Call to Action Buttons
Appraisers Don't Set Value
The Academic Report
By: Dr. Charles E. Gilliland, Ph.D.
Recently, residential appraisers have been blamed for obstructing recovery of the housing market. Appraised values for homes falling short of the combined costs of land plus building cost thwart the sale for newly built properties. Similarly, appraisals that fail to reach proposed offers on existing homes cause those deals to fail. If only the appraisers would appraise the homes at the agreed price or cost, the deals could proceed and the market would heal.
The problem with this logic betrays a distortion of the role of an appraiser in real estate markets. Much like comparison shoppers, appraisers investigate recent market activity to discern prices recorded in sales of comparable homes. After identifying a suitable sample of sold homes similar to the subject of the appraisal, the appraiser uses specific techniques to ascertain the most likely price a prudent buyer would pay for the subject. The appraiser does not manufacture or determine the market value only the market can do that. The appraiser merely reports what the typical market participant can expect to receive in a normal sale.
Blaming the appraiser because the amount is too low to justify the envisioned deal is like shooting the messenger for bringing bad news. Instead, the disappointed market participants should consider the possibility that their envisioned prices is not justified by conditions in the market.
In the frenzied markets of the 2004-2006 era, buyers outside of Texas routinely paid 9 or even 12 times their annual household income for homes. The statewide ratio for Texas was 2.48 in 2006 according to Bureau of the Census statistics. Resetting prices from the more lofty levels to more sustainable level would require a substantial reduction from prices paid in that era. For a market where participants were paying 10 times income, restoring the ratio to the conventional 2.5 times income would require a 75 percent reduction in home prices with all other things remaining equal.
As that reality has become more apparent, prices in markets outside of Texas have plummeted to reflect a more sustainable relationship with household income. Even some Texas markets have weakened. Appraisers are simply documenting the results of market actions seeking to reestablish a the historical relationship between home prices and owners’ ability to pay for housing from without relying on soaring appreciation to make ownership affordable.
Dr. Charles E. Gilliland is a Research Economist with the Real Estate Center in the Mays Business School and is Helen and O.N. Mitchell Fellow of Real Estate in the Finance Department in the Mays Business School at Texas A&M University.
Comments
Appraiser's Don't Set Value...Or Do They?
I can both relate to and appreciate the author's commentary. And, after 25 years in this profession as both a Certified Appraiser and Certified Assessor with extensive statistical modeling knowledge, I must respectfully disagree to a point. Quote: "After identifying a suitable sample of sold homes similar to the subject of the appraisal, the appraiser uses specific techniques to ascertain the most likely price a prudent buyer would pay for the subject."Case in point: I do very little work in the entire county I reside in due to local lender relationships with some "not so credible" appraiser's. A couple weeks ago I conducted an appraisal on a property in the city I personally reside in. The listing agent is a significant aquaintance whom I've know personally for over 15 years.Apparently the buyer had done something relative to funding that caused the initial lender to retreat. While an appraisal was conducted on the property within the past 3 weeks by a well known local appraiser with over 30 years in the industry, the mortgage broker was now placing the loan with another lender and they required another appraisal be conducted with the "client's" name on it. Nothing new here.My opinion of value came in 12% below the contract price which, not so ironically, was the opinion of value of the prior report. A reconsideration of value was requested and, through the channels, I was presented with the "comparable" sales from the prior report that supposedly supported the subject's contract price.While I normally wouldn't do this, given I knew the listing agent and it is, after all, my hometown in which I have a vested interest in not wanting to see declining values, I chose to take the "comparables" and grid them as additional sales in the report. Even in light of the fact that the subject was a 2 bedroom dwelling and none of the supposed comparables were. Applying the same adjustments from the original report based upon market-extracted value-related differences based upon simple linear regression, were the additional "comparables" weighted and reconciled into the report, the indicated value would have, in fact, been less than my original conclusion of value.This obviously upset the listing agent, who was quick to point out I kept at least 7 people from earning a wage from this transaction, not to mention the fact I kept the buyer from living the American Dream. Damn...didn't know I had that kind of power and was using it for evil! And this was obviously my fault because the prior appraisal had passed underwriting so I must be an idiot. In fact, she went to far as to say "We all know appraisals are whatever you want them to be, so can't you just make this work?"I apologize for the rant, but this is just the latest in a string of almost daily instances reflective of how we are both viewed in the industry and, unfortunately how some choose to conduct their business. I unfortunately know this all too well as one of the few who still chooses to provide review work (at an appropriate fee).As someone who's seen the S&L debacle and endured the lame and misguided politics and policies as of late, I must be an anomaly as I continue to thrive based on honesty and professionalism while a select few of my brethren continue to believe they're still in the "oldest profession in the world". Setting values, I mean.
Risk
Remember the days when community banks which funded and retained loans on their books actually wanted the truth about the market and market value. After all, they had to eat the losses resulting from bad lending decisions. Risk and loss mitigation was a real issue for some lenders in that time.Remember when some one in at the national level, in Congress, if memory serves, wanted appraisers to use the Cost Approach, not the Market Approach, to "determine value." A few years later actual sales prices of condos and multi-family residences is some markets were below the actual cost of the materials required to reproduce them. Fear (risk of loss) is the key to reforming mofrtgage lending. Government bail outs & the like encourage rampant greed and bad decisions. Retired appraiser.
How do you establish a new market?
I am a Custom Home Builder and the problem I have with appraisals is that we build a unique product and are creating a new market.The homes we build are highly energy efficient, they have a healthier indoor environment to live in, they require less maintenance and will last longer, the homes are more comfortable for the occupants. and much much more.There are no homes in the area that are comparable. We are creating a unique new market!Typically what happens is the appraiser comes in and compares our homes to the existing obsolete market.We get our appraisal and it comes in less than cost of the materials to build the home!How can you fairly compare a market of obsolete homes with a HERS ratings that are well over 100 equal with one that has a HERS rating of 55?We have customers that recognize the uniqueness and value of the product we produce and are willing to pay for it. But the broken appraisal system won't allow it!This needs to be fixed. There must be a way to establish a reasonable price point for a new product class!Unless our customer can pay cash we can't sell our homes!
Some where along
the line we need 3 comparable sales. So if it's a new market I can understand your concern, but like other's have said we have to follow guild lines, from the lenders, FNMA and others, our hands are tied. I have seen some homes which I know are worth certain $$, but no sales to prove it. Even when we use older sales and from different areas several miles away, lenders don't approve it. Some time when I have done work for local banks they will work with us. But amc's are very difficult to work with. They have a set of guild line and are not very smart ti think for them selves. Your best bet is to use lenders who do not use amc's and used qualified appraisers with years of knowledge, Like SRA Appraiser's
New Product, New Market
The last sentence is the key to his whole problem. Using someone else's money comes with conditions. The Lender Guidelines appraisers must follow are based on conforming properties, not unique properties. Lenders know from 60 years of lending, unique properties are much more risky to investors to lend on. Unique properties may require unique financing. The one rule builders should always keep in mind is Cost does not equal Value. Now that I'm done with my lecture, there may be something the builder can do to help the appraiser. I appreciate any help I get from the builders or Investors that flip properties. Lists of work done, special features and the cost are useful and included in the improvement description section of the report. If the builder knows of a similar development outside the area, get that info to the appraiser. If there is a bonus factor there, that percentage may be applied to the subject assignment. Give all prior sales, pending sale info and cash sales to the appraiser too. This is a complicated appraisal, Make sure to get an appraiser with many years of experience that will take the time and do a real analysis and pay him/her accordingly. Also, If your buyers goes to a lender that uses an AMC that pays appraisers cut rate fees, with 2 day turn time, you will get a cut rate appraisal, Not all AMC's are that way. If that's the broken system referred to in the complaint, I agree.
Some solutions
These may not be what you are looking for but they are at least the basis of a viable alternative to having appraisers rubber stamp the price of the house: 1) Make sure the lender knows that they need an appraiser who has educated himself in green, LEED and energy efficient components to housing. There are courses out there that teach appraisers how to take these aspects of a property into account and justify adjustments for these features 2) You and other builders may have to make a market. If the appraisal comes back too low, either have your buyers pay the difference or try to hold a second mortgage on the difference that they cannot pay. When enough buyers purchase these energy efficient homes at the price that takes into account these new features, then an appraiser will have good comparables to choose from. The alternative is to reduce the price to get rid of the inventory. By holding a second mortgage you at least will recoup your money although it will take a little more time. 3) Encourage your local, state and national home builders associations to educate lenders about new energy efficient features which may cost more on the front side, but save the homeowners money in the long run. Not having to pay huge amounts of money for energy bills will help make sure they can pay their mortgages. I wish you well in your building ventures. I am an appraiser, RE broker and hold a homebuilder's license also. -Chuck Robertson
To the custom home builder who can't sell his new homes
You are bucking the market not the appraisers. Read the article again. You are going to have to come up with innovative ways to market and mortgage your innovative product. And you are going to have to find an innovative mortgage source if your customers can't pay cash. As you observe, your product does not fit in the market of traditional housing so quit expecting that it will. It may be that you and your suppliers are going to have to form a mortgage source.
What is a market?
A market consists of buyers and sellers brought together. You are creating a new product, not a market. You, as seller, recognize a premium value for your product. However, typical buyers also need to be willing to pay a premium for your unique product. Sometimes they do and sometimes they don't. But I, as an appraiser, would provide a positive adjustment for the comparable obsolete homes when valuing your product. However, that adjustment would be only as much as the typical buyer would be willing to pay, and not likely the cost of adding the features to the home.
Have been in the appraisal
Have been in the appraisal profession for over thirty years. Still looking for that "prudent buyer".
Spread the News
I suggest the author provide his analysis and commentary directly to NAR and the NAHB members. It is unbiased research and reports the facts as they were/are.Perhaps the analysis regarding income to purchase price (meaning debt load) needs to be further communicated to all others in the transaction. Of course, with most real estate agents, the only math they can readily understand relates to calculating their commission amount.
Appraisers and value.
So, we can't use foreclosure sales for appraisals, but can then appraise them after a knowing buyer and their agent has bought the house at a reduced price, thrown some paint and flooring in it, and now wants 2 1/2 times what they paid for it, and that is OK. And do an appraisal for the bank of the "NEW" house. The authors comments are right on. Unfortunately, no one but us appraisers understands it. Now even NAR is against us. And I have also held a real estate broker's license for over 25 years. It all does make you wonder where we will end up with the greed of the banks and the real estate offices and agents. But, we are also our own worst enemies. I still hear of apprasiers complaining that they can't get a fair fee. I thinks that most of the time they won't ASK for a fair fee. Thay take what is offered. So we as appraisers are also in the game to some point with what we do.
Sorry to be nit picking, but if you are going to write a comment
As far as receiving full payment for an appraisal, I haven't done a mortgage appraisal since HVCC went in to affect. I have 30+ years experience, I have been put out of business due to low fees that I refuse to accept. The problem is all the new appraisers accept low fees as they are similar to what they received during training.Even the person that taught me, started to accept the low fees just to pay his bills. It makes me sick. If we had all stuck together this would not have happened.If we all go on strike 4/1/12, they will have to start paying us our TYPICAL AND REASONABLE FEES. Of course there are those that will take advantage, but, save up your money and you will reap the rewards that we so deserve. THINK of all the education , experience etc over the years. The years that it took us to get the clients we depended on, that went away. You might forgive my spelling, but I'm so angry that you have let this happen to us. The law is behind us, now we HAVE to stand up, and tell the AMC that WE ARE NOT TAKING THIS ANYMORE. PLEASE, let's do this other wise we are just hookers looking for the JOHN that pays the most. JUST SAY NO. THEY WILL HAVE TO START PAYING WHAT WE ARE WORTH. I am so sad, that this has been allowed to happen to us. That is why I am a proud member of the NAIFA, past state director twice, president and VP as well as others. If you don't stand up, you deserve what you receive. GET A BACK BONE, Joine us, Cathy D Gillispie, IFA.
reply
"If we all go on strike 4/1/12, they will have to start paying us our TYPICAL AND REASONABLE FEES." Dude, your comment just lost all credibility.
Blame game....
And that's just what it is, a blame game! Some one will always get the blame for something gone wrong. I've been in for 20 years and it's always been known the appraiser is the scapegoat in all aspects of a real estate transaction. Which tells me, appraisers have the most power! Unbiased analysis to arrive at a solution to a problem is power. And as we all know, anybody with power, there's always somebody out there to knock 'em down. My current gripe stems from builders who have an excess inventory and are selling this inventory for less than what the exact same home sold for a couple years ago. And then they turn around and complain that appraisers are the culprit. And then there's the second home market where a lot of people that have second homes are letting them go because they can't afford two or more house anymore. Take these two scenarios along with the short sale and foreclosure sales and an appraiser is "darned if you do and darned if you don't" when it comes to choosing and using the most comparable sales that represent a "true" market value. And then on top of all that, you have everybody and their brothers and sisters telling everybody what adds value and yet, when a licensed and certified appraiser comes in, oh no!, here comes the bad guy/girl. To me there ought to be a marketing campaign that goes something like this "After you've checked with the home improvement store employee, checked with your neighbor, checked with the internet guru's, checked with your local Realtor....We'll still be here.....The Real Estate Appraiser!"
Appraisers do not determine value the market does!
I have been saying this for years. People think we determine value. NO we analyze the market and report what we see and express it as market value. We do not have the kind of power people think. The market is the only power who sets values. If the proposal by congress to NOT use foreclosures passes they are living in la la. Land! Guess what when we appraise property for banks we protect their lending risks. The whole idea is IF the owner defaults they need to know what it is worth just in case they have to sell it. So they do not want to over lend on the property. If it goes into foreclosure the home is now vacant and competing with all the other foreclosures out there not those homes that are cream of the crop wishful thinking arms legnth transactions where top dollar may be paid! We should appraise all homes as if vacant like relocation companies ask for! Has everyone in Congress lost their memory? Over inflated appraised values got us in big trouble. Appraiser Independence is the best thing that happened. We are trained to analyze market data and report values. Let us do that without persecution please. It is not our fault that the values come in lower than anticipated. Buyers and sellers are at the heart of it. As someone else said don't shoot the messenger!
right on
Finally someone put pen to paper on this. Very well written article. Matt McCormick, Cert. Res Appraiser
Appraisers Don't Set Values
Do we really need a PHD or rocket scientist to tell us something we all ready know. As long as the gov't does not encourgage and does not allow folks to participate in so called "Inducement Programs".....the better the market. This fiasco with the market was a direct reflection on how market players became because of the influx in easy loans, government inducements; and down payment programs. All of which did one thing..........caused the value of homes to exponentially inflate over 30% over the past five years. If the gov't would get out of the way and let markets and market players freely participate as designed............this mess would never had occurred. End of Story!!!!
Mortgage Collapse
Please correct me if I am wrong but; lenders have been under pressure since the Clinton Administration to increase home ownership for all Americans, even those that could not afford them. Barney Frank and Chris Dodd who headed the finance committees in Congress at the time demanded ever greater percentages of loans be made to low income people. Unfortunately when the Republicans took over they sadly did not have the backbone to “just say no”. That combined with FNMA and FREDDIE buying over 90% of those loans was a recipe for disaster. And oh, don’t forget the packaging of loans in a futile effort to hide the worst ones. The collapse of the mortgage industry was inevitable; it was just a matter of time.Anonymous
Anonymous
And what about realtors letting their buyers put in ridiculous offers knowingly and willingly their is no market support only to collect a higher commision. I did an appraisal with a sales price of $310,000 and their wasn't a sale out their showing it worth more than $242,000. Talk to the realtor and they are obviously complaining about the value submitted and then she literally said, "well, i thought it would come back somewhere in the $270,000 range" OK THEN WHY DID YOU LET THEM PUT IN AN OFFER FOR $310,000 WHEN YOU YOURSELF DIDN'T THINK IT WAS WORTH $310,000..bmcmanus@woh.rr.com
Appraisers don't set value, they report the facts
We already knew that, but it was nice to hear anyway.
Home Builder "Bailout" Bill - H.R. 1755
"Recently, residential appraisers have been blamed for obstructing recovery of the housing market. Appraised values for homes falling short of the combined costs of land plus building cost thwart the sale for newly built properties." Appraisers, PHD's, and rocket scientist may already know that appraisers do not determine market value, but apparently no one has informed Congress.In order to provide liquidy to banks and ensure stable credit for meeting the Nation's need for new homes, Congress has introduced H.R. 1755, banning the use of REOs and short sales as comps when determining the appraised value. Goggle it or click on the following link: http://thomas.loc.gov/cgi-bin/query/z?c112:H.R.1755.IH:This proposed legislation requires bank to use "Realistic Market Based Appraisals" that use comparable sales that are "Arms Length Transactions" which is further defined as transactions excluding "any transaction involving a short sale or foreclosed property or any other distressed real property". Lots of co-sponsors to this bill. It appears the NAHB lobbist did their job.When will it be amended to incorporate demands from NAR and MBA.I can't wait for the next exposure draft from the ASB proposing a change to the 2014-15 USPAP revising the definition of "market value", replaced with "realistic value".When will appraisers be Bailed Out?
HR 1755 - Really?
When this happens, there will be those appraisers out there who willingly prostitute themselves and submit to those all-powerful GSE's, and I'll tell them to all go urinate up a rope (please forgive my crudeness, but it's been a long day and I don't need this poo). After all is said and done, I don't think it'll fly. There are too many markets with no "arm's length transactions". As stated in the article, we appraisers are simply reporters and analizers of the market. We're mere conduits.
Appraisers to blame----Really!
As an appraiser, I know I determine the market value from the market data- meaning the sales prices of similar houses in the market area. Who gave us those sales prices? The real estate agents who sold those houses. Then they complain that we are the problem. The builder who dumps a bunch of his inventory when he can't hold on to his houses any longer and then after dumping them, builds more and jacks the prices back up for the same house- the Lender who fudges on the debt ratio for the borrower- where is the appraiser in this scenario- I don't see us there- do you? It is ridiculous to blame the appraiser- we are all so fearful of doing something wrong most of us just try to stay on the straight and narrow and do our job to the best of our abilities- and let's not forget the AMC's who only want appraisers who will go along with "their" idea of reasonable and customary fees. I have tried to increase my fee by a mere $50 with one of them and still haven't heard back after 2 weeks if my fee will be approved. The just ignore my request. I gave them a deadline of Feb 1st for the new fee- we'll see what happens. If there are bad appraisals out there- then look to the AMC's and how they are assigning appraisal orders and to which appraiser. When the government seeks to fix something it seems all they do is make it worse for all of us.Diana Bratton, Certified Appraiser, Texas
reply
Diana, You dont determine the market value of anything. Youre an appraiser. You ANALYZE, AND ESTIMATE the market value.