In 1998, I began my appraisal career. Most lenders required the appraiser to take photos of the comparable sales. This is not an USPAP requirement. However, it is a requirement of most lenders. There is good reason for this requirement. Viewing each property in person makes it easier to determine if views and locations of the comparable sales are truly comparable to the property being appraised. Of course, with the advent of technology, an appraiser can observe satellite and street views without leaving the office and make a fairly good analysis of these things.
I put about 25-30k miles on my vehicle every year. A lot of those miles come from taking comp pictures. It’s not such a big deal when I am already in the area for the observation of the subject property. However, no matter how much research I make before making the home observation of the property I am appraising, it seems that on a regular basis, during the analysis of the data, when I get back to the office, I find a comparable sale or two that is really better than those I took photos of initially. So, I have to go back to the area and take additional comp photos. For me, that’s just part of my work. I would rather provide some of the best comparable sales available than less comparable sales, just to save time. This situation is time consuming. I know that there are services that will take comp pictures for me, but I personally don’t feel comfortable using this kind of service. Even with this being the case, I schedule my day so that I still nearly always have the report back to the client within 48 hours or less, from the time of the walk-through of the subject property, unless the appraisal is on a complex property.
THINGS ARE CHANGING
Fast forward to where we are now. In recent years hybrid appraisals have come on the valuation scene. There has been so much discussion about them in recent times, including prior posts of my own, that I was reluctant to even talk about it again. However, I do feel that it warrants further discussion.
I remember when they first started being used. The creators and users of these bifurcated products painted a picture of the importance of the appraiser’s analysis, after the observation was made. They presented this new type of valuation reporting as helping the appraiser to perform what is arguably the most critical part if the appraisal process. Namely, the analysis of the data.
With these types of valuation products, someone other than an appraiser will make the observation of the home and will digitally upload the data, including photos if the subject property, to the lender who then shares this information with the appraiser. It is noteworthy that the people they use to “inspect” the subject property do not take the comparable sales photos. In fact, no one does, because comp pictures are not required to be taken. The appraiser uses this information to develop an opinion of value based upon the information provided.
The person making the observation is not an appraiser. They are unlikely to understand what things and situations will affect value in their walking through the home. Will they recognize what a tandem bedroom is or some other functional issue? Will they measure the finished area of the basement or even know how to calculate gross living area accurately? If they are not measuring the GLA, can public records really be trusted as accurate? (Not in my experience) There are many things that an appraiser is trained to look for that can affect value. I highly doubt that these things will be readily noticed or accurately documented by the non-appraiser inspector.
Did you know that the observation of most homes takes about 30-60 minutes on average? Of course, the observation might take considerably longer if the home is complex. Usually, the observation is the shortest part of the entire process. Before I ever leave the office, I usually spend about 30-60 minutes just pulling data for market trends, searching for possible comparable sales and data for extracting adjustments. After the observation of the property being appraised and comp pictures are taken, it usually takes me another 2-3 hours, and sometimes much longer, in completing the analysis and developing my opinion of value.
In hybrid style appraisals, in which the appraiser is supposed to use their valuable skills to develop an opinion of value, most lenders ordering these type of products say that they can be completed in an hour. Say what!? By the way, they are not even paying market rates for what they claim is an hour of work, at least in what I have experienced. I just saw an advertisement for what the AMC called a “staff appraiser” position, which paid $50 per hour. They prefer that the appraiser have a bachelor’s degree. When I read further, it was basically an add for an appraiser to perform desktop appraisals all day.
What this means for appraisers that complete these kinds of reports is that they have to really rush through these reports if they want to have any chance of making a decent living. There will be no time for a careful analysis of the market, neighborhood trends, extracting market derived adjustments and so on. There’s just enough time to find three quasi comparable sales, slap them on a grid, add an opinion of value and push out the report. Yep, a form filler. I thought we were getting away from that type of appraisal mentality. And yet, it seems that the mortgage industry is embracing it more and more.
Do you think that something is going to be lost in quality and accuracy, when appraisers have to pump out these reports in rapid succession?
I completed a few of these over the past couple of years. They took me about as long as a traditional appraisal, when all of the work necessary to be USPAP compliant was completed, including the work necessary to develop a supportable opinion of value.
One of the hybrid appraisals I completed did not allow for adjustments to be made. Some do allow for adjustments to be made. However, an hour is not enough time to develop an appraisal which includes deriving market adjustments. Making market supported adjustments is such an important part of the valuation process. That’s why the GSE’s have spent a lot of time and money implementing systems to flag appraisals in which the adjustments may not be supported by the market. Do you think that not making market derived adjustments will make the opinion of value more or less accurate?
YOU GET WHAT YOU PAY FOR
Make no mistake, hybrid appraisals are about speed and money. They have nothing to do with the appraiser being able to focus more on the analytical process. Part of the reason I feel this way has to do with the ridiculously low fees that are being offered, and the anticipated time that these products are claimed to be able to be completed in. If lenders want to use hybrids, then pay the appraiser for the time it will take to develop the hybrid appraisal properly. Pay them for the training and education required to become an appraiser, which today also requires a college degree or equivalent. I bet the people who perform the inspections are being paid about the same fee as the appraisers, while not being required to have anywhere near the education that appraisers must posses, including on-going CE. Let that marinate for a while.
Clearly there is some time savings in performing a hybrid appraisal in comparison to a traditional full appraisal. The hybrid appraisals I have seen pay the appraiser about 20% of what a normal full appraisal would costs. If only developing a credible value using a hybrid model really only took 20% of the time a full appraisal takes.
I am convinced that lenders that use these products are going to get what they pay for. However, it’s about risk. I get that. While these products may have been originally invented or at least proposed with quality in mind, quality is no longer the focus. History repeats itself. We are clearly seeing this again as some banks are willing to lend using riskier business practices and business models until it bites them. The riskier practices are not just seen in the use if this product. The only real losers will be home owners and tax payers. Just like in 2008.
One of the dangers with these appraisal products is that while they can be useful for some limited purposes, if they are slowly allowed to be used on a larger scale for making mortgage lending decisions, the damage will not be realized until it has already taken place. It’s like boiling a frog. How do you boil a living frog? You put the frog in a pot with a nice temperature of water. Than you gradually turn up the water temperature until the damage is done. The frog gets used to the increased temperature until it’s too late. The water reaches a deadly temperature and the frog is kaput.
While these products are not used for every loan right now, some lenders seem to be moving more in the direction of relying on these more in the near future.
Sometimes all it takes is one step in the wrong direction that can lead to disaster!
I do believe that the creators of these products really did feel that they were creating an environment in which appraisers could focus more on the data analysis. But sometimes good intentions have unexpected consequences. Like the scientist who discovered the massive energy that could be harnessed by splitting an atom. Little did they know that their discovery would be used to make weapons of mass destruction!
If I were a betting man, I would bet that, if users of these products are not careful, the cost of these bifurcated valuation products will end up costing the lending institutions that use them, considerably more money than a traditional appraisal. Sometimes chasing after the money can make you loose more than you get!
Would simply removing the requirement to take pictures of the comparable sales made a difference in speed? Would appraisers be willing to accept a smaller fee for not having to take comp pictures? I believe that the answers to those questions might be yes, at least in some cases. However, that’s not really the answer. I think it really comes down to a lack of appreciation for what appraisers do and why we are still needed at this point in time.
It will be interesting to watch this play out. It is my belief that this is going to damage the housing market down the road. I hope I am wrong. If it does, and homes began to default due to loans made based upon faulty (risky) valuations, seasoned appraisers will be here to perform full appraisals for the banks when these homes are foreclosed upon. Then they will hire the appraiser to perform full appraisal to develop a value in which they can sell the home they foreclosed on, in a 90 day time period to minimize their losses, which ironically may have been created, in part, by making a risky loan in the first place. All in the name of saving time and money on the appraisal.
Here are some other articles and videos I enjoyed recently! I hope you will also…
Commuting By Vertical Travel When Your Home Is Nearby – Housing Notes by Jonathan Miller
More Owners, Less Sales & Confidence – Sacramento Appraisal Blog
The Most Expensive Birmingham Home Sale in 2018 – Birmingham Appraisal Blog
How’s Your On-Line Presence? – DW Slater Blog