Home Appraisals. Tell me how horrible they are or aren't.

April 1, 2016 7:43 AM

I am buying a condo / loft in the Atlanta area. I am in the first 1/3 of my due diligence period, and I have questions about appraisals.

So, over 10 years ago, I bought my first house, and I am fairly sure that in 2003, the appraiser was firmly in the pocket of the lender, and the house should not have appraised for what it appraised for. 11 years later we sold the house as part of the divorce, and we barely got out alive.

I also spent a period of time (2007-8-ish) working in a residential and commercial lending office, and while "the lender didn't know who the appraiser was going to be" I know from that experience that these guys all know each other socially and professionally, and Appraisal Firm X knows very well that Bank Z sends them Y work, and there is a human, if not malfeasant, urge to continue receiving business from said bank.

I realized last night that I was anxious about this condo buy for these reasons. I need to feel very sure that the appraisal is independent and that I am not getting rooked by this process. I am very well able to go on the hook for the money I'm talking about spending, but my skepticism is serious and well-earned, I think.

I would prefer, at this point, to be the one to order the appraisal. I am going to have to pay for it out of pocket anyway, so who cares? I would be happy to use someone from an approved list of appraisers from the bank (these will be the major guys in Atlanta anyway), but *I* want to be the customer, not the bank. I don't think that this is unreasonable, and I think that if it matters who orders the appraisal from a mutually agreed on resource, then there is something wrong.

So my question:
1) Am I being unreasonable?
2) If you know about this process, relate to me how I have it right or wrong.
3) If there is ammunition you are aware of that I can use to make sure this thing is done properly, please sing out.

posted by Medieval Maven to Work & Money (12 answers total)

Appraisals are pretty cheap ($200-ish) and frankly I'd go ahead and get one of my own, independent from the bank. The bank is ostensibly using the appraisal to insure that whatever they're advancing you by way of mortgage will be recouped should you default on the loan. They won't want to use your person for their mortgage.

So if it makes you feel better, get your own appraiser.
posted by Ruthless Bunny at 7:49 AM on April 1, 2016

Response by poster: to be clear, I'd be fine ordering my appraisal myself *from their approved list.*

And these suckers are now like $500 so I'd prefer not to be out that much twice if at all possible.
posted by Medieval Maven at 8:01 AM on April 1, 2016

I put more stock in comparable sales in the area than appraisals. You can look up similar properties with your Realtor or through sites like Zillow. Ultimately, that's what really determines the "value" of the property, though part of life is that property values do rise and fall. A big part of what an appraiser does is looks at comps.

If you're at the appraisal stage, it's because you've basically said that the building is worth that much to you - the appraiser is there to verify to the bank that it is worth that much. The home inspection is the thing you need to be more concerned about, as it's telling you how much you can expect to need to work on the building after you acquire it (or require that the current owner fix prior to sale).

For example, my appraiser put the value of my home significantly higher than what I paid, because I knew (and the home inspection confirmed) that I was going to have to put 10s of thousands of dollars of work into the house in the first few years (root, A/C, etc.). It's not that they did a bad job, just that their job is more to say what the going price for buildings in that general condition in that general area sell for.
posted by Candleman at 8:01 AM on April 1, 2016 [1 favorite]

Best answer: I would prefer, at this point, to be the one to order the appraisal. I am going to have to pay for it out of pocket anyway, so who cares?

The laws regulating loan fraud care, that's who.

This process was made "blind" a few years ago. The bank orders the appraisal through an electronic system but they cannot specify who does it.

If consumers were allowed to provide appraisals, even from the selected appraisers, it goes around this blind system and could allow loan fraud to sneak in.

See real estate years. 2004-2007.

So do not buy your own appraisal because the bank cannot accept outside appraisals. Stick with the very rigid system the loan officer uses.
posted by littlewater at 8:11 AM on April 1, 2016 [5 favorites]

Also, check the local tax records for what the locality values it and similar properties at.
posted by Candleman at 8:40 AM on April 1, 2016

If consumers were allowed to provide appraisals, even from the selected appraisers, it goes around this blind system and could allow loan fraud to sneak in.

See real estate years. 2004-2007.

Ahahhahah. Sorry, that was bank- and broker-driven fraud (though I'm sure some borrowers turned a blind eye). Your bank may not accept an appraisal you paid for yourself, but if you are anxious about the accuracy of someone on the bank list (because, you're correct, they know who their repeat customers are), ordering your own for peace of mind is not the worst idea.
posted by praemunire at 9:37 AM on April 1, 2016

Best answer: The appraisal process has become much more highly regulated since you were in the industry.

I didn't say better. Just more highly regulated.

You can get your own appraisal if you want to, but it won't matter an iota if you're taking out a mortgage; the bank will insist on having their own done.

Regarding lenders knowing who all the appraisers are....not really? Since you left the industry new regulations have spurred an explosion of what are known as "appraisal management companies" or AMCs; the banks can pick an AMC but the AMC pick an appraiser for the roster of dozens to hundreds they have on contract. (This has its own disadvantages --- if an appraiser is unfamiliar with a neighbourhood and its quirks their appraisal can be wildly off.) Further, Fannie and Freddie --- who are the ones left holding the bag if loan officers lean on appraisers to inflate their estimates --- have implemented an automated valuation system, Desktop Underwriter. If the bank appraisal comes in wildly off what DU thinks the value should be, they'll refuse to buy the loan. You getting screwed over banks don't care about; this banks care about. So some of the old bad habits have been forcibly beaten out of them.

I mean, ultimately, this is all bullshit anyway? If house prices have declined in your area when you go to sell down the road, what it appraised for in 2016 won't mean dick. All the appraisal is in the end is a little piece of paper verifying that this is about how much people are paying for similar properties in your area. You're looking at a condo -- I assume this a big multi-unit building? If you find a bunch of recent sales in the building for the same size unit and they're in line with what you're paying --- factoring in average price increases in your market over the past year or so, which you should be able to get from Zillow or Redfin --- then that's about as reassured as you're going to get.
posted by Diablevert at 9:58 AM on April 1, 2016 [1 favorite]

IAAL, IANYL.

Also, check the local tax records for what the locality values it and similar properties at.

Depending on these jurisdictions, these numbers can be wildly, wildly off from market values for a number of reasons. These include age of the assessments (because reassessments can be horribly expensive and politically unpopular, so 10, 20, even 30 years can pass between assessments), and the assessment procedure/methodology (does it take into account the condition of the property, or only the raw numbers? how much detail did the assessor get about the property? does the stated value represent a negotiated settlement between the locality and a property owner? were competent assessors hired?)

You also have to look at the right number. Many municipalities in the jurisdiction where I work have an "assessed value" that does not actually represent market value. Instead, that assessed value has to be multiplied by value factor that changes by year to arrive at an almost completely artificial so-called market value that represents a compromise between when the property is actually worth on the market, and what won't get the municipal officals run out at the next election. The situation gets even murkier if, as is the case in some areas, the law requires that a single value factor for all properties, both residential and commercial.

tl;dr: it may not be the case in the greater Atlanta area, but where I am, numbers used by a local real estate taxing authority are almost always wildly misleading with respect to market value.

Also nthing the comments by others that your bank has no obligation to accept any appraisal that you order. Just as you have concerns about them hiring a biased party, how do they know you haven't gone out and gotten your best friend to give a wildly inflated value/slipped an unethical appraiser an extra $100?
posted by joyceanmachine at 10:42 AM on April 1, 2016 [1 favorite]

So, over 10 years ago, I bought my first house, and I am fairly sure that in 2003, the appraiser was firmly in the pocket of the lender, and the house should not have appraised for what it appraised for.

This seems backwards to me. In general the lender doesn't want to give you money for an over-valued home, because if you walk away they are screwed and they really don't want to be screwed. Overvaluing a home benefits you, because it makes it more likely you'll get the loan. If the lenders had their way homes would be under valued, which would mean they could refuse more marginal loans.

Appraisals are a guessing game. They are a guessing game with data, but they rely on comparable homes being sold recently and if the market is slow or your home is rare or in a uniquely nice location then comparables may not exist and a number is kind of extracted from thin air.
posted by It's Never Lurgi at 10:50 AM on April 1, 2016 [1 favorite]

In general the lender doesn't want to give you money for an over-valued home, because if you walk away they are screwed and they really don't want to be screwed.

Over-valuation only affects the entity that ends up holding the paper, and only if the borrower defaults. Appraisal fraud was rife in the first half of the 2000s, because the banks were eager to write larger loans that they could then bundle into securitizations, effectively (to simplify) reselling to other investors. Those people are the people who got screwed in 2007-08. Banks were happy to give you money for an over-valued home because they didn't hold the loan for more than a brief period, and there was a huge market for "resale."

And, of course, brokers wanted higher appraisals to support higher home prices to get higher commissions.

The situation is a bit different now, because the most lucrative subsection of that market has dried up (though it's starting to make a comeback), but appraisal inflation at the behest of banks and brokers was absolutely going on at the time the OP bought OP's house.

Since you left the industry new regulations have spurred an explosion of what are known as "appraisal management companies" or AMCs; the banks can pick an AMC but the AMC pick an appraiser for the roster of dozens to hundreds they have on contract

All right, so. The banks hire the AMCs. The AMCs hire the appraisers. Not only is the borrower not paying, but the borrower is not the source of any repeat business, whereas the banks are the AMCs' major source of income. Whose wishes, exactly, do you think the resulting numbers are going to conform to? I think there's less appraisal fraud now because of shifts in the market, but it's not because the structure of the appraisal industry has evolved to prevent it. Demand is just less.

Further, Fannie and Freddie --- who are the ones left holding the bag if loan officers lean on appraisers to inflate their estimates --- have implemented an automated valuation system, Desktop Underwriter.

Automated underwriting systems, which is what DU is, are not particularly reliable tools. You know who else had an automated underwriting system? Countrywide. I believe Fannie and Freddie had a similar program even back in the mid-oughts, though I can't check right now.

I have to admit that I'm a bit startled that, since this type of fraud was a significant contributor to the Great Recession, all educated US adults aren't more familiar with it.
posted by praemunire at 11:13 AM on April 1, 2016

Appraisal fraud was rife in the first half of the 2000s, because the banks were eager to write larger loans that they could then bundle into securitizations, effectively (to simplify) reselling to other investors. Those people are the people who got screwed in 2007-08.

This is broadly true, but banks did not escape unscathed. Fannie and Freddie forced a lot of buybacks post crisis. Since banks weren't well-capitalised, even being forced to take a handful of bad loans into their books was enough to put a wrecking ball through bank profits.

I don't mean to suggest that Desktop Underwriter is a panacea by any means. Just that banks are paranoid enough about buybacks that they will kill a loan rather than risk lending out on something and finding that Fannie and Freddie won't take it. As to whether automated underwriters are reliable in general, like anything else it's junk in, junk out. From my understanding having talked with appraisers about this issue, right or wrong, loans that don't pass DU basically aren't getting funded, and figuring out how to write a report that will pass muster is a big part of staying in the biz these days.

In re appraisal fraud in general, what the AMCs cut out is the ability of a loan officer --- whose commission depends on loans closing --- from personally leaning on the appraiser. That's what was happening back in the day and which OP is rightly wary of. The broader mis-alignment of incentives --- ultimately, AMCs work for banks, not homeowners --- it does little to address. They introduce a layer of complexity and provide a bit of a liability shield for lenders. But broadly speaking the biggest thing protecting you from your appraisal being wildly overblown is not the introduction of AMCs but that underwriting standards are much tighter across the board because everybody's still licking burned fingers from what happened back when OP was in the industry.
posted by Diablevert at 11:49 AM on April 1, 2016

This is broadly true, but banks did not escape unscathed. Fannie and Freddie forced a lot of buybacks post crisis.

Not as a result of appraisal fraud per se, actually. Some RMBS investors, including the two, succeeded in forcing some repurchases because the loans did not conform to their descriptions in the various securitization documents. This was the result of some creative litigation tactics (in fact, many of the repurchases occurred as part of settlements rather than court order). For a long time, it looked like the banks were going to get away with it. Had those loans not been securitized, but resold in a more old-fashioned manner, there might have been no repurchases at all.

Since banks weren't well-capitalised, even being forced to take a handful of bad loans into their books was enough to put a wrecking ball through bank profits.

No, really, Chase could eat a few crappy half-million-dollar mortgages, especially once collateral values began to recover. Those big losses were for fraud or material misstatements in connection with the sale of securities. In some of those cases, the sponsors took back the bonds. In others, they just paid damages. In either case, most of the loans themselves remain the property of some forlorn Delaware trust that may or may not be making payments on its notes.
posted by praemunire at 8:05 PM on April 1, 2016