eBook - Real Estate Appraisal from A to Z

I met an appraiser once who owned a business that did work for insurance companies. His appraisal firm did replacement value appraisals on homes. These are needed for insurance companies prior to writing some homeowner's policies. This appraiser was telling me about how insurance companies don't want to spend any money on these appraisals. He would get calls from insurance companies all over the country looking for someone to handle their appraisal work. When he told them his fee, their response was always, "That's more money than we're paying now for these appraisals. You have to lower your prices. " After hearing this, the appraiser would ask the insurers why they called him if they already had an appraisal company handling their work. The insurers response would be, "We're not happy with the quality of the work we're getting from the appraiser. " The appraiser would answer, "That's why I charge more!" It's a simple concept that some people don't seem to understand. If you want top quality work, then you have to pay more for it.

According to the Federal and State Appraisal Standards, an appraiser has to do the same amount of work for all of their reports, no matter what they're being paid. You can't cut corners because you're not getting paid enough on a particular assignment. If you take shortcuts, you're going to make mistakes and you'll end up regretting it. Unfortunately, many people forget this. That's why you have lazy and unqualified appraisers who are only concerned with mailing out as many reports as possible to clients. These appraisers don't have any concern about the quality of the work in their reports. The reason for this lack of concern is that these appraisers feel that they're not getting paid enough to spend sufficient time on each report. I think some lenders might want to refresh their memories about this old saying: "You get what you pay for!"

By doing so many foreclosure appraisals, I can tell you that I've seen the results of this problem firsthand on many occasions. I've seen what a nightmare it becomes for a mortgage lender to have to foreclose on a property. I've seen lenders lose a ton of money in foreclosures. One of the aspects that play a big part in those loans being granted in the first place is the appraisal report. Some of these lenders would never have granted the loan if they had hired a more thorough, competent appraiser to estimate the market value of the property. "Oh yes, but I forgot, those lenders are very intelligent businessmen. After all, they saved an extra $100 or $150 by hiring the cheapest appraiser in town. They didn't need to hire a competent, honest and knowledgeable appraiser and pay the extra amount by billing the loan applicant for the additional appraisal fee. " All those lenders had to do was to charge the mortgage loan applicant $100 to $150 more for the appraisal reports. If they had, then they could have saved themselves tens of thousands of dollars in losses for many of the loans that had gone sour! And I'm not talking about the lender paying the higher fee to get a good, competent appraisal done. The appraisal fee for mortgage loan applications is passed on to the potential borrower when they hand in their loan application. It makes me sick to my stomach to think that the American taxpayer paid for the whole failure of the banking industry due to foreclosures and a recession in the 1980's and early 1990's.

Surprisingly, in 2003 some major mortgage lenders began using electronic appraisals which are touted as a fast-growing "alternative" to traditional, full-cost appraisals. See section Electronic Appraisals for more information on why using electronic appraisals is a HUGE mistake for banks and mortgage lenders. "Intelligent" decisions like that may come back to haunt these lenders later with foreclosure loans and enormous financial losses - as it did in the late 1980's

Here's another example of "intelligent" mortgage lenders that focus on the minor costs and disregard the major costs: In 2004 real estate appraisers were complaining that one of their biggest problems was intimidation and pressure on them to "hit the number" desired by mortgage loan officers and others involved in real estate deals to move the deal along. Appraisers had been complaining for years that they are frequently pressured to value homes at the price needed to make the sale or refinancing loan go through. Appraisers who don't cooperate with loan officers say they are either: 1) Blackballed those lenders and third parties, 2) Receive no further appraisal assignments from those lenders, or 3) Are not paid their fees for the appraisal report. This is a very serious issue, especially if the appraiser is faced with being blackballed and losing that lender as a client. The long-term financial loss in income to that appraiser and appraisal firm can be huge! Over 6,000 appraisers had signed an industry-wide petition demanding an end to this type of pressure from mortgage lenders.

Legislation that includes the specific federal ban sought by appraisers was introduced in the House of Representatives by Rep. Jan Schakowsky (D-Ill.). The bill, known as the Save Our Homes Act (H.R. 2531), is primarily aimed at curbing "predatory lending " practices. The language of the bill would amend the Federal Truth in Lending Act to prohibit a creditor or mortgage broker from "influencing the independent judgment of an appraiser with respect to the value of real estate that is to be covered by a conforming home loan or is being offered as security according to an application for a conforming home loan. " The Schakowsky bill language would allow appraisers to report and document illegal pressure from lenders and mortgage brokers to federal authorities. Any infraction of this bill would constitute a violation of the Truth in Lending Act, subjecting the violator to a Federal lawsuit and fines of $10,000 per violation. Regulations implementing the ban would have to be drafted by the Federal Reserve. The language in the bill would appear to cover a wide range of situations, including loan officers "shopping " a contract by faxing competing appraisers the price "needed " for the deal. Appraisers that were unable to "pre-comp" the subject property (provide a preliminary valuation hitting the number) never get the appraisal assignment!

Appraisers feel that even more serious than this are forms of pressure where appraisers who already have an assignment are asked to "fudge the numbers" and bump up the value estimate of their appraisal report by the $10,000, $50,000 or more needed to close the sale or refinancing deal. Inflated appraisals are dangerous for banks and other financial institutions, and they force appraisers to violate their own professional and ethical standards to earn their income.

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