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Appraise Your Appraiser

Here is an interesting Q&A with a professor from the Wharton School of Business, where she discusses the appraisal profession.


Why are home appraisals so crucial to the home-buying process?

Real estate is the most important asset in terms of share of worldwide assets. It’s the largest asset class. But real estate is unlike other assets that trade continuously, such as stocks, which can be priced from the market. Real estate is local, and properties are idiosyncratic. You’re not going to learn what the price is from the market. Besides, a property may not have traded for several years. You need to have judgment in the valuation process.

What part did appraisers play in the most recent housing debacle?

There’s always pressure for appraisers to “hit the number,” but in this past cycle it became extreme. There are many stories of appraisers pressured to certify that the price a buyer was willing to pay for a particular property was what the property was actually worth.

Isn’t it?

Appraisers shouldn’t simply rely on whatever a buyer is willing to pay. They have to look at comparables — genuinely comparable properties — that show that the price a borrower is willing to pay isn’t an outlier. But then there’s the question of what is a comparable. When a wave of low-cost financing comes to a neighborhood suddenly, you have a lot of comparables. That’s the limitation of appraisals.

Have reforms been put in place to ensure that appraisals are on the up and up?

This isn’t the first time a real estate bubble brought the system down. After the savings-and-loan crisis, appraisers were required to be licensed, and uniform standards were adopted. One problem is that the response to a violation might be to take an appraiser’s license away — that’s very draconian, so appraisers are hesitant to penalize their own. Self-regulation can’t be the entire solution. Banks and mortgage brokers must have an incentive not to push deals that don’t work in the long run.

What can home buyers do to ensure a fair valuation?

The appraisal is not meant to identify the right price for the borrower. The appraiser’s responsibility is to tell the lender whether to make the loan. Buyers should do their own due diligence and find comparables in the local market.

It is nice to see the meme about appraisal pressure spreading into Academia.

Comments
  1. Bettty

    Does anyone have any data on how many loans were made with AVM’s and not appraisers? It is easier to manipulate an AVM but choice of criteria than an appraisers.
    Many professors of econometric modeling (which is the basic math behind AVM’s.) are appalled that AVM’s were used as Stand-Alone valuation products.

  2. CORRINNE LANE

    Brokers and Loan Officers who are not trained or required to take education yearly, know only what is taught to them by the company they work for. This is faulty and has caused the strive for the “perfect” file whether it be accurate or shaded to make the deal. The appraiser who continually makes the number, gets the work until they are finally “used up” in errors and ommissions insurance claims, state regulatory punishment and the company hiring them goes out of business. Honest appraisers have had lots of dry months and some of the really good ones have sought other careers. I was born honest and when I die, I will die honest. My appraisal work speaks for itself. If every appraiser had that motto, it would be less easy for messes like we are in to happen.

  3. Ossie

    My hat is off to Corrinne !
    She thinks like I do.
    I have been in this business 35 years and never have bended to lender pressure.
    If they want crap work, then hire a “form filler”.
    Ossie

  4. Patty

    If it wasn’t for the scum bag loan officers pressuring or threatening the appraisers, the greedy real estate agents that over-price listings, out- of town uninformed buyers, Banks that blacklist honest appraisers (because they won’t make the number). We would not be in this mess, I will not bend to these pressures, I will leave this world with a clear concience.

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