The last few years have been tough on real estate appraisers in the Colorado housing market.
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With the Minnesota housing market slumping, questions and challenges over 2007 tax assessments have more than doubled in Ramsey County over last year, and queries have risen significantly in Hennepin County.
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As countless borrowers suffer through an increase in mortgage rates and attempt to refinance adjustable-rate home loans, other aspects of the housing market are going largely unnoticed.
For example, appraisals are viewed as an ancillary component of mortgage financing that went mainly unquestioned by lenders when home values rose by double-digit percentages each year.
Have inflated home appraisals helped fuel the current mortgage foreclosure crisis - and effectively helped con artists scam lenders? Property appraisers say yes - and want regulators to crack down on the lenders who’ve pressured them to raise estimates of homes’ values so overpriced sales go through.
Ninety percent of real estate appraisers feel pressured to “hit the number.”
Such is the finding from an October Research survey of approximately 1,200 appraisers. That number is up sharply from the 2003 survey, which reported that 55 percent of appraisers felt pressured by mortgage brokers, lenders, real estate agents and homeowners to reach a predetermined value.
The American Society of Appraisers (ASA) believes that lender pressure is an ongoing problem for appraisers and is committed to supporting legislation to reform fraudulent practices in the mortgage lending industry.
ASA, along with the Appraisal Institute and the American Society of Farm Managers and Rural Appraisers, are actively supporting legislation that seeks to combat predatory lending and mortgage fraud.
“I am not surprised that so many appraisers surveyed still feel pressured by members of the lending industry to hit a particular number to close a deal,” said Mike Evans, a Fellow of the American Society of Appraisers. “There is currently little regulation or incentive that stops this type of behavior from taking place.”
ASA appraisers support the consumer’s right to receive a home purchase loan based upon an accurate appraisal. It is in the buyer’s best interest to receive an accurate appraisal to ensure that they are not over-paying for their loan.
As the only independent, objective third party involved in a real estate transaction, the appraiser can perform an important role in protecting the homebuyer and financial institution. ASA cautions buyers, therefore, to try to make sure that their appraisal is accurate and not a result of pressure by lenders to come up with a value that makes the deal go through.
The following are a few things consumers should know to protect themselves in a real estate transaction.
“Home buyers should take an active role in scrutinizing the practices of everyone involved in their home purchase,” said Evans. “If they feel that agents are overly aggressive in wanting the deal to go through, or if the price of the house they want to buy isn’t comparable to other similar houses in the neighborhood, they should be wary.”
SOURCE: RIS Media
With U.S. home prices softening and sales volumes sagging, real estate appraisers say pressure on them to inflate their home appraisals has soared.
Syndicated columnist Kenneth Harney writes in the San Jose Mercury News that a new survey of the national appraisal industry found that 90 percent of appraisers report that the mortgage broker, real estate agent, lender and even the consumers will pressure them to raise valuations to close deals.
That percentage is up sharply from 2003, when 55 percent of home appraisers reported attempts to influence their findings and 45 percent reported “never.”
Now the latter category is down to just 10 percent.
“I call it a perfect storm scenario,” said Alan Hummel, Senior V.P. of Forsythe Appraisals of St. Paul, Minn., one of the largest property valuation firms in the country. Forsythe was a co-sponsor of the new research.
“You’ve got a situation where sales are down, so everybody in the deal needs it to go through” at the contract price - the mortgage broker, the realty agent, the mortgage lender, and even individual sellers.
U.S. mortgage brokers are now routinely “dialing for values,” Hummel said. “They call up appraisers and say, we’ve got this sale at $335,000 at such and such an address. Can you get to that number?” If an appraiser answers yes, he or she gets the assignment. If not, the appraiser is bypassed.
Worse yet, said Hummel, is when an appraiser comes back with a fair market value estimate that is lower than the sales contract price, the appraiser may not get paid for the work, and frequently is blackballed by the mortgage brokers or real estate agents.
The survey found 75 percent of appraisers report “negative ramifications” if they refused to come in with a higher valuation, while 68 percent said they lost the client - typically a mortgage broker or mortgage lender - following their refusal to doctor the numbers, and 45 percent reported not getting paid.
Hummel said ticked off real estate agents may retaliate against non-cooperative appraisers by telling a local mortgage broker or mortgage company something to the effect of:
“Look, I’m not sending any more (home purchaser) clients to you if you continue to use that appraiser.”
Though mortgage brokers were ranked the most common source of pressure - 71 percent of appraisers said the broker had sought to interfere with their work - the real estate agent came in a close second at 56 percent.
Both numbers were up significantly from where they were in the 2003 survey. Also identified as sources of pressure were consumers - typically the home sellers (35 percent), the mortgage lenders (33 percent) and the home appraisal management companies (25 percent).
Mortgage brokers represent the biggest problem, said Hummel, because they are lightly regulated at the state level, often wield the power to bestow or withhold appraisal assignments at the application stage, and ultimately “if the deal goes south two years from now, they’re long gone.”
On the other hand, a lender, including banks and mortgage companies, “has more skin in the game” - they are more intensely regulated and can be forced by bond market investors to buy back a defaulted mortgage that has inflated an appraisal.
Hummel emphasized that the responsibility for the problem of pressure rests not only with the loan broker, realty agent and home loan lender, but with the appraisal industry itself.
Many newcomers with inadequate training and little experience flocked into the field in recent years - drawn by high home sales volumes and constantly escalating prices.
Now that sales are down, said Hummel, “you’ve got more appraisers out there who think, gee, if I don’t (cooperate), maybe I’m not going to get any more work.”
The good news is that the vast majority of appraisers resist the pressure they get - from any source - and simply refuse to submit valuations they know to be inflated.
Beginning today, Zillow.com will allow homeowners and real estate agents to advertise for-sale properties on its website at no cost.
The Seattle-based company, which rocked the real estate world this year when it began offering free online valuations of almost 70 million homes, made the announcement Wednesday evening, the Seattle Times reports.
It also announced a feature called “Make Me Move” for owners who’d consider selling if the price were right. If it catches on, this could create a shadow “for sale by owner” market with the potential to bypass formally listing homes or paying agent commissions.
Owners adding “for sale” or “Make Me Move” data can upload their photos, neighborhood commentary and descriptions of the property, potentially justifying a price higher than Zillow’s “Zestimate.” Also, real estate agents can add contact info and link to their own website for free.
For an industry that’s long sought to control for-sale information, it’s a pretty radical approach. Historically, online real estate companies have sought permission from listing services or real estate companies to display listings.
Now, Inman News predicts that agents will jump at the chance, particularly in this slumping housing market, to bypass that step. It’s already happening with other sites, such as Craigslist, which allows posts of for-sale properties, complete with photos.
“Homes are on the market longer and agents’ commission dollars aren’t as fat,” Inman said. “If someone is going to give them a free alternative online, I think agents are going to flock to it.”
A 2004 National Association of Realtors (NAR) study found that Realtors’ median income was $49,300, and that they spent a median $1,150 annually on promotion and marketing expenses, although almost 20 percent spent $5,000 or more. This was on top of marketing expenses paid by their parent real estate companies.
With Zillow offering free advertising, pressure may be put on real estate agents to cut commissions, which are about 6 percent of the sales price, paid by the seller. On a $350,000, house that’s $21,000. And that $21,000 understandably means a lot to the people who will be forced to take out a new home loan.
Agents argue that the complexity of real estate transactions justifies that cost. Still, online real estate brokerages, including Seattle-based have made inroads by offering discounts. When you consider the high cost of a Washington mortgage, any way to cut costs is worth a serious look.
Marketing homes directly was Zillow’s plan even before it launched in February, but it wasn’t a priority, spokeswoman Amanda Hoffman said.
“There are already so many sites that offer homes for sale,” she said. “This just makes our site more complete.”
Zillow logs more than 3 million visitors a month. Some 80 percent of all homes in the Seattle housing market have been viewed at least once.
A National Association of Realtors survey found that 12 percent of homes are sold directly by their owners. That percentage has actually dropped, from 18 percent in 1997, because of the increasing complexity of transactions and the amount of time they take, NAR spokesman Walter Molony said.
“The other issue is security,” Molony said. “Anyone with any motivation can come see your house without being prescreened,” Molony said.
There are many steps to take before you sign on the dotted line of a mortgage loan contract. For example: How can you be sure you’re receiving fair market value on the property you want?
It’s recommended that borrowers go through with an appraisal before agreeing on any final terms. With that in mind, here’s a look at the most common methodology used by appraisers:
1. REPLACEMENT-COST APPROACH. This appraisal method usually involves multiplying the square footage of the structure by the current construction cost for comparable quality to arrive at the estimated replacement cost of a building.
The next step, probably the most difficult for an appraiser, is to estimate applicable depreciation for an older structure to arrive at a reasonable replacement cost-estimate. The land value, based on cost per square foot, is then added to arrive at the property’s total market value.
Insurance agents often use the replacement-cost approach to arrive at recommended replacement-cost insurance coverage for houses. Although used as a crosscheck, most appraisers and mortgage lenders don’t pay much attention to the replacement-cost approach for all but newer residences.
2. RENTAL-INCOME APPROACH. This appraisal method is most appropriate for rental-income property, such as apartment buildings, shopping centers, office buildings, warehouses and other rental structures. If the property is owner-occupied, such as a warehouse, then rents for equivalent nearby rental property are used with this approach.
The net income, minus a vacancy estimate, is capitalized (based on the local capitalization rates for recent sales of similar income properties) to determine the estimated market value of the subject property.
Even when a house is used as a rental, this is usually not the best appraisal method because the market value of most residences is determined by recent sales prices of comparable nearby houses, not their rental income.
3. COMPARABLE SALES-PRICE APPROACH. This is the most important appraisal method to determine the market value of a house or condo. To be accurate, the sales prices of comparable nearby residences should be as recent as possible.
Sales prices more than six months old are usually not used unless there have not been any more recent home sales in the vicinity. In a rising or falling housing market, comparable closed home sales within the last three months are preferred.
Because this is the most important appraisal approach for houses and condos, the experience of the appraiser becomes critical to determine what is a truly comparable similar nearby residence. However, adjustments must usually be made to both the “subject property” being appraised when comparing it to the comparable nearby home sales, and to the comparables, to compensate for the pros and cons of each residence.
The critical part of the appraisal process is the appraiser’s addition or subtraction of value, often involving thousands of dollars, based on his or her expert valuation judgments. This could make a significant different in the type of home loan financing you require.