Appraisers 101

An appraiser is a professional person who provides an objective report on the estimate of value of real estate. An appraisers opinion of value is very important as the appraiser must prove to the bank that a property is with equal or more than the loan the buyer is trying to obtain.

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With that said, below is a MarketWatch article by Daniel Goldstein that dispels some myths associated with real estate appraisers and is appropriately titled “10 things real estate appraisers won’t tell you” published on November 22, 2014.

 1. We’re working under a cloud

There are about 80,000 real estate appraisers in the U.S. and they play a key role in most home sales: Until they weigh in with a determination of a property’s value, the buyer typically can’t finalize a mortgage. (Appraisers also play roles in property-tax appeals and home-equity lending, among other transactions.)

The profession got a reputational black eye, however, during the housing boom and bust. In numerous instances, including federal lawsuits against real estate data companies, appraisers were accused of fudging their numbers so that unscrupulous lenders could approve loans for unqualified buyers. “Appraisers were no more innocent than lenders or their CEOs,” said Phil Huff, CEO of Platinum Data Solutions, a real estate appraisal data company in Aliso Viejo, Calif. “They share the blame, too.”

As a reaction to such allegations, the Dodd-Frank Wall Street Reform and Protection Act of 2010 required more state and federal supervision of appraisers, and put more pressure on lenders to work through appraisal management companies, or AMCs. These independent firms are designed to keep appraisers and lenders from getting too cozy, explains Sam Heskel, manager of appraisal firm Nadlan Valuation in Brooklyn, N.Y.

But appraisers say that new rules have made the process slower and more complicated for consumers—and that they haven’t stopped some appraisers from yielding to pressure from banks.

2. We don’t know your neighborhood

One unintended consequence of the Dodd-Frank reforms: AMCs are increasingly sending out-of-county or out-of-state appraisers to calculate property values. This happens because AMCs in some cases assign homes to appraisers essentially at random, says Huff: “They may not know the area all that well, and not use the right [comparisons],” says Huff.

This matters because inaccurate appraisals can hurt consumers. An appraisal that undervalues a property may keep a seller from getting a fair price; one that’s too high could put a mortgage out of reach for a buyer.

3. We work for the bank, not for you…

The typical appraisal costs between $350 and $500, according to Zillow, and it’s paid for by the consumer (usually the buyer). But while home inspectors, real-estate agents and contractors technically work for the consumer, the appraiser’s work is owned by the bank. And in some cases, homeowners and buyers are adversely affected by appraisals they never personally see.

Consumers do have recourse: Federal law requires that a copy of any appraisal be given to consumers who request it in writing. And unlike inspectors or agents, home appraisers have to answer to Uncle Sam, which means dissatisfied customers can complain to the feds. Complaints about appraisers and their practices can be filed with the Appraisal Subcommittee, which is part of the Federal Financial Institutions Examination Council.

4.…but banks still don’t trust us

During the housing bust, many banks tried to resell homes they’d foreclosed on—only to find that their real value was far lower than the appraiser’s report had suggested. “The home wasn’t in the condition the appraiser said it was, and sometimes the home wasn’t even there,” says Greg Schroeder, president of Comergence Compliance Monitoring, a Mission Viejo, Calif., appraisal-technology company.

In part to satisfy the banks, regulations now require appraisers to fill out more paperwork, with the size of the typical appraisal record having doubled to about 30 pages. “Most of this work is defensive in nature,” says Lora Helt, director and appraiser with Bradford Technologies, an appraisal software company in San Jose. “If the deal goes bad, the first person that gets blamed is the appraiser.”

5. Get a second opinion (maybe in advance)

When an appraiser’s decision jeopardizes a deal, consumers are likely to feel aggrieved. Since the housing bubble, appraisers have typically gotten the most heat is over their work in neighborhoods with many distressed properties—since distressed sales and foreclosures create a baseline of comparable home sales (or “comps”) that tends to drive down prices. The Appraisal Institute, an industry trade group based in Chicago, says that such situations aren’t uncommon, and it encourages consumers to get a second opinion.

But some real estate pros advise consumers to get a valuation estimate of their own, even before the appraiser shows up. Buyers and sellers can ask their real-estate agents to provide a broker’s price opinion: Those estimates themselves may not always be accepted by lenders, but they can give the borrower a baseline from which to judge an official appraisal’s accuracy.

Heskel advises that buyers get at least two opinions, even if they’re paying cash. Differences in estimates can knock $10,000 to $20,000 off the final sale price of a home, he says.

6. It’s too hard to get this job

In many states, it takes relatively little training to qualify as a home inspector or real-estate agent. But for appraisers, the requirements can be very high—in large part because would-be appraisers have to be in compliance with both state and federal guidelines.

Simply becoming a trainee requires 75 hours of classroom time, according to the Appraisal Institute. To become a licensed residential appraiser (which only allows the appraiser to examine homes that have a value of $1 million or less) is another 150 hours of classroom time involving finance topics, valuation and market analysis. Qualifying as a certified residential appraiser, one of the highest levels, takes another 210 hours. Moreover, any appraiser that works with a federal agency must be certified on what’s known as a National Registry, which has more requirements. And typically, appraisers have four-year college degrees, or even postgraduate education.

The licensing and upkeep of an appraiser’s certifications is also getting tougher. Appraisers typically work with multiple AMCs, and each requires its own background checks, which appraisers must pay for out of pocket, says Schroeder, whose company is building a web portal designed to simplify the process. Given that some residential appraisers can earn only about $150 per job after the AMCs take their cut, many would-be trainees are put off by the educational and financial hurdles, says Schroeder: “There’s too much work for too little money.”

7. Our ranks are shrinking (and aging)

In 2010, there were 90,000 appraisers in the U.S. By last June, that figure had shrunk more than 10%, according to the Appraisal Institute, which says its ranks are thinning due to retirements and fewer people entering the profession. Today, more than half of appraisers are between 51 and 65 years old. And less than a third of all appraisers work in the residential sector, the institute says.

One issue is that hiring in the field has generally slowed down. In a 2013 Appraisal Institute survey, just 9% of residential appraiser firms and 21% of commercial real estate appraisal companies said they planned to hire more trainees.

When they do hire, some hope they’ll keep diversity in mind. About 90% of the 80,000 appraisers in the business are white and just over a quarter are female. The institute has formed a diversity committee to provide scholarships and training for minority appraisers.

8. We’ve got some bad news about your home makeover

Some homeowners assume that spending $50,000 on, say, a fancy new kitchen will raise the value of their house by $50,000. But that’s seldom the case: Ambitious home-improvement projects “are often not worth the price in a resale situation,” says Lance Coyle, incoming president of the Appraisal Institute.

Which renovations are more likely to raise a home’s value? A fresh coat of paint in neutral colors, or new fixtures or trim boards, can add value the fastest, Coyle says, as can Energy Star-compliant “green” renovations that pay the homeowner back in lower utility bills.

9. Don’t follow us around

Some homeowners confuse the roles of home inspectors (who assess the physical condition of a home) and appraisers (who estimate its sale value). One key way in which they differ: While many inspectors want consumers to follow them around—so they aren’t shocked when they’re presented with a multi-page fix-it list—experts say there’s no benefit for the owner or buyer in tagging along with the appraiser.

“(Following them) is a distraction,” said Platinum Data’s Huff. “Let them come in and do their jobs. If you want them to know about something, give them a list beforehand.”

10. Someday, drones could do our jobs

A typical appraisal takes about eight hours to complete, even if only an hour is spent at the property itself, says Helt, the San Jose appraiser. Behind the scenes, appraisers gather property records and data on land values and check features of the home against “comps.”

But technology is speeding up the process. “Big Data” software has eased the gathering of real estate information, while tools like Google Earth are figuring in more appraisers’ research. Even drones could soon come into play, if regulators allow their commercial use. “I don’t think there’s a replacement for boots on the ground, but the precise way a piece of collateral information is collected will change,” Huff says.

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