"Palos Verdes Resident since 1947"

Appraisals

This article was originally written in April, 2009, in the wake of the “meltdown”, but still holds true today:

Much has been written about the causes of the recent economic events as pertains to real estate, from the unqualified buyer, the predatory lender, potential collusion between the various parties, bogus loan ratings, and right on thru to the ultimate trusting investor.  Some have even addressed appraisals, but there is a problem with appraisals I’ve not seen discussed anywhere:

The purpose of the appraisal, of course, is to provide “independent” 3rd party verification that the property being loaned upon meets certain standards of value.  What this generally means in practice, for

The appraiser

the purpose of this discussion, is that it must be worth at least the sale price.  The reliance put on the appraisal is not, however, justified by the actual process, and here’s one recent illustration that is fairly typical:

I had recent sale in South Torrance, the loan for which required an appraisal.  The appraiser was from the 909 area code (Riverside, etc), and actually had to Google the location of the property to find it.  While I’m sure this gave the appearance of complete independence and objectivity (after all, what are the chances that this appraiser knew anyone connected with this deal who might unduly influence him), clearly this appraiser, who was going to inscribe on stone tablets the value of the property, was completely unfamiliar with the area.  Equally obviously, he had not seen a single comparable home in the area while it was for sale (it’s tough to see them after the new owner has moved in); but these were the ones, after all, that he was going to use to establish the value of the subject property. 

So what he does is “run the comps” and drive by them, relying upon the description and pictures in the listing, which were written and taken by an agent trying to sell that property.  Occasionally, he might call the agent to ask a few questions, but it is no surprise that the “comps” generally look better in the listing than they did in person.  Generally receiving less than adequate consideration by the appraiser are such important factors as condition, floor plan, quality of the lot, quality of the “remodel” — in short, characteristics that one would only accurately know, and be able to compare, from having seen the property.  Maybe you had to walk thru the 2nd bedroom to get to the 3rd one — do you think the listing agent is going to put that in the listing, which is the only way the appraiser would know?

Then we have the issue of the relative values of areas:  for example, does an appraiser from Riverside really know the difference between a South Torrance property in the Lake and one not in it?  Does the appraiser even know about the Lake?  Another problem for appraisers is that such factors as condition, weird floor plan, etc, are subjective and difficult to put a number on.  This is why appraisers rely heavily upon a dollars-per-square-foot analysis; that, and it makes the appraisal look objective and highly analytical to a 3rd party.  I’m sure the reader understands why a dollars-per-square-foot valuation, even tho it is common, is completely bogus; if not, call me 310 613-1076.   

So this begs the question:  how is someone to whom the area is so foreign supposed to provide anything resembling an accurate value?  The answer, of course, is that accuracy under these conditions is too much to hope for and not the real goal.  Like most of the loan process, the lenders are more concerned with making the process look like it has integrity, because 9 times out of 10 that loan is immediately going to be sold off to some trusting 3rd party, absolving the lender of the risk.  And this approach, of course, is one of the prime causes of the recent mess.

I have a solution to the appraisal issue, if anyone would listen.  My assumption is that the goal is accuracy; if not, read no further because the current system is fine.

What the lenders ought to do is to re-structure the appraisal process such that certain appraisers that work for each lender (be they payroll or independent) are assigned to a specific geographic area.  For example, Chase would have 2 appraisers assigned to the Palos Verdes Peninsula, 2 to the Beach, 2 to Torrance, Lomita, Harbor City, etc.  Same thing with each lender — for efficiency, the appraisers could even be the same companies or individuals used by multiple lenders.  The number of appraisers would obviously be a function of the amount of business that lender does in that area. 

These appraisers would be responsible for looking at property in their assigned areas and becoming as intimately familiar with them as are realtors active in that area.  They would go to broker’s open houses just like the realtors do, for example.  Thus, when they receive an appraisal assignment, they would have a fair chance of recalling something about the comp 3 doors down from the subject, which the listing shows as having 3500 square feet of living area, of which all but 1500 was unpermitted.  Or the one two streets over which was promoted as having a “remodeled kitchen” that actually consisted of 1967 Threemica (cheaper than Formica) and paint.  Just as realtors cannot competently do business from, say, Manhattan Beach to Long Beach, neither can appraisers.  Even if the realtor or appraiser somehow had time to look at all those properties, the chance of recalling anything useful later when it mattered would be nil.

Now, you may say that this system would promote a certain coziness between realtors and appraisers.  Maybe it would, but so what?  The appraisers are being paid by the buyer/lender and don’t give a rip whether the escrow in question closes or not or whether they get a Christmas card from the agent — they still make their fee.

After nearly 30 years in this business I’ve had a chance to observe the process, and this does seem to me to be a better system than the current one.

  1. Aime Alvarez

    You are too funny and so right- different situation but similar context. (I am the person that emailed you as well btw). So, there I am with nothing in my pocket looking at a house for lease (American dreaming) off of black horse ave, down the hill (you know where) as a result of my restless nights on Craigslist. If I would have known this realtor was coming from walnut, I never would have wasted his time. But there we are. First time seeing the house. Lucky for him I’m not an experienced buyer but I have been in the property management business for 10+ years and I know one thing, have the right keys when showing a apartment! Couldnt even open the lock. So I walked around and side gate was open, by the time I went back to the front, I would have already made up my mind. Again, walnut so I go through the process!! (and I’m hoping I’m right in that you could find some humor in this- if not, delete me. Block me. No hard feelings 😉
    We walk inside and I told him that the washer and dryer was included. He responded that the garage was nice and clean. Obviously. I said, I hope my girls can stay in the same school. He asked what schools, and I responded knowing that it made no difference. He knew nothing about the house nor the community. Oh, but he sure did pass judgement on me. From head to toe! Ok so I looked a little tired and my jeep had a spare. Thank God, after cruising in his Mercedes, trying to figure out where to park in a residential community where it’s practically free for all parking (guess he wanted to make sure I wasn’t armed) he decided to show us the house for the first time. In the end, I felt better knowing that I did him a favor. Gave him a brief rundown about some questions about someone who would actually have the ability to lease, would ask and now he knows it’s comes with a washer and dryer and the garage is clean. How’s that for funny???

    Just though you would appreciate this, but not nearly as much as I have enjoyed my evening reading everything you have written.

    Good night

  2. danagraham

    Aime:

    I fought the merger of the various MLS’s tooth and nail. This almost never happened when agents had to join the local MLS to get the info — they wouldn’t do it because they knew they’d never have more business in that (remote) area. Now they can just dabble wherever they want with results similar to your experience.

    The current system serves only the realtors and brokers who are simply interested in a commission, not in doing the best job for the buyer/seller.

Leave a Reply