Is It Time to Dump Real Estate Appraisals?
If you’re looking for a villain-of-the-month club in real estate, you might want to speak with your nearby friendly appraiser. They’re getting a lot of grief these days, in large measure because by doing what they’re supposed to do, they’re annoying a lot of people. Sellers don’t like appraisers who value properties below contract prices, brokers often see them as “deal killers” who delay and deny commission checks, buyers don’t like the fees appraisers charge, and lenders can hardly talk with them for fear of violating rules that prohibit efforts to influence valuations.
To make matters worse, we’re selling a lot of houses but we’re not expanding appraiser ranks. In many areas there’s an appraiser shortage, so to resolve the problem, several of the nation’s leading financial regulators ruled in May that temporary practice permits and waivers could be used to bulk up appraiser ranks, especially in rural areas where the lack of appraisers is seen as most acute.
In July, several federal regulators proposed simply doing away with appraisals for a large number of commercial transactions by raising the commercial real estate appraisal threshold from $250,000 to $400,000. This proposal, said Martin J. Gruenberg, Chairman of the Federal Deposit Insurance Corporation (FDIC), “will be a meaningful reduction in regulatory burden, particularly for rural banks who would be expected to originate many of these smaller transactions.”
“In addition,” said Gruenberg, “the proposal seeks comment on the threshold for residential real estate, and I look forward to the comments on that issue.”
Get it? The head of the FDIC is asking how we can solve the appraisal shortage by cutting back the need for residential valuations.
Appraisers, for their part, argue that they’re just doing their job, a job where pay increasingly lags skills, training, or experience.
Jonathan Miller, president and CEO of Miller Samuel Inc., a real estate appraiser in New York and Connecticut, says much of the problem comes down to money. Simply put, Miller (no relation), says appraisal management companies (AMCs)—firms that act as intermediaries between lenders and appraisers to assure that valuations are not influenced by lender pressures—are getting far more than their services are worth.
Writing in the HousingWire, Miller explains that “AMCs take half of the market rate appraisal fee to manage us. This administrative fee is earned by confirming we had a license, forcing us to interact daily with 19-year-olds—chewing gum checking on the status of their appraisal—subjecting us to expanding scope creep to validate their existence and run analytics on our appraisal opinions to keep us accurate. This relationship is done all in the name of compliance even though there is no regulation requiring banks to use AMCs.”
Francois (Frank) K. Gregoire, a nationally recognized valuation authority and a Florida appraiser based in St. Petersburg, argues that there’s a simple solution to the appraisal shortage: “If appraisers were able to seek business directly from lenders, and appraisal fees were market based, there would be no ‘shortage’ of appraisers.”
3 Ways to Resolve the “Shortage” of Appraisers
Looking ahead, one can see three ways the appraiser “shortage” can be resolved.
First, we change the rules to require fewer residential appraisals, just as we see with the proposal to eliminate commercial appraisals for transactions of $400,000 or less. This approach assumes that lenders—and borrowers—will accept more price risk.
Second, we can dump AMCs, a move that will instantly increase the actual payments going to appraisers by 50%. With higher fees, we can expect more appraisers to return to residential evaluations and with more appraisers, we will then see fees fall.
Third, we can substitute electronic valuations for in-person appraisals. Lenders now use appraisal reviews to check the work of human appraisers, but such reviews are so complete they can often eliminate the need for appraisals. For example, electronic appraisals might work well in situations where fairly identical properties are being sold—the Model B in a subdivision with 1,000 like units. Where electronic valuations don’t work is with older neighborhoods where properties differ as well as in situations where homes have been poorly maintained and no appraiser goes inside. Appraising, at least to date, has more variables than electronic models can capture.
“Automated valuation technology has come a long way, but it’s still not a replacement for the appraisal process,” said Rick Sharga, executive vice president at Ten-X.com, the online real estate marketplace. “Appraisals are still equal parts art and science, and they have value because they help lenders avoid funding more than they should, and prevent consumers from overpaying for a property.”
Like many professions in a changing economy, appraisers now face new challenges. And yet, to paraphrase “Ghostbusters,” who you gonna call if you want to know how much a home is worth? As long as each and every parcel of real estate remains unique, appraisers will have a lot of work ahead.
Peter Miller is a contributing writer for Ten-X and Auction.com as well as a nationally syndicated newspaper columnist. He is the author of the 2016 edition of The Common-Sense Mortgage.