraisers. If appraisers can’t agree on one standard, why the hec should we?

What will it take for the Appraisal Foundation to make a measurement standard mandatory? It’s almost funny to hear the same comment over and over again – “we don’t care which standard we follow or whether we count stairs as square footage one one floor or on two floors, we just want one rule so we can all do it the same way.” It really does make our profession look bad.

We all know the problem is real and it cheats home-owners every day. So, what can we do to establish a national measurement standard for appraisers? Who has the answer? It’s time…

 

Are You a Hybrid Appraiser?

by Hamp Thomas on 06/29/18

That’s the million dollar question. Big banking is counting on the majority of appraisers to fall in line with whatever hybrid product they decide is best. It makes for an interesting road ahead because appraisers actually have the power to make these products a success or a failure. A hybrid appraisal is still an appraisal and must have a signature from a licensed appraiser.  

 If banks can keep whittling away at the appraiser’s scope and can get the total appraisal fee low enough, they will achieve their goal and increase their declining profits (if you really believe they are declining or if they just want more). And, why not? Appraisers have been forced to go along with every other change thrown at them in the last ten years, so why not this one? Or, will appraisers say, “you know I really like to see the house in person and measure it, and make my own judgments about condition and quality. My fee is the same whether I inspect it or you get someone else. My fee is based on what I know, just like every other professional. It’s not tics of the clock, but tics of the brain.”

Let’s talk about who’s going to do these hybrid inspections. If I’m a successful real estate agent, do you really think I’m going to spend my time doing appraisal inspections for peanuts? Who will get the jobs? The newest of the agents who could use a little gas money. It’ll be just a part time gig until they start making some real money selling real estate. It will actually be very good on the job training for the agents, but for home-owners and consumer protection, on the job training may not be the best way to handle something this important. People who have the least education and experience of anyone in the industry, who know little about the real estate business and even less about measuring square footage will be the people appraisers are supposed to rely on to provide them with accurate information. If I’m buying a house, do I really want the lowest person on the totem pole providing the foundation for my value? Not likely…

And remember, these are the same bankers that don’t like appraisal Trainees. They don’t trust the people appraisers have personally trained and know. So they say, let’s get someone we don’t know or trust at all and let them get this important info for us. And make no mistake, this information is extremely important to the valuation process. An outsider looking in on this would say it’s an insane scenario. We won’t take appraiser trainees, but we’ll take real estate trainees who have about 30% of the education of appraisal trainees, who are not good enough for the job evidently.

 Consider what might happen if appraisers simply refused to sign these reports. You can write whatever you want in the report, but if there’s a problem in the future, guess who they’re coming after. Look at a little history and you can see who lenders will come after if there is any trouble, and it may be six or seven years after the fact -  the lowly appraiser. Do you really want to sign a report (with all it takes to earn and keep an appraisal license) for a few hundred dollars? Is that an appraiser’s worth to the mortgage industry? Have you ever seen GSE’s and banks asking for public comments on this topic? It’s only important to those looking to make huge profits from the new products. The Golden Rule is in full swing.

 If there was ever a time for appraisers to just say no, this is it.

 Of course, this is a business decision for every appraisal business across the country. However, if the number of appraisers willing to sign off on these hybrid reports is low enough, just maybe, they will figure out we’ve gone as low as we’re going and we’re starting to push back. Just maybe it’s time to leave the appraisal industry alone for a while and focus on the real estate industry and appraiser’s “Source” of information. No one ever clamoured for lower appraisal fees, except for lenders, and they only want a cut of the appraisal profits. It’s still all about control and money. But this time, appraisers can actually influence their own futures. So, are you going to be a hybrid appraiser? Get ready, the requests are coming soon…

 

Tax Values Just as Accurate as AVMs?

by Hamp Thomas on 05/25/18

The battles rage on to decide who will take over the automated valuation process. There are big companies lining up to take over this massive profit arena. And, make no mistake, it’s all about the money. At the end of every discussion about AVMs verses traditional appraisals, it has less to do with faster or cheaper, or better, and sadly little to do with consumer protection. It has to do with who gets the profits that will be taken away from the appraisal industry. 

 

Let’s talk about the goal of these valuation products. Supposedly, lenders are looking for faster and less expensive ways to get a valuation product to speed up the lending process. All of this is the pursuit of making the entire process faster and less expensive for consumers. I certainly agree there are times when a full appraisal seems like overkill. For a client looking to get a 40% loan with an 800 credit score, paying for a full appraisal seems unnecessary. We do need other options.

 

Well here’s an idea. Instead of paying for automated valuation services, which depend on public records for a large amount of their data, let’s just use the tax assessments. Whoa, stop the busses! What are you talking about? If we really want to speed up the process and save consumers a ton of money at the same time, lenders and the GSEs can simply use the tax assessment value to establish an estimated home value when making loans that don’t require a traditional appraisal. At least the tax department has seen the property in person. And, if you will take ten homes, pull three AVMs for each one, and then pull the tax assessments, I am betting you won’t find a 1-2% difference in values. So, why all the drama about who has the best algorithms and fancy programs for sorting through all this data? The tax department wins hands down. Other than getting inaccurate square footage (which is NOT part of their job description), tax departments do a great job. Their track record on accuracy is certainly as good, or better than that of AVMs.

 

I’d also like to give a shout-out to Lima Ekram with Moody’s Investment Services, who has the foresight to realize the dangers of automated valuations. Moody’s has concerns over the vast differences in the models for AVMs, and the lack of standardization in data which provides a greater risk to investors. Any loan supported by an AVM should NOT be packaged with loans supported by traditional appraisals. Moody’s is trying to protect their clients, understands the potential dangers of these big data products, and is a voice of reason in an arena of frenzied AVM products racing to the market. 

 

Please, do your own test. Then share it with everyone who will listen. Find ten houses and compare the assessed values with any automated valuation service. I am betting you will find it proves my point. This automated valuation revolution is all about making profit. It’s got nothing to do with saving consumers time or money. It is simply a new prize on the table, with everyone fighting to see who wins. It’s also part of the bigger plan to allow big banks more control over the lending process, where appraisers are the last line of defence for the consumer.

 

Think about this. Assessed value is a single number. It is a number available for anyone to see. With automated valuations, if the lender doesn’t get the value they want with the first AVM, they can simply find another product until they get the value they need. There is no such option using tax records and that’s another plus for consumers.

 

In a head to head contest between tax values and AVMs for use in mortgage lending, I’ll take tax assessments every time. That is the best way to establish values without the use of a traditional appraisal. It would also be a huge win for consumers…

 

 

I choose not to be part of the big data valuation revolution

by Hamp Thomas on 02/14/18

The big data and automated valuation explosion will ultimately destroy the real estate industry and it will take decades for it to recover. The facts are, we live and work in a price-per-square-foot industry. The square footage data used in the so-called “official record” in local tax records is in error enough to alter home values and it’s an equal opportunity offender – values can be too low or too high. And, it’s wrong enough to dramatically change home values, ranging anywhere from as low at 10% to as much as 60% (and even more in some cases). That margin of error is just too high to ignore. Until someone comes up with a way to improve this square footage information, the one number that serves as the currency of real estate, all the big data in the world will never price real estate fairly or consistently. It may work in 10-20% of markets across the country, but in every other market the valuations can be a joke. Ask local bank managers about the quality of online real estate valuations. Ask appraisers. It’s no secret. However, the local people dealing with consumers don’t have to deal with stockholders and corporate boards, who are only concerned with raising profits. This massive online valuation push has nothing to do with improvements in technology, it only has to do with timing. Big Banks see this as their best opportunity to force feed the idea of better, faster, and cheaper valuations at a time when appraisal problems have been in the news.

 This is not even a new discussion, even though many would like you to believe it is. They will argue we have all these great new data tools at our disposal we didn’t have even ten years ago. And, armed with this new data and technology, home valuations are easier and more credible than ever. That’s simply not true. The entire appraisal industry assault that started with the HVCC is all about the money. It’s nothing more than the Golden Rule at work. The banks have all the money and are doing a great job convincing Fannie Mae and Freddie Mac that online valuations are the way of the future. They argue they will do a better job and do it cheaper. Even if they allow appraisers to only work on the comparable selection and valuation process, they would have real estate agents or anyone else but an appraiser perform the onsite home inspection. If you take away the inspection process from the appraiser, you place an untrained person in charge of one of the most important parts of the process. Computer valuation or untrained inspection with limited appraiser participation, I argue the whole program is nothing more than smoke and mirrors and the ultimate loser will be the American home buyer, and the mortgage investor who relies on these unreliable systems.

This is not rocket science. For all their specialized mathematics, the most weight in each valuation comes down to price-per-square-foot, using inaccurate square footage details. When the largest part of the valuation process comes down to only two numbers – the sales price and the square footage – and one of those numbers is wrong (the square footage) – then every value created using this formula will also be wrong. It’s not that complicated. I say show us your formulas used to create these “better” values, but no one wants to share. Behind the scenes, we hear it again and again, it still comes down to the price-per-square-foot in the vast majority of residential valuations.

Write this down. If online valuations replace living, thinking appraisers, the results will be an onslaught of unreliable mortgage loans based on a faulty data system. Home buyers will think they have a 10% equity situation only to learn they actually have two or three. Or, a mortgage loan for $250,000 will discover the house is actually worth $210,000 when they decide to sell. Who will pick up the tab? Not the big banks that knew all this going in. It will be the taxpayers who will pay the price, twice.

The evidence is easy to see with just a little investigation. Appraisers, find ten home sales that went through the MLS where you did the appraisal and compare their online valuations (and their tax valuations). Get ten of your peers to try that in ten different markets. Two patterns emerge. First, the square footage numbers in the appraisals are different from those in tax records (and likely MLS); and second, the values don’t come close to matching. There is over and under pricing with percentage errors all over the place. Don’t trust my theory? Try it for yourself.

Real estate appraisers need more training to make their reports better and they do need to learn more about the latest tools at their disposal. They also need to do more research and analysis than ever, not less. Appraisers are charged with protecting people’s single, largest, lifetime investment, and the place they will call home. And yes, the price of an appraisal might even go up a little. Consumers never complained about appraisal prices, only banks who wanted the money for themselves by using automated valuations they control. Think anyone is clamouring for doctors to lower their fees? How about new car prices -- is anyone working hard to lower car prices? People want quality care and products and the price is the price. However, the “price” of this fiasco may be the downfall of the American real estate market.

 

 

Are you getting the full value for your home? 
Got a Question about Square Footage, Public Records, MLS, or AVM's?

We'll try to help. 
The Real Estate Advisor