Institute of Housing Technologies
Improving the Real Estate Information Network
MLS - Multiple Listing Service
Real estate is full of three letter titles; CMA, AVM, BPO, CRS, ABR, GRI, CRB, MLS, etc., etc. There are a LOT of three letter abriveations, but none more important than the MLS - Multiple Listing Service. What is the MLS? It is the voice of the largest private trade organization in the world. The MLS provides the exclusive information of Members of the National Association of Realtors®. This massive database is created one sale at a time, by each listing Agent. Regardless of who provides it or where they get the information, once it's recorded within the MLS it instantly turns to Gospel. It is considered a Fact of information and many industries depend on the quality of this information. MLS is called the "most trusted source of real estate information in the world." However, as more agents turn to online public records and no longer report square footage details, the "source" of this important information is often the local tax department. MLS - one house and agent at a time...
In MLS, there is no independent check on the accuracy of the description of the home’s attributes. Also, there are few restrictions on what agents can type into a field in the database, and no requirement that all fields be completed. As a consequence, there can be substantial amount of missing data for some variables, such as SgFt and a lack of uniformity in the way fields are codes. Any national search engines cannot obtain uniform data without uniform input of these fields. With or without flaws, the MLS is the way homes are valued. The quality of the appraisal industry is in direct correlation with the quality of information contained in the MLS.
AVM - Automated Valuation Model
Most people have looked at one of the nationally known automated valuation models or AVMs. Sometimes just for curiosity, and sometimes to try and get an idea of what their home might be worth in today's market. Real estate is still in the news and everyone is familiar with falling home prices and empty neighborhoods scattered across the surburbs. Inventories are high and prices are dropping in many markets. Most AVM's have one common denominator; they all use the square footage number taken from the county tax office. Somewhere in their forms and formulas, you will find the price-per-square-foot calculation. AVM's also use the sales that are closest in Proximity, not necessarily Comparability. They may compare homes built in 1920, 1950, 1990, or new construction all the same. Brick, log home, Colonial, Contemporary, golf front, water front, etc; anything within a one mile radius is considered the most comparable sales, at least according to most AVM's. They don't consider things like the home's condition or quality, or even things like one home located directly across the street from another, where one is water front and one faces a golf cart storage shed. Using this Proximity mentality, added to using inaccrate square footage data listed in public records, most places you would b wiser to trust the local tax assessment than a computer valuation product. At least the tax department has seen the house. If you want to have a little fun looking up your neighbor's house or your boss's house, they're great. If you want to know the true value of your home, call a professional. I guarantee you it will save you money, grief, or both.
Most AVM’s select comparables based more on proximity rather than comparability. While an agent or appraiser tries to find the most similar sales, meaning closest to the subject property, but more importantly, the most similar to the home itself; an AVM will display every comp based on two main factors. The date sold and the closest distance to the subject property. Pull up some of your friends or families homes and look at the "comparable" sales. Do you think they are a fair comparison to your home? The "comps" may be built in 1930, 1950,1990, or, yesterday; they are all included in the calculations.
What about the square footage all being the same? Test it out for yourself. Check the sqft total on any AVM and then pull up your local tax site. The sqft total is the same number. Also look at any AVM and on most of them you will find the phrase “Price-Per-Square-Foot.” Well, If size doesn’t matter, why include it in their formula and display it on every property? Everybody uses "Size" in calculating home prices, but nobody seems concerned that there are dozens of different measurement methods to create the size of houses. When two numbers (sales price and size) control such an awesome power, they Both need to be accurate. Today, there's a very good chance one of those numbers is FLAT OUT WRONG!
Usual and customary appraisal fees should be set by each local appraiser. Who has the power to price any other person's worth or value in the marketplace? The only reason there is a discussion about appraisal fees is simply because banks want a part of the appraisal profits. Appraisal fees are rising and consumers are getting less for their money all the time. That's the kind of reform we can live without!
The "Turn Time" Myth
Prior to May 2009 and the HVCC,"turn time" was not a phrase most people had heard was not a big issue in the appraisal business. Timing always matters in the loan process, but this is one timing issue that has been completely manufactured. Have you ever heard of "turn times" for home inspectors? Why not? Because home inspections are generally ordered near the start of the loan process. Most people want to get the inspection report back to make sure the home is sound. By having it done early, it gives the buyer and seller time to evaluate the contract, and if further negotiation is necessary, there is time to complete the task without both parties knowing the moving truck is scheduled and you have already signed up for vacation time to move. The home inspection is a critical step in the home buying process. So is the appraisal! Lenders used to tell consumers they ordered appraisals later in the loan process to make sure the loan was approved before they made the buyer spend the money for an appraisal. Do you really think the bank is worried about you saving the appraisal fee? Wouldn't it be nice to think so. However, business is business and the bank is NOT concerned with you spending your money for an appraisal report. Didn't you have to pay for the home inspection? Why should the appraisal be different? When you are ready to buy a house, if you have been pre-approved and know the only reason the sale will not go through will be due to either the home inspection or the appraisal report, wouldn't it make sense to order them both at the same time? Then the appraisers would have about three weeks to get the reports done and there would be no "turn-time" discussions.
Appraisers evidently make good scapegoats. Loan delays used to be blamed on appraisers when the appraisal order had been placed only hours before. Any loan delays were due to the appraiser; at least that's what the customers were told. Then appraisers were blamed again when the HVCC took the appraisal business model and told thousands of appraisers they had to work for someone else now - AMC's or middlemen. Try that on Wall Street. That's a lot of power for any one government official. Even the president couldn't do what Mr. Cuomo did with one stroke. Downright un-American!
And now we have another new new law. About getting your appraisal report back at least three days prior to closing... what a disaster! Three days prior to closing, after everyone has made plans to move. Boxes are packed and plans have been made. Insurance in place, utility change orders completed, moving trucks and friends and family lined up to help. Three days before you are scheduled to close on a new home is NOT the time to bring in a potential bombshell! How would you like to get the home inspection three days before closing? It's insane to think having the appraisal ready at lest three days prior to closing helps the buyer (or the seller). If there is a problem, what are they going to do? Is the seller packed and ready to move or have they already moved out? Just imagine the stress level three days before two families (or more) change their entire worlds. The biggest move of your life, and after investing all your hard work and emotions, now you find out the appraisal came in low. This is a train wreck heading to a real estate office near you.
If you are a buyer, seller, seller's agent, or a buyer's agent, make sure the appraisal is ordered early in the loan process. Don't let a low appraisal, at the end of the trail, turn such a happy occasion into a nightmare. Even a few thousand dollars difference in the appraisal can create pandemonium and kill deals that would survive with just a little time to absorb the information. Appraisals - order early, move easier...
Forcing appraisers to work under unrealistic deadlines is not helpful to the home buying process to start with. If this is my largest lifetime investment, I want my appraiser to take their time and do a good job. And, make sure they feel they are being paid a fair wage, so they can take the time that is needed to do a thorough job. This is NOT the time to pinch pennies. Nobody wins by rushing appraisers and pushing down their fees, so consumers can pay more for appraisals, get less quality, and lenders can make more money.
CMA - Competitive Market Analysis
The Golden Rule
The Golden Rule is alive and well in mortgage lending. Who controls the real estate market? Banks do. All the rules and appraisal changes in the world aren't going to help the real estate industry. They took away all the low and no-money down loans and appraisal problems magically disappeared. Now, the lending rules have been completely reversed and very qualified borrowers are often left with no loans. Too often, unrealistic appraisal guidelines keep the real estate market from moving forward. Do we want to repeat the free flow of money we had before, no. But, we have to get back to practical lending policies. The ones who control the flow of money for mortgage lending hold the future in their hands. It's time to move back to common sense lending. Five percent down may not be adequate. But, with 10% and closing costs in hand, and a realistic credit score, consumers should be able to buy houses and get America moving again. Reform Wall Street and let Main Street get back to business!
It truly is the information age as more and more people, regardless of their age, turn to their computer first. The real estate business, like most others, got along just fine before we ever had computers, cell phones, or the internet. Now, the internet is just the way it is; our kids can’t imagine how we survived with “World Book®” and “Britannica®” encyclopedias as our only source of information. Ask a kid a question these days and their first thought is the computer and Wikipedia®. Remember libraries?
One of the most interesting aspects of this information overload is that people generally accept whatever information they see on their computer as factual. After all, it wouldn’t be published on the internet if someone hadn’t checked it for accuracy, right?
A little scary and certainly revealing about human nature. We expect the “professional,” in whatever business it may be, to know what they are talking about. After all, this is how they earn a living. Consumers trust the information Realtors® provide. Whenever an agent posts their information in the MLS system or to their personal or company website, it is instantly available literally around the world. Millions of people can see this information and they expect it to be reliable. Most real estate agents work very hard on just about every other aspect of their trade and spend a great deal of time and money to get noticed. However, very little time is spent discussing how to measure a house or the importance of accurate square footage data. Measuring real estate is one of the most basic components of the real estate trade, yet it receives very little conversation or educational opportunities. Measuring houses is generally little more than one page within most pre-licensing books; for agents and appraisers.
Any information, once it's reported through the MLS, is automatically assumed to be a fact of data, and its accuracy never questioned. The most reliable "Source" of real estate information in the world. What a remarkable power (and responsibility)! Regardless of who provides it or where they get it, once reported in MLS it turns to Gospel.
The Information Age
Where Does MLS Real Estate "Information" Come From?
Realtors and Square Footage - Part 1
So, how many of you are completely comfortable measuring square footage? Do you ever think about how the information you provide through MLS affects your clients, your peers, and the many other professions that use the MLS? How about creating a CMA? Where’s the first place you automatically reach for the square footage total? Or, do you measure every house before you do any math? Does your company have a written policy on providing square footage? Do you automatically pull up the local tax rolls and use their square footage details? Like most of the real estate business, it depends is part of the answer.
If you work around real estate for very long, you’re going to hear someone talk about the local tax department and the square footage numbers. It’s no big secret. Most brokers have heard that the sqft information contained in public records may not be reliable, but (come on) how bad can it be? If it’s only off a small percentage, does it really make that big of a deal? After all, everybody does it. And, that way you can say you took the total from the tax department so it reduces your liability, right? If a buyer has any questions, they can have it checked out on their own. That’s what we tell everyone. It’s just wonderful that the tax department provides this service for us! What a great liability saver…
Well, if that’s the case and you simply tell all your clients where you
got this sqft info from, what form do you use to have them acknowledge
that fact? Don’t think that’s important? Some agents are learning that
lesson the hard way. If you give out any square footage total, it just
became your responsibility. Listen to that again. If you give out any
square footage total, you are responsible for its accuracy. Square
footage should really be no different from Agency. It should have a disclosure form. Every contract should include a “statement of square footage” signed by buyers and sellers. Right now, Colorado is the only state that mandates such a disclosure statement for their licensees.
Over the past ten years, the use of public records has skyrocketed. If you search most MLS systems, it doesn’t take long to find a square footage total that matches the square footage listed by the local assessor’s office. Depending on the area, much of the information used in every CMA, and that appraisers use in every appraisal, comes straight from the tax department; who creates “an estimate of size for assessment purposes only.” Ask your local tax assessor.
There was no meeting between the tax department and the real estate industry, or any agreement for the tax department to provide square footage totals for the real estate industry. For many agents, it’s hard to pass up a fast, free number, that many still believe is free from liability. But, if you check out the recent court decisions in Texas, Arizona, and Oklahoma, you will see that agents (and appraisers)are being held responsible for the square footage numbers they provide, regardless of any disclosures in MLS. Stay tuned… You will be talking more about square footage in the next few years.
The Multiple Listing Service - MLS
The power to change real estate values. The most powerful "source" of real estate information in the world. Created one sale at a time, by each listing Agent. Entering a listing to attract a buyer, or for use as a comparable sale, are two different functions. MLS often provides only the picture painted by the listing agent to attract a buyer. Pictures are the best way to keep MLS as a complete source of information for use in CMA's and appraisals.
See the Top 10 List
of Measuring a Home
Last week I measured a home for a new listing and the tax records showed 4,449 sqft of finished living area. My sketch revealed 1,638 sqft of finished living area, and lots of garage and storage space. Just imagine the automated valuation model's value on this home. Even at only $50.00 per-square-foot, the error in tax records (of 2,811 sqft) provides over a $140,000 mistake. And, it's NOT the exception. It happens every day, in every state. Size does matter and the MLS is the most trusted source of real estate info. Don't trust your listing and your client's finances to tax department square footage totals.