I just completed an appraisal of a single family house in Camas, Washington. It is a 30 year old, 2,000 square foot place on a typical sized lot.
When I did the MLS search for sales data I did a statistical analysis of the data I found. I looked at the data during the most recent three months and then at the data from the previous three months to that.
The analysis suggested that the market for that house had increased a 2% per month over the last six months. And this, in the face of an ever declining market.
I looked at the whole Camas area and did a statistical analysis on it. The result was that the market was declining at a rate of around 2.5% per month over the last six months.
So, in the face of the 1004MC (market conditions report) which do I report. Is it up or is it down???
I say report both. The macro market is going down. The subject micro market is looking up.
However, statistical significance is an important consideration. The “up” market was based on 4-5 sales. The down market was based on 50-70 sales. I think the larger sample carries the day.
I have been pretty proud of myself lately. I had gotten scores back from relocation appraisals, as all of us who do relocation work do. My worst score in the last 24 months was a 7.41. That means that the house I appraised for a relocation company sold for a price that was 7.41% different than what I said it would sell for. Any score under 5% is considered good. Scores from 5-10% are mediocre in the eyes of a relocation company. Anything over that is unacceptable.
I appraised a house in the Village at Fishers Landing at the end of last March. It is a 20 year old house in good condition. The neighborhood is very popular and the properties are well maintained. I appraised the house at $390,000.
Coincidentally, I got the assignment to appraise the house when it sold in the early part of May. It had sold for $405,000. When I went to the house for the second appraisal inspection the owner quizzed me about the first appraisal. How could I have been so low??? The other appraiser (relocation companies always get at least two appraisals) had concluded $410,000 in their relocation appraisal.
I did my best to answer the questions. The house had sold for 3.85% more than my appraisal had suggested it would sell for.
I did the appraisal and forgot all about it; until yesterday that is. I received my score from the relocation company. My score was 22.83. Remember, anything over five is not good. Anything over ten is terrible.
Oh my!!!! What happened???
As it turns out, the sale of the house in May fell through. I don’t know why. Probably the borrower just did not qualify for the financing. Then the house went back on the market.
The listing, which had been about $415,000 went down to $405,000 in May. In June it went down to $400,000. In July it went down to $375,000. In September it was reduced to $350,000. And, it finally sold in October for $320,000.
Wow!!!!!!!
The market in that area of town had been strong for months before my March relocation appraisal. I played it strictly by the numbers. If the May sale had closed, I’d have gotten a good score. With that sale-fail, I got the worst score I have ever gotten.
And, in this environment, loan officers will call asking why my appraisal is so low on this or that.
A lender sent me an e-mail from an angry borrower. It follows in part.
“This appraisal is a joke. We are totally insulted. We have already had an independent appraisal that has come in at $207,00.00.
For this appraiser too use repossessed homes located out of our neighborhood that the lenders sold under market value to liquidate the debt is NOT a valid comparison. It took ONLY 2 and 1/2 hours to find over a DOZEN homes sold in our neighborhood alone using the same sources used in this appraisal (sold just as recently as these three repossessions) that sold for an average of $200,00.00. These homes were also a more qualified comparison than any of the three repossissions. This statement can be proven with sound evidence, and if ****** (lender’s name omitted) does not reverse the charges for this appraisal, we will take legal action in all avenues available to us.
We are appalled at the very idea that ******* (lender’s name omitted) plays these kind of games with their account holders.”
My response was as follows:
Hi ******,
Thank you for sending the comments from the borrower.
I read them and see no specific complaint about the appraisal that I can address.I only see a general statement of disapproval from the borrower.
I do understand the sentiment.However, without specific, documented sales data that show that the appraisal did not include the best data available, there is little I can do.
I will make one retort however.I work with many lenders.I can say that ****** is very high on the list of those with the highest integrity in the market place.And, that is a statement that I can back up with lots of specific examples and anecdotes.And, I would be happy to present such an argument using these examples and anecdotes to anyone who chooses to attack ****** integrity.And, I might add, that ***** did not install this “integrity” as a result of the current economic crisis.****** integrity has been in place for a long, long time.
I understand a person being upset about the state of the economy/market, but I disagree with making it personal toward ****** and/or me.
Thank you
Ralph Olsen
Pwas.net
Hey, I admit to a little schmoozing here. But, what I said was true about the lender. During the last three decades, in the residential sector, they have never asked me to mess around with a value conclusion. People make up the organization. And where people are involved things can get messy. So I am not saying any particular lending institution is perfect. But, as I say, this one has never tried to twist my arm over a residential deal.
Also, I sure can get the borrower’s frustration. The market is going down. Real estate has fixity of location. It only moves in floods and earthquakes. So, if your property is surrounded by foreclosure sales, guess what……your value will be affected by this activity. You can’t move the property away from it. You can only wait it out.
Epilogue: The borrower called me last week. They wanted to talk about the appraisal. I told them I could not talk about the appraisal without the lender’s permission. That is because state and federal law say the lender that ordered and paid for the appraisal owns the appraisal.
Fortunately the borrower was keen enough (and finally calm enough) to ask if they could talk about appraisal practice in general. “Yes, of course.” Said I.
After that discussion the borrower said they were quite satisfied with the work I had done and understood what was going on in the market their house is in.
I might add that all the bad news that residential market analysis is producing today, by me and other appraisers, is no joy for me either. I don’t like having to report that values are down. And, I look forward to the recovery of the market.
The example I am writing about is VERY TYPICAL and represents BUSINESS AS USUAL in the residential real estate finance business throughout the United States (and more specifically, Clark County Washington).
Recently I appraised a 3,300 square foot, four year old house in a neighborhood of very similar houses. Coincidentally, on the same day, another appraiser appraised another house (2,900 square feet) on the same block for the same lender.
The value conclusion I derived was about $360,000. The other appraiser concluded about $425,000 in their appraisal of the smaller house.
The quality of construction of the two houses was virtually identical.
I am sure you realize that the economy has been in decline. There have been major bank failures. There is a multi-trillion dollar rescue program developing to prop up the economy.
The loan officer involved in these two transactions called me and expressed his dismay. He also said how unhappy he is when he sees that I get an appraisal assignment from the lender he works for. That is because, he said, appraisals I do often “come in low,” when “other appraisers never come in low.” The loan officer implied that I do not know what I am doing and should get my act together and stop “killing deals.”
Then, the loan officer offered to send a copy of the other appraisal to me. I accepted the offer. Here is what I found.
Remember the banking industry collapse? Remember the weak economy? Also, I can tell you that listings are down in the district that the houses noted above are located in. In fact they are down over 20% from a year ago. Also, the MLS reports that sales prices have dropped, on average, over 10% in the last year in the district that these two houses are in.
The other appraiser used sales from last summer and did not include any sales that took place in 2009. And, there are sales from 2009 that are applicable. The other appraiser did not address the change in market conditions that took place since the summer of 2008. There are several other major mistakes in that appraisal that I will not address here.
I say that other appraisal is a fraud.
Now the loan officer has an ethical dilemma. The loan officer has to appraisals in hand that the customers have paid for and the bank may lend on. One appraisal is a fraud that makes the loan officer happy. The other appraisal is likely more accurate, but limits what the loan officer can offer the borrower.
If the loan officer gets the loan through with the higher (I say fraudulent) value, and then the borrower defaults in four or five months, the loan officer could be found to have knowingly participated in bank fraud and likely suffer civil and criminal penalties. This could be a very unfortunate, career defining moment.
I say that the residential real estate lending industry and the residential appraisal industry are so drunk on the intoxicating effects of self perpetuated fraud that they can’t manage themselves properly. (The industry needs a program like Alcoholics Annonomus for these people.)
I say that the collusion between appraisers and lenders is still rampant and adding to the steepness and slipperiness of the downward slope the market is already on.
I hope the appraiser doesn’t loolse his license and E&O insurance. And, I hope the loan officer doesn’t loose his job. I also hope that the regulators can see through the fog and manage to create effective regulations that allow enough freedom to do business, while also reigning in the lax or even missing ethics of so many of the players in this game.
