Who will protect you from the protectors?
A new homebuying guide offers consumers advice on timing their purchase, selecting a real estate agent, and choosing the best home on the market from the "uniquely unbiased perspective" of a real estate appraiser, according to its publisher, the Appraisal Institute.
Inman News, August 31, 2010
Maybe it was coincidence, and maybe it was karma, that also on August 31, 2010 Reuters News ran the story No Class-Action Status on Phony Appraisals. Seems the People's Friend, New York Attorney General Andrew Cuomo, had "accused First American and its eAppraisalT unit of responding to pressure from [Washington Mutual] to use appraisers who inflated values". No doubt because of Cuomo's highly-public accusation (Cuomo appears to know no other kind), a group of First American investors filed suit against the company and asked a district court to certify it as class-action, but the court refused. However, a "New York state appeals court in June 2010 said Cuomo could proceed" with his own lawsuit.
So what we have here are plaintiffs claiming they were damaged by inflated appraisals that also inflated the value of the company in which they invested. Sounds like someone isn't convinced that every appraiser has a "uniquely unbiased perspective". A whole lot of someones.
And maybe it was more coincidence, and maybe it wasn't, that a transaction that closed the same day Inman's article appeared gave me an up-close look at how subjective and just plain wacked out the appraisal process can be. The first appraisal of the house, done by an appraiser based at the other end of our great state (so much for even the pretense of local knowledge) and riddled with defects, miraculously came in at the contract price. Good boy! Sounds like maybe a few appraisers haven't forgotten the lesson lenders taught them during the boom: play ball or you don't play at all. It's a simple lesson, one the appraisal industry took to heart. The next step was a lender-required review of that appraisal, done by a more local appraiser still far from local and apparently with little if any experience in the neighborhood. His appraisal was also riddled with defects, and with the help of adjustments right out of Appraising for Dummies came in a whopping $150,000 below the contract price and even below its value to two separate builders whose only use for the house was to tear it down and build new—in other words, the reviewer's appraisal came in below land value, a neat trick for any appraiser. Bad dog! Sounds like maybe a few appraisers are thinking the Home Valuation Code of Conduct makes them gods among men. And since by then even the lender was wondering what the heck was going on, a review of the review, done by an appraiser who's so local he lives in the same city, which came in at the contract price. A contract price, by the way, that was at the low end of my own Comparative Market Analysis. And none of us used the same comps.
So what we have here are buyers who, because of this appraisal train wreck (that cost them a hefty $950) were at one point faced with two really lousy and totally unnecessary choices: either come up with an additional $150,000 or so in cash they didn't really have, or walk away from their dream home knowing it was well worth what they'd offered. In fact, they would have paid more.
Then, just four days later, I get this plaintive email from a Palo Alto homeowner and former client: "I met an appraiser yesterday for a refi of our home who didn't know what an Eichler was. I politely tried to tell him that Eichlers command 10-20% less in Palo Alto. He didn't seem to buy it." Now, any appraiser who doesn't know what an Eichler is most likely has never done an appraisal in Palo Alto, and if he has, he shouldn't have. Because Eichlers, a famous or infamous (your pick) example of Midcentury Modern residential design, are a big part of Palo Alto's housing stock and, as my client says, they sell for a little less than conventional ranchers. Why the discount? Because while some homebuyers love the Eichler's minimalist design, many (most?) don't and would never never never buy one. That's not including the homebuyers who like the design but are scared away by rumors of construction defects. So the pool of buyers for Eichlers is significantly smaller than the pool for conventional ranchers, which, of course, reduces demand for Eichlers and therefore their market value. Eichlers do sell, of course, but many who buy them do so grudgingly, and only because these homes are a way to get into a neighborhood they like.
My client doesn't own an Eichler, and I would never use an Eichler as a comp to value his home, even if it were a block away. But because Eichlers are a block away, well within the one-mile radius a paint-by-the-numbers appraiser would use, my client may well see an Eichler or two on the appraisal that determines the value of his home. Even though he shouldn't.
So what we have here is a homeowner who, because of an appraiser who apparently doesn't have the local knowledge he's professionally and ethically obligated to have when he accepts an assignment, may well end up having his house appraised for less than market value, which means he won't be able to take full benefit of today's rock-bottom interest rates.
My point isn't that appraisers are bad persons; I've met a few who are really clued in, and I'm sure there are lots of other stand-up appraisers I haven't met. (On the other hand, anyone who's read the comments on NAR's Home Valuation Code of Conduct bulletin board knows that some appraisers detest agents, a feeling I hope isn't shared by the Indianapolis appraiser writing the Appraisal Institute's homebuyer guide.) And my point isn't that consumers don't need help timing their purchase, selecting a real estate agent, choosing the best home on the market and a whole lot more—including how to protest a bad appraisal—although these and many other homebuyer issues are so subjective (and, often, hyper-local) that no book written by an Indianapolis appraiser can completely address them. The rest is up to the homebuyer's gut, her head and her agent.
My point is that appraising isn't necessarily the highly scientific, "uniquely unbiased" process the Appraisal Institute and, doubtless, the appraisers involved in the stories I've related, would have you believe. Appraisers aren't finely-calibrated measuring instruments, and the homes they value aren't identical commodities. Much depends on the competence and local market knowledge of the appraiser, especially in an area such as ours, where micro-neighborhoods every few blocks make broad-brush appraisal techniques not just irrelevant but harmful.
No, I guess my real point is two-fold: always question a) why some industry or group would want to "help" you, and b) whether you want them to.
No, I guess my real point is: never trust The Last Honest Man In Real Estate.
Unless that's me, of course ;-)