Fast Turnaround and the Real Estate Appraisal
When I first got started as an independent appraiser on my own, it was 1975 and it was a different world. I would arrive at my office and the phone would ring with someone calling in a request. Back then the standard “turnaround” time (the time between receiving a request and delivery of the completed report) was 9 calendar days, which method that Saturday and Sunday were included. In effect then, it meant 7 working days. Today, If someone were to call and I told them it would take 9 calendar days to complete the report, the caller would probably either hang up or faint. In fact, most callers are hoping I will say I can have it done by the end of the day or tomorrow at the latest. How have things changed and why the rush?
When I began, owning a computer was impractical. The desktop PC hadn’t been invented however. It was nevertheless a big deal to have a desktop calculator that had a LCD readout! Computers were the domain of universities and large companies. It was nevertheless the heyday of the IBM punch card computer. Likewise, when someone signed a contract to buy a home, they went in person to a lending office to apply for a mortgage. The time to complete the application course of action and issue a mortgage observe was anywhere from several weeks to several months. Much of the time was spent getting forms such as employment verifications and credit reports sent and received back by mail. Back then, as now, an appraisal was not ordered until the borrower was approved for the mortgage, however, it nevertheless took at the minimum a associate of weeks after mortgage approval before closing could take place. There was consequently not such a rush for an appraisal as there is today.
These days, a mortgage can often be approved in a matter of minutes. Most of the infor5mation that is needed to qualify and approve a borrower is online and many of the more “burdensome” information needs have been “streamlined” away. It is now routine for me to receive an appraisal request where the borrower signed the sale contract a few days ago and they are wanting to close within a week of signing. Most of the speedup can be credited to the proliferation of computers and the internet.
In the days before computers were in use for appraisal, we typed our reports on a typewriter. Computer forms processing software deleted the typewriter. Various software evolved to make the processing of the forms appraisers use lightning fast. For many years though, the biggest remaining problems were in the use of photographs and delivery of the finished report. The arrival of digital photography finally deleted the need to take traditional paper photos and paste them onto “picture” pages. Then the extensive use of email and electronic signatures deleted the need to hand deliver or mail reports. It is now literally possible to receive a request for an appraisal and have the completed report in someone’s email box within a few hours.
For many people, the amazing transformation of the appraisal course of action has been a blessing. For others it has been a curse. It is a blessing for commissioned salespeople in brokerage and lending because it method they get their commissions faster. It is a blessing for the seller or buyer under pressure to complete a transaction in a hurry. It is a blessing for the appraiser who is willing and capable of doing appraisals in high quantity. But it is a curse in some ways for the lending industry and for the highly detail-oriented and conscientious appraiser simply because of the intense pressure to complete jobs as fast as possible.
Some types of residential appraisals are easier to complete than others. The appraisal of a small home in a “cookie cutter” neighborhood where plenty of market data is obtainable is comparatively easy. But anyone who believes that this is the normal scenario is mistaken. Every home is different and so is every neighborhood. Most of the work that I do is quite varied and requires enough time to be able to think about the situation and perform a decent examination. This can be difficult when one has people regularly calling in a panic to get the completed report. So it’s a mixed blessing in that I will make more money but deal with more pressure.
Every residential appraiser faces reviews of his or her work now and then. For one reason or another, a percentage of my reports will be examined by others. I do a lot of this work myself for various clients as part of their quality control system. As time goes by I have little by little seen a decline of quality in residential appraisal reports. Not in presentation, for the various brands of report software give beautiful presentations, but decline in examination and detail. The nuts and bolts of the report. Having better than 30 years in the business it is plainly obvious to me that the routine rush character of mortgage lending appraisals has had a negative effect on appraisal quality. Too much is being overlooked or sped by. Reports are often filled with small errors that should have been caught by proof reading and analyses of problem situations are often shortchanged or omitted. Residential appraisers are simply under too much pressure to get these reports done too quickly in mortgage lending. Of course, there is the greed factor present in every job or profession, that motivates some people to do sloppy or dishonest work in addition as the desire to compete, but I believe that time pressure is the dominant culprit in deteriorating quality.
In the ever-increasing desire to complete real estate transactions in a flash, lenders have been attempting to make use of software appraisal solutions such as the AVM or Automated Valuation form. These are basically computer programs that perform an examination of public and private records to provide an “appraisal” of a home. These AVM products have come increasingly into use as a replace the traditional human appraiser, considered much too slow for today’s market reality. Being a human appraiser I am naturally inclined to be biased against being replaced by a software program, but I am willing to put these programs to the test to see if they are as reliable and useful as claimed. In writing this article I used an AVM operated by a large corporation and offered by a major banking institution to “appraise” a home for which I recently completed an appraisal. The idea was to see how the two compared.
The home in question is located in a suburban neighborhood that contains a reasonable amount of sales data in the local MLS. If anyone were to do an appraisal or a Competitive Market examination, there would be sufficient recent data to do an accurate examination. I was able to find 3 recent sales of highly similar homes that provided a range of value from about $150,000 to $160,000. The home was under contract for $156,990. The above mentioned AVM provided a value range from $130,000 to $261,000. The “value range” provided by the AVM was so wide and so nebulous as to be of no use whatsoever. If a human appraiser issued a report with a range of value that wide, his or her report would be discarded closest, for it would be obvious that something was terribly wrong. however those same types of AVM ranges are being used to “justify” or “sustain” contract selling prices and thereby mortgage loans all over the nation.
What does this average? It method that someone from out of town, not knowing any better, could possibly buy that home and get as much as 95% (or more) financing on as much as a $261,000 sale price. For a $156,990 home. Don’t think it cannot happen out there because it happens far too often. It isn’t hard to imagine what will happen later if that loan goes into default and the home is foreclosed. An AVM can have its uses, however, in my estimation it is generally a poor replace the human appraisal.
Much has been written about lender “pressure” for appraisers to appraise a home at or above a given price. But I believe that not nearly enough has been written about lenders and others pressuring appraisers to complete reports too quickly. People need time to think about what they are doing. I also believe that not nearly enough has been discussed about the merits of super fast sales and lending practices. Again, people including buyers and borrowers need a little time to think about what they are doing.