WOV! 

Worth, Opinion, Value

There is a popular saying among real estate cynics that a house is only worth what someone will pay for it. Hmm So how does a seller know how much a buyer will pay?

There are many ways to determine home value. For example, potential sellers can check listings on local publications like zillow, trulia, or any of the other popular home listing sites. They can all give sellers a general idea of value.

To get a more accurate value idea, sellers often choose to have a Comparative Market Analysis completed. A CMA is a study of the prices at which similar properties close to the “subject” property sold. Adjustments are made for condition, size, location, number of bedrooms and baths, age, lot size and how much the Realtor creating the CMA likes the sellers. (Just kidding on that last one!)

While CMAs can be detailed, take much time, and present a clear picture of local home sales, they are not “official.” The only official value of a home is its appraised value. 

Let’s shatter one illusion first. A home appraisal mainly protects the bank lender from owning a property that is not worth what a buyer is paying. In other words, if I choose to buy a house for $500,000 and the appraised value comes in at only $450,000, that’s a problem if I am attempting to obtain financing for the purchase. 

In the old days in the mortgage business, we hated when this happened. The result was essentially one of these possibilities. The associated Realtors can find new “comps” (comparable local home sales that the appraiser might have missed that demonstrate more worth in the home for sale). Or the seller can lower the sales price (umm, yeah, no). Or the buyer can choose to pay the difference and mortgage only the appraised value at the appropriate value (again, yeah, no). Or the transaction falls apart. 

Not so long ago, every house being bought/sold needed a zillion page appraisal. There were pictures, there were comps, there were appraisers’ opinions, there were value adjustments ...  And if you purchased a house needing jumbo loan financing, there were often multiple appraisals required. What fun! NOT. And, let’s not zoom too quickly into the future here. This practice is still required on many properties by many lenders in many markets. However, some significant changes have occurred.

Think scanning. Think databases. Think Freddie Mac, Fannie Mae, Ginnie Mae, big banks, and now think TECHNOLOGY. But before we get to today, let’s look at a few turns on the road, so to speak, that also happened.

First the 2009 Home Valuation Code of Conduct (HVCC) occurred. Then in 2010, the dreaded Dodd-Frank Act changed the appraisal process. Let me illustrate this by saying the comps from Reators after low appraisals I mentioned above were actually gathered by Mortgage Loan Officers. Oh yes, they would spend countless hours trying to prove appraisers were wrong and to encourage them to raise the value via comps that only occasionally had anything to do with the subject property. The HVCC, which precluded lenders from having direct conversations with appraisers and required them to use third party appraisers, changed that dramatically. Then it got worse.

Dodd Frank instituted AIRs--appraiser independence requirements. This mostly meant that appraiser Bob who sat in the cubicle next to MLO Ron no longer existed. AIRS was intended to prevent influence and conflicts of interest and instituted prosecution and fines to ensure this. By necessity, lenders moved to appraisal management companies (AMCs, yes, yes, of COURSE we need an acronym! I even titled this blog with one!). 

As these AMCs popped up all over the country, some initial oopsies occurred. Here are a few (bad) memories. 

I recall attempting financing for a condo in New York City selling for $2,000,000. The AMC sent a Northern New Jersey appraiser who lived near farms, lakes, no traffic and an average home value of about $300,000. He appraised the NYC condo for $800,000. Just off a tiny bit, right?.

Then there was the beach house that sold for $1.9 Million. It appraised for $3 Million. The seller wanted to cancel the contract and raise the price. The buyer disagreed.

Or how about the $180,000 sale price home that appraised for $130,000 because the appraiser didn’t like the color it was painted (light blue) and stated that in the appraisal as she “adjusted” the value down $50,000. 

We also had a fellow from a “new” AMC (which went quickly out of existence) who conducted an appraisal in Washington DC and ended up in a fist fight with the Realtor.

And then there was Sarah who made a $30,000 upward adjustment to a house because one small bathroom “obviously had ceramic not plastic tile.”

It was a mess.

But in the late 1990’s, institutional lenders started using what is called the Automated Valuation Model (you guessed, it AVM). This technology estimated risk when these companies purchased collateralized mortgage loans. Then the practice because more widely used and accepted. 

AVMs save time, money, staff, and angst. The claim is they avoid fraud, remove the guesswork and emotional aspect of human decision making, and use computers to fully eliminate subjectivity. Great, right? Not always.

AVMs do not use any information about property conditions. There is no physical inspection completed. New construction is tough because there may not be any online applicable comps. Some sources of data used may be lagging or not quite accurate. 

 But where do these AVMs come from, get stored, etc.? According to Investopedia, 

“Leading AVM providers include CoreLogic, The Federal Home Loan Mortgage Corporation (Freddie Mac), VeroValue and Equifax. Major providers tout their accuracy, comprehensive coverage, and time savings.”

The industry didn’t stop with AVMs though. There are a variety of Computer Assisted Mass Appraisal tools now. Oh, excuse me. Those are called CAMAs. And please let’s not confuse those with  Shama lama ding dong. 

For example, you can ACE it! That’s the Freddie Mac Automated Collateral Evaluation, of course. On the website Freddie brags, “... (ACE) leverages our proprietary models, along with historical data and public records to let you to originate eligible loans without a traditional appraisal.” 

And please do not confuse appraisal form 2075 with form 2055!  A 2075 is basically a collateral verification, which means the property actually exists and appears intact. In this case, the home loan borrower did not appear to be low risk enough for a complete AVM, so an additional step was taken. The Desktop Underwriter already judged the sales price as reasonable. This is just an inspection form which asks for some general data about the property and neighborhood.

A 2055 appraisal is an exterior inspection. This is a sort of personal favorite of mine as it is known as a “drive by” appraisal. In one office I managed, a humorous MLO always said something like, “I’m guessing this property will just need a shooting” as a twisted shorthand for 2055 or drive by. 

My eyes are starting to glaze over. And I haven’t even mentioned narrative appraisals, Form 1025 for two to four family income-producing properties, the most extensively used, “URAR Form 1004, Uniform Residential Appraisal Report" or others. But I am strongly in need of fun, so let’s go and let’s make it acronym-free!

Here’s a fun one from Home Appraisals, Inc. 

“Many years ago, an appraiser we know from Alaska told us this story:

I went to examine a home but could not get in through the front door because a massive moose was standing right in front of it. The person inside could not get outside either! I waited in the car until animal authorities arrived and helped shoo the moose off the premises! Needless to say, this was the most bizarre appraisal situation I’ve ever encountered.”

How’s this listing from AOL.com? 

“... we've never read anything quite like this listing for this Birmingham, Alabama home. To be honest, the copy alone would probably be enough to make us want to place a bid on this place.

Immediately described as "the perfect starter home to show your parents and friends that you have it together," this home boasts two bedrooms and two bathrooms.

Never fear -- the master suite is big enough in case you want to "avoid your guests" by hiding out in there.

In the event that you do feel like socializing and entertaining, take a walk down to the kitchen complete with granite countertops and "a large pantry which is perfect for storing your gluten-free Bisquick." Score.”

Why do appraisers carry a wasp in their hand? Value is in the eye of the bee holder.