Hot off the presses. Recession
prompts cities to print currency
by Broderick Perkins
© 2008 DeadlineNews.Com
Unauthorized use of this story is a copyright violation -- a federal crime
Update: Federal bill aims to suspend new appraisal law
Deadline Newsroom - During the height of the housing boom, appraisers were pressured to up the value of homes. Now, during the housing downturn, appraisers are being pressured to lower the value of homes.
Either way, consumers, both buyers and sellers, are caught in the middle.
What's a consumer to do?
So, through all the muck, how can consumers be sure the appraiser's work is on the up and up?
It's not easy.
Appraisers are typically hired by the lender to protect its stake in a home buying transaction. That means the appraiser is beholden to his or her employee -- the lender -- not necessarily the buyer nor the seller.
However, both the seller and the buyer can play a role in the appraisal process through a process of due diligence known as looking over the lender's shoulder.
Here's how.
When the appraisal choice is yours or if you are the seller, demand the lender use only local, licensed and certified appraisers with trade group designations. Seek referrals from family, friends, co-workers or others you trust who've recently enjoyed satisfactory work from an appraiser.
Even if the choice isn't yours, you can ask the lender, or get your real estate agent to ask the lender for the appraiser's credentials.
"The buyer can ask how the appraisal was done, but you need to speak to the lender about the appraisal if you have any questions," said Ted Faravelli, Jr. an expert witness, forensic real estate analyst and executive director of the California Association of Real Estate Appraisers.
First, a local appraiser is much more familiar with local market and property conditions than outsiders.
In California, the state Office of Real Estate Appraisers licenses and certifies appraisers. Appraisers must be licensed before reaching certification. Licensed appraisers can appraise residential properties with a value of up to $1 million. Licensed appraisers with certification have as much as twice the education -- the equivalent of an associate or bachelors degree -- and can appraise any residential property no matter the value. At the highest level of certification, an appraiser can appraise any type of property, residential or commercial.
Affiliation with the Appraisal Institute or other trade group is also key. Institute members typically work beyond state licensing and certification requirements to earn a Senior Residential Appraiser (SAR) designation just as real estate agents work beyond state licensing requirements to achieve designations based on greater education and experience.
"SARs are much more experienced. They have more education and they are held to a higher code of ethics than state licensing. If you hire one, you'll get a true estimate of a home," says Jim Amorin, president of the Appraisal Institute.
The Appraisal Institute is comprised solely of real estate appraisers, but the American Society of Appraisers, which includes members from all appraisal disciplines, likewise grants accredited member real estate appraisers designations based on achievements that go beyond state requirements.
Local work, an unblemished license, certification and designations are good indications of an experienced and ethical appraiser, but not a blanket guarantee.
• Determine how much of the appraiser's work is done for lenders. A high number could mean the appraiser is just returning predetermined values the lender wants, rather than true market values. If all of an appraiser's work is done for a lender and the appraiser tells you he or she never comes in with a value that is lower or higher than the sales price, find another appraiser, whenever possible.
• Consider appraisers who also do estate and trust work because they are under pressure to be accurate -- not high or low. Another indication of quality is forensic or litigation work. Ask the appraiser how he or she helps litigants. The answer should be that he or she is an advocate for market value, not the litigant. Appraisers are legally required to be impartial.
• Buyers and sellers can ask their real estate agent to see a copy of the appraisal before the deal closes.
"Ask to get it in ample time to look it over. The first page has the factual information about the property, location, physical description, etc. The second page is where the value analysis takes place," said Amorin.
If the appraisal was a drive-buy or automatic valuation model-generated (AVM) some assumptions could have been made about the property and its description. If you know from your own ownership or inspection of the property that the information is inaccurate, tell the lender.
"Every borrower is entitled to a copy of the appraisal and they need to make sure they get it. A lot of them never do. You need to ask for it and you need to read it. If there's anything in there that you take exception to, you need to bring it to the attention of lenders," said Faravelli.
• Home buyers should also make sure to leave their financing contingencies in place until the lender has signed off on the appraisal. That makes financing contingent upon the buyer's approval of the appraisal.
So, through all the muck, how can consumers be sure the appraiser's work is on the up and up?
It's not easy.
Appraisers are typically hired by the lender to protect its stake in a home buying transaction. That means the appraiser is beholden to his or her employee -- the lender -- not necessarily the buyer nor the seller.
However, both the seller and the buyer can play a role in the appraisal process through a process of due diligence known as looking over the lender's shoulder.
Here's how.
When the appraisal choice is yours or if you are the seller, demand the lender use only local, licensed and certified appraisers with trade group designations. Seek referrals from family, friends, co-workers or others you trust who've recently enjoyed satisfactory work from an appraiser.
Even if the choice isn't yours, you can ask the lender, or get your real estate agent to ask the lender for the appraiser's credentials.
"The buyer can ask how the appraisal was done, but you need to speak to the lender about the appraisal if you have any questions," said Ted Faravelli, Jr. an expert witness, forensic real estate analyst and executive director of the California Association of Real Estate Appraisers.
First, a local appraiser is much more familiar with local market and property conditions than outsiders.
In California, the state Office of Real Estate Appraisers licenses and certifies appraisers. Appraisers must be licensed before reaching certification. Licensed appraisers can appraise residential properties with a value of up to $1 million. Licensed appraisers with certification have as much as twice the education -- the equivalent of an associate or bachelors degree -- and can appraise any residential property no matter the value. At the highest level of certification, an appraiser can appraise any type of property, residential or commercial.
Affiliation with the Appraisal Institute or other trade group is also key. Institute members typically work beyond state licensing and certification requirements to earn a Senior Residential Appraiser (SAR) designation just as real estate agents work beyond state licensing requirements to achieve designations based on greater education and experience.
"SARs are much more experienced. They have more education and they are held to a higher code of ethics than state licensing. If you hire one, you'll get a true estimate of a home," says Jim Amorin, president of the Appraisal Institute.
The Appraisal Institute is comprised solely of real estate appraisers, but the American Society of Appraisers, which includes members from all appraisal disciplines, likewise grants accredited member real estate appraisers designations based on achievements that go beyond state requirements.
Local work, an unblemished license, certification and designations are good indications of an experienced and ethical appraiser, but not a blanket guarantee.
• Determine how much of the appraiser's work is done for lenders. A high number could mean the appraiser is just returning predetermined values the lender wants, rather than true market values. If all of an appraiser's work is done for a lender and the appraiser tells you he or she never comes in with a value that is lower or higher than the sales price, find another appraiser, whenever possible.
• Consider appraisers who also do estate and trust work because they are under pressure to be accurate -- not high or low. Another indication of quality is forensic or litigation work. Ask the appraiser how he or she helps litigants. The answer should be that he or she is an advocate for market value, not the litigant. Appraisers are legally required to be impartial.
• Buyers and sellers can ask their real estate agent to see a copy of the appraisal before the deal closes.
"Ask to get it in ample time to look it over. The first page has the factual information about the property, location, physical description, etc. The second page is where the value analysis takes place," said Amorin.
If the appraisal was a drive-buy or automatic valuation model-generated (AVM) some assumptions could have been made about the property and its description. If you know from your own ownership or inspection of the property that the information is inaccurate, tell the lender.
"Every borrower is entitled to a copy of the appraisal and they need to make sure they get it. A lot of them never do. You need to ask for it and you need to read it. If there's anything in there that you take exception to, you need to bring it to the attention of lenders," said Faravelli.
• Home buyers should also make sure to leave their financing contingencies in place until the lender has signed off on the appraisal. That makes financing contingent upon the buyer's approval of the appraisal.
"It's an ever-changing pendulum," says Jim Amorin, president of the Appraisal Institute.
No longer arrived at by using a simple drive-by inspection, computerized automated valuation model (AVM) or even just comparative analyses of similar properties, appraisals have become yet another sticking point along the already viscous road to home ownership.
"Everyone got seduced by double digit property value increases and never thought the bottom would come. Doing an appraisal today is a complex deal with foreclosure sales, short sales and fewer sales. You want to get the most experienced folks doing appraisals," Amorin added.
An appraisal of a home is supposed to be a fair, impartial and professional evaluation of a property's true value. The risk-management tool is designed to assure the owner gets a fair price, the buyer pays the right price and the lender's risk in making the loan is commensurate with the property's true value.
A appraisal can make or break a sale, refinanced mortgage or equity loan. It can also attract or repel buyers.
During boom times, in the first half of the decade, lenders typically used desk-bound, in-house appraisers to determine home values when skyrocketing values boosted the use of drive by inspections and computer generated values.
Now, lenders are compelled to send appraisers out into the field to inspect a property before making a final assessment.
But that doesn't mean lenders take that approach, especially when the property is a foreclosure or other distressed property.
Appraisers who complained about pressure to up the value of homes when values were skyrocketing, are now not only under pressure to lower values, but also work in a market where values are skewed by unprofessional appraisals.
Appraisal practices lacking uniformity
A primary culprit is the Broker Price Opinion or BPO. BPOs are used when lenders and mortgage companies want to expedite the sale of repossessed (real estate owned or REO) properties, foreclosures, short sales and other unconventional, distressed properties.
A BPO involves a real estate broker conducting a drive-by inspection or internal comparative analysis to come up with the value. The broker conducting the valuation is also often the broker who lists the property for sale.
"There's a lot of controversy about this end run. The person contracted to do the BPO is the sales person who is going to get the listing. How can you be impartial and objective when your conclusion is based on you getting the listing of the property?" asks Ted Faravelli, Jr., a forensic appraiser, expert witness and executive director of the California Association of Real Estate Appraisers.
There's also fallout for the homeowner with the foreclosed property. If the property is priced to move at a level lower than the amount the foreclosed owner owes (and, perhaps, lower than the house could actually sell for) the owner will have to come up with the difference to clear his or her name from bad credit hell.
"It's a real hot button for appraisers when brokers are doing work appraisers should be doing," says Amorin.
Also, the values of the BPOs get thrown in the pot of homes appraisers later must consider when doing professional valuations. That makes it tough to decide when, when not to and how to use properties assigned BPOs.
"One of the biggest problems we see is the conflict over the use of short sales and REOs and foreclosures. They are dominant in some segments of the market and we have to take them into consideration, but we have to temper our opinion when we use those," said Faravelli.
Recognizing how the pressure cooker property valuation process contributed to busting the boom and how it now may be prolonging the bust, the Feds recently put in place, the Home Valuation Code of Conduct (HVCC).
In an agreement, effective today, May 1, 2009, between New York Attorney General Andrew Cuomo, Fannie Mae and Freddie Mac, and federal regulator, the Federal Housing Finance Agency, HVCC is designed to enhance the independence and accuracy of the appraisal process, and provide added protections for homebuyers, mortgage investors and the housing market.
The hope is that by relieving appraiser pressure, appraisals will become more reliable across the board.
Unfortunately, good intentions don't always pave the way, according to the Appraisal Institute.
Amorin, testifying before the U.S. House of Representatives' Financial Services Committee said the institute believes HVCC has too many shortcomings.
The institute says HVCC
• Doesn't focus enough on appraiser competency.
• Undercuts professional relationships between honest appraisers and reputable mortgage professionals.
• Increases the influence of bottom-line oriented appraisal management companies.
• Encourages the continued use of AVMs and BPOs, which lack relevance in today's market.
For similar reasons, the National Association of Mortgage Brokers unsuccessfully filed suit to delay HVCC.
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© 2008 DeadlineNews.Com
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Broderick Perkins, an award-winning consumer journalist, parlayed 30 years of old-school journalism into a digital real estate news service, the San Jose, CA-based DeadlineNews Group, including DeadlineNews.Com, a real estate news and consulting service and Web site, and the Deadline Newsroom, DeadlineNews.Com's news back shop. Perkins is also a National Real Estate Examiner. All the news that really hits home from three locations -- that's location, location, location!
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