Appraisal 101 teaches us that appraising is part art, part science. In some cases during the boom years, appraisers might have gotten just a little too artistic. That explains, in part, why we have tremendous scrutiny today on our appraisals.
We have lost our way. There are three approaches to value. We have systematically devolved into a single approach to value, the Sales Price Approach. We have dumbed it down, way down. I have heard all of the excuses…”appraisers didn’t do the Cost Approach correctly so we got rid of it” or “there isn’t enough rental data so we don’t need to do the Income Approach”. Nonsense. There is value to developing all three approaches.
The paradox of our time is that we have access to big data. Enterprising companies have found a way to aggregate MLS data. Not too many years ago, MLS data was considered to be the Holy Grail. When I think of data, I think of facts. When I think of MLS I think of a marketing brochure–subjective highly nuanced terms designed to make something more appealing than it actually is; or at its worst, a manipulation of the price and terms to obfuscate the truth. After all, the agent’s role is to achieve the highest possible sale price. There is a natural conflict between selling and appraising.
Any appraiser who puts public record data and MLS side by side with their own data knows that they are sitting on a pot of gold. Yes, that is right. Look no further than your own desktop. And I will bet you don’t trust too many of your peers because you’ve cleaned, scrubbed and verified this data yourself. I don’t think it is a good plan to judge appraisers against their peers with an unreconciled database with no independent oversight. In short, if you are the outlier you might indeed be right.
Appraisers have an expanded scope of work and insane assignment conditions. Fees are getting thinner; appraisal reports are getting fatter. But appraisal reports are not getting any better. That is not sustainable.
No machine can describe the condition and quality of construction like a trained appraiser. It is the appraiser who can describe that a given home has a well-designed floorplan, superior maintenance, and has outstanding curb appeal. An appraiser can hear the noise from the traffic patterns of the local airport and smell the odors emanating from inside and outside the home. It is that local appraiser who knows what neighborhoods are in decline and identify the next hot neighborhood. Conversely appraisers understand that there are certain risks associated with unusual designs such as geodesic domes or log homes. There are certain risk factors that are completely ignored in the current form altogether.
The bigger question is really what are appraisers solving for? The current definition of market value is flawed. Any definition of value that includes the word “price” has a self-fulfilling prophecy. Let’s develop a range of value and a new definition that is a “lending value”. Somehow we have adopted the misguided notion that if one is willing to pay a certain price, sometimes an irrational price, that the lender is obligated to loan the money. Every single stakeholder in the housing finance system has enabled that bad behavior and in the end everyone loses.
Let’s reengineer the appraisal process and find a path where art meets science. Let’s seek a holistic solution that satisfies all stakeholders so that we may gain confidence once again in homeownership.