Real Estate
Appraising the Home Appraisers
They're supposed to be the market's gatekeepers. But who are they really working for?
By Anne Kates Smith, Senior Associate Editor
From Kiplinger's Personal Finance magazine, November 2008
- Comments
- Email This Article
- Print This Article
- Order a Reprint
Advertisement
Susan Wachter is a professor of real estate at the Wharton School of the University of Pennsylvania.
Why are home appraisals so crucial to the home-buying process? Real estate is the most important asset in terms of share of worldwide assets. It's the largest asset class. But real estate is unlike other assets that trade continuously, such as stocks, which can be priced from the market. Real estate is local, and properties are idiosyncratic. You're not going to learn what the price is from the market. Besides, a property may not have traded for several years. You need to have judgment in the valuation process.
What part did appraisers play in the most recent housing debacle? There's always pressure for appraisers to "hit the number," but in this past cycle it became extreme. There are many stories of appraisers pressured to certify that the price a buyer was willing to pay for a particular property was what the property was actually worth.
Isn't it? Appraisers shouldn't simply rely on whatever a buyer is willing to pay. They have to look at comparables -- genuinely comparable properties -- that show that the price a borrower is willing to pay isn't an outlier. But then there's the question of what is a comparable. When a wave of low-cost financing comes to a neighborhood suddenly, you have a lot of comparables. That's the limitation of appraisals.
Have reforms been put in place to ensure that appraisals are on the up and up? This isn't the first time a real estate bubble brought the system down. After the savings-and-loan crisis, appraisers were required to be licensed, and uniform standards were adopted. One problem is that the response to a violation might be to take an appraiser's license away -- that's very draconian, so appraisers are hesitant to penalize their own. Self-regulation can't be the entire solution. Banks and mortgage brokers must have an incentive not to push deals that don't work in the long run.
What can home buyers do to ensure a fair valuation? The appraisal is not meant to identify the right price for the borrower. The appraiser's responsibility is to tell the lender whether to make the loan. Buyers should do their own due diligence and find comparables in the local market.
Topics:
- Comments
- RSS
Permission to post your comment is assumed when you submit it. The name you provide will be used to identify your post, and NOT your e-mail address. We reserve the right to excerpt or edit any posted comments for clarity, appropriateness, civility, and relevance to the topic.
View our full privacy policy
Reader Comments (9)
Posted by: wkp at 10/11/2008 10:20:56 AM
...The appraiser's responsibility is not to tell the lender whether to make the loan. The appraiser's responsibility is to provide the lender with information so they can make their own informed decision whether to make the loan.
Posted by: Jeff Patterson at 10/14/2008 11:51:43 AM
I have been in the business over 30 years, and there has always been pressure on the appraiser, whether they do the appraisal for a mortgage broker, attorney, accountant or whatever. Although pressure is a contributing factor it is not the sole reason for...excessively, artificially inflated values....It is in part due to the lack of analysis done by appraisers that makes the reports become less and less reliable. If the proper analysis were done such as incorporating more than one approach to value, providing support for trends and adjustments, the use of linear and multi-linear regression models as it was done to some extend 30 years ago than we would not be in the situation we are now. As a professor and a representative of Wharton University, I am surprise that you're not an advocate the use of statistical tools, and other methods of establishing and supporting value that your new doctoral program must have on establishing and supporting value estimates. If appraisers were more educated they would find that swaying left or right on an estimate of value would not be possible if appraisers utilized tools such as those you must teach at the university. Maybe in part you don’t expect your readers to understand such tools or the bases for supporting a reliable estimate of value. However I expect they can and I am looking forward to an article that does more than blame it on pressure on the appraiser and appraisers policing appraisers. Let not forget, banks are the ones (in part) that determine what an appraiser does with respect to depth of analysis and they control the board that sets up the criteria of USPAP.
Posted by: dont understand at 10/22/2008 09:40:44 AM
Food for thought The Agent/Broker is licensed and collects a significant fee and facilitates the sale... The Appraiser is licensed and collects a relatively small fee and gives an opinion of value.. The Loan officer controls all the money and can at times make the largest commission, and they can run rampant..No training or understanding of any type of business ethic? Absolutely! Spit out enough game to get someone to sign loan papers your first day on the job and you are in business.... That my friends, is why we are in this mess and why the subprime market imploded!!!! Well, the lenders did lend the money too and the laws are loosely written..I guess it just depends which side of the fence you are on :-)
Posted by: earle hamlen at 10/22/2008 10:30:37 AM
I was a real estate appraiser for 35 years until 2001 when legislation was passed to allow lenders to hand pick their appraisers rather then have them assigned from a pool. I have been out of business since then as I would not compromise my ethics. Anyone with half a mind can see what has happened since then. You can thank Mr. Greenspan and our Congress for the mess they created.
Posted by: MikeW at 10/22/2008 01:12:22 PM
Appraisers being assigned from a pool, that is an excellent idea and would seem to protect buyer from typical Agent/Lender "I know a great appraiser". But,as usual, under the guise of removing regulations, consumer gets the shorthand and stands alone. And, as housing bust, dot.com bust, Enron, etc. prove if you work to lowest common denominators most consumers need someone looking out for them almost as if they were children
Posted by: Iron Byron at 10/23/2008 01:14:11 PM
Anyone see the financial crisis caused by the relationship between the Realtor,Appraiser, and Mortgage banker?
Posted by: Brandon at 11/05/2008 01:45:00 PM
The concept of limiting communication between lender and appraiser is a strong one. The only problem now is limiting the communication between the appraiser and the soon-to-be required appraisal management companies....AMC's discourage quality appraisal work and now have the power the banks once had, "appraiser pressure".
Posted by: Hoku at 11/24/2008 10:41:06 PM
As a commercial real estate appraiser, I must comment on Susan Wachter’s assertion in this article that "The appraiser's responsibility is to tell the lender whether to make the loan." This is *very* inaccurate and gives consumers false information on what an appraiser's responsibilities entail. Our primary role is to develop an opinion of value for a specific property. It is *not* the appraiser's responsibility to tell a lender whether or not they should underwrite the loan. This is just as inaccurate as saying that credit reporting bureaus make the decision on whether or not to approve someone for a credit card. The credit reporting bureaus only report a consumer's credit history to the bank (so it) can make a determination on whether or not to extend credit. Appraisers work in a similar manner...we only provide the bank with our opinion of market value of a property. What they do with that information (i.e. determine whether or not to underwrite the loan) is up to the *lender,* not the appraiser.
Posted by: iron byron at 06/12/2009 09:12:57 PM
did the start of the real estate industry have anything to do with carpet baggers?