The World of Residential Square Footage
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.
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.”
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.
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?
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 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.
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.
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®!
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…
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…
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…
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.
Appraising real estate is a tough job, even under the best of circumstances. There are too many occasions where every person involved in the transaction is upset and all eyes are focused on you. Even if you’ve done the best appraisal of your career, had perfect comps, and though you did a great job that no one could argue with; argue they do and at the end of the day, you are the only person screwing up the deal for everyone involved.
And, we’re not talking about being a little upset. We’re talking about downright mad as hell angry. The kind where they will tell everyone they know. They will do their best to hurt you, the way you (in their minds) have hurt them. You single-handily took their dream home right out from under them and how are they supposed to forgive that? It’s not your job to be the know everything better than everybody else, real estate God that never makes a mistake, it’s only your job to complete what the bank needs to get the loan approved. A lot of other people have already figured out the price long before you got involved. They looked at the competition and know what’s going on in the current market. You come along with these closed sales and say that the sellers, the seller’s agent, the buyers, the buyer’s agent, and the lender must all be wrong. The appraiser is basically saying everyone else is wrong and they are right, deal with it. Now that is power!
Welcome to the world of a residential appraiser. Sometimes, not matter your best intentions, the value just isn’t there. You really think the agents must have done a sale’s job on the buyers and the sellers are trying to make a huge profit that’s not even close to what the value of neighboring houses has been.
Sellers overprice a home – anyone ever heard of that?
Real estate agent take an overpriced house just to get a listing – anyone ever heard of that?
Buyer’s love that design or location or something. They are willing to pay whatever, but they want that house. Maybe their best friends live next door, or parents live down the street, or they just have to be in that school district. For whatever reason, they want that house and don’t really care about the price – anyone ever heard of that?
A buyer’s agent go along with what his clients want just to make a commission – anyone ever heard of that?
A lender who only gets paid if the loan goes through – they don’t really care about a house being priced twenty grand over current market value – anyone ever heard of that?
It comes down to motivations…
The question is – what is the appraiser’s motivation?
For the majority of seasoned appraisers (not the ones who came along during the boom years), there is one mandatory goal – price it fair. Nothing complicated about that. The comparables paint a picture, that (even in a rising market) shows a pattern of current market value. The appraiser doesn’t personally decide the value, they just report the market. Appraisers are taught to be fair and honest and not swayed by motivations. They are working hard to protect people who often don’t want their protection. When that loan is sold in the secondary market, if that appraiser doesn’t do their job right, then someone’s retirement account may get the short end of the stick. But that doesn’t seem to happen very often and they are not the ones on your phone and in your face. Buyers and sellers, agents and lenders have an emotional and financial interest in this transaction. Today, they want what they want.
It takes a strong mentality and confidence in your ability to be, and to stay an unbiased appraiser. All these people, with far less training than you have, read your report and tell you where you made errors. Is it really our job to say to them that “because we are smarter than everyone else, you can’t buy this house?” Where do we draw the line?
? Seller is mad
? Both agents are mad
? Buyer loves the house and really just wants to loan to go through. They are mad
? Lender is mad and doesn’t get paid unless the loan goes through
And there lies the appraiser’s dilemma. Do you have the courage to stand in the face of all this pressure and stick to your guns about a value? Do you trust your skills and experience? We’re not talking about a few thousand dollars on a $500,000 contact, none of us are that good. But, how about a $20,000 difference on a $250,000 house? The comps are perfect, you used everything close and used six closed sales plus two active listings.
What would it take for you to change your report?
How much pressure is there to make changes?
Do you have what it takes to stay firm with your valuation?
Should you really care?
If you don’t, maybe you shouldn’t be an appraiser. Yes, it matters. No one wants to bring in a low appraisal. But we also don’t want to see a buyer overpay, even if they are okay with it. If you can hold firm in the face of adversity, then you may have what it takes to be a residential real estate appraiser.
The lender gets a call. Agent tells them that appraiser “X” just called to set up an appointment to do the appraisal for 123 Main St. That darn appraiser killed my last deal and if he is appraising this house, I will have my clients find another lender. I flat-out refuse to work with this appraiser.
Whether it’s the listing or buyer’s agent, who put this person in charge of the appraisal process? Does the banker have to listen to them and risk losing the loan? It depends.
What’s his motivation? To protect his client and do the best job he can; or to simply get a commission. Far too often the commission wins. Many could care less if the appraiser is honest. They think they have already figured out the value and they don’t need someone coming in and checking their math. They just want an appraiser who understands their job, which is their mind is to bring the appraisal in at the contract price. The agents have already set the value and no appraiser knows better than they do about the current market.
This is happening all across the country and is getting out of control. How much power does a Realtor® have over the appraisal process? Apparently, they have decided they know best and are taking charge.
Then there’s the MLS. That’s a whole different set of problems that keeps getting worse. Puffery and flat out exaggerations (lies) are filling the MLS. Anything to get a sale and get paid. And, square footage being correct is getting worse in more and more places. Most agents aren’t going to measure a house, or pay to have it measured. They are leaning towards using tax records and figure it’s close enough. Reality is – It IS NOT!
If appraisers don’t help protect buyers, lenders and mortgage investors, and keep doing their job the best way they can, with fair and honest values, many of these rogue agents will say anything to get a deal done. Consumer protection is going backwards at an alarming rate and no one seems to be looking at agents and the MLS. Why is that? Reform needs to make a beeline for Realtors® and the MLS!
The appraisers we need to keep consumers protected are the very ones being driven out of the business. They are being forced out by big banks and AMCs (who much too often provide zero benefits to consumers). Everyone seems to have forgotten that these services (provided by AMCs) used to be part of the bank’s responsibility for every loan. It was just the cost of doing business. Then came the AMCs and banks’ profits had to go up. After all, they lost a whole department. Now they pass the expenses along, mostly on the backs of appraisers, who haven’t had a raise in over a decade. They have had fees lowered due to AMCs taking part of their fees (which are still undisclosed in settlement statements). Appraisers also have not had an increase in fees, but have had their work load more than doubled. Think about that, twice the work for less money. No other business would have been allowed to follow that path, yet it’s exactly what is happening to appraisers.
With bank profits up already since the invent of AMCs, now this has become “normal business” so banks need more. Along comes the automated valuation revolution. Now banks want to push the use of AVMs with more and more loans, which gives them even greater profits. This is not rocket science and it’s nothing more than the Golden Rule at work (the one with the gold makes the rules).
With Zillow® and RPR® pushing online valuations to consumers and agents, and banks pushing the same, it is all very bad for consumers. The hard, cold facts are - AVM’s are not accurate. But, they are a money making machine that is driving this revolution, and no one in the government seems to care about protecting home buyers from these valuation imposters. All these automated valuations are based on inaccurate sqft details listed in tax records (and flooding the MLS as agents have stopped measuring homes). Local tax values are typically more accurate than AVM’s, but there’s no profit in that.
So consumers will suffer once again, and so will the companies and people who invest their money in mortgage securities. It’s simply a matter of when, not if, another mortgage meltdown strikes. Someone needs to pay attention to the ‘big picture” here. In the next 10 years, if something doesn’t stop this current trend, we will be too far gone to correct. Write this down and mark my words – appraisers (as we knew them) will be all but gone within the next ten years. I believe less than 20% of all loans will require a traditional appraisal if we continue on this current course. With the appraisers we need to train the next generation all gone (which is what big banks have wanted all along), it gives them total control over the loan process and no oversight. Appraisers are trained to be fair and lookout for consumers and mortgage investors. Everyone else has a motive in the process and is rewarded much greater than the lowly appraiser who got the brunt of criticism over the last mortgage crisis, when it’s beyond crystal clear that big banks were the problem so much greater than appraisers ever were. Big banking fines and penalties are still making news but no one cares. It certainly hasn’t impacted their profit statements.
These changes will take a heavy toll on the real estate industry. True equity values may be dependent on which AVM the banks use. And, they will have several at their disposal. People who are not trained in real estate values will be in charge of loans and collateral security. It’s like turning the hospital over to the pharmacists. They may be very good at their job, but they have no business treating patients and giving out medical advice. We need doctors, and we need appraisers. The train is rolling full steam ahead and appears unstoppable.
The next generation is doomed if all real estate pricing is dependent on home values created through online valuation services, most of which are not worth the paper they are printed on. It’s an ugly truth. Buyers beware…
Realtor Property Resource® is a private automated system just for Realtor® members. They are making great strides in promoting this service, and more and more agents are using this system to create their CMAs to present to owners. I recently reviewed a report provided by the listing agent which included sixty-nine pages of every imaginable piece of information. To an owner, this must look very impressive. However, to anyone who understands what a “Comparable” sale is, this report was downright frightening. To think that many of the newer agents are using this tool to develop home prices is a warning sign we are in for a new run on low appraisals. With the RPR®, chances are the agent will get over and under valuations. They might get a report with a close value in a large urban area, but only in limited areas. The reports with accurate values, in my opinion, would be no more than 20% nationwide. It’s a bad system, but with great advertising. And, much like the new Zillow® ads telling consumers they can feel better about what they are paying for their new home by checking the value on Zillow®, these warm, fuzzy commercials are geared for first-time home-buyers and they are trying to teach a whole new generation to trust in automated valuations. Consumer protection goes right out the door as consumers learn to trust these online valuations over a local, highly trained appraiser.
Let’s take a look at the comparable details from a “Seller’s Report.” First the subject property is listed with 3,436 sqft of finished living area. Per my measurements, based on the ANSI® standard, the home measured 2,923 sqft or GLA. A difference of 513 sqft. So, no matter what happens, this report (using the sqft details from local tax records) is going to be wayyyy off. Now, let’s look at their selection of so-called “comps.” This home should be priced somewhere between $425,000-$450,000. The list of sales used in this report ranged from $275,000 all the way up to $1,100,000. That’s an $825,000 spread. These comps were homes ranging in ages from 1913 to 2016. The total sqft range was from 1,240 sqft up to 6,388 sqft. Coming up with an average price-per-square-foot value, using this range of sales, is basically useless. These homes don’t even remotely resemble “comparable” properties. Any valuation based on such wide parameters is not a true indication of fair market value.
But, to a seller, they look very professional and the agent explains how they look at the “total market” to come up with a listing range of values. A seller may not understand, but an experienced real estate agent should know the difference and realize this is comparing apples to grapes and watermelons. What is a seller supposed to think? They may bring in two agents to interview for their listing. The first shows up with this 69-page report that has the Realtor® brand all over it, color graphs, and all the bells and whistles possible. The next agent shows up and suggests they get a prelisting appraisal to be sure about the fair market value. This agent comes in with an appraisal summary and a final value that is $80,000 lower than the number the first agent gave them. Guess who gets the listing?
Then what happens if they do get a contract? They get a low appraisal. They will be told it’s because the appraiser did a bad job. No one ever considers the home may have been over priced from the start. It’s a new twist on an old game and it is very bad for the public who has to trust in the real estate profession. The “one number” that really matters, the “final value,” is the most important element of any valuation and in online valuations, it’s far too often not worth the paper it’s printed on. It comes down to the “Trust Game” and for right now, online valuations are winning in dramatic fashion.