The Appraisal “Power Line”
No matter where I go or who I ask, this simple question always seems to provide the same answer. What is the first line you look for when you open an appraisal report? Out of anywhere from ten to twenty pages contained in most appraisal reports, the first line that seems to draw everyone’s attention; the final value. That’s it every time; straight to the power line, the money line.
Regardless of how well the report is written, how fancy the pictures and maps, or how detailed and precise all the explanations; most of the time, all this information doesn’t really make any difference. It all looks professional and very well put together; that is, as long as the value comes in where you expected. When that one all-powerful line, the money line looks good, it appears the rest of the report must have been created by a skilled professional.
The appraisal has served its purpose and the loan moves forward. Everybody says what a great job the appraiser did and all is well with the world. During every transaction, with every homebuyer who is getting a loan, at some point and time you find out if the appraisal is a “go” or a “no.” If it’s a “go” that’s the end of the appraisal conversation. Now it’s on to the next step in the process. However, if that “power line” is not what the client is hoping for, needs, or expects, that very qualified professional appraiser just turned into the star of the next edition of “World’s Dumbest Real Estate Appraisers.”
How could this happen? Can you believe what they appraised it for? Why did they use that appraiser? You must be kidding! What were they thinking? How could they possibly think that house is worth that? Can you believe what that appraiser said? I was afraid the appraiser wouldn’t understand that house and see why it’s worth more; who called that appraiser anyway?” The most experienced real estate professional can get booted to the dog house in a matter of minutes, as the word quickly spreads about the low, automatically assumed bad appraisal. Buyers, sellers, both agents, the local lender, and everyone else who knows anything about this sale is placed on alert. Beware; a low appraisal is messing up our deal.
This list of appraiser questions could go on and on and most real estate brokers have said something similar at least once during their career. And lately, they seem to be saying it more often. Most practitioners eventually find themselves faced with an appraisal decision that changes their plans. The first thought is, “what an idiot that appraiser must be!” However, if you sell enough houses, sooner or later the inevitable is bound to happen. That one appraisal comes in and stops your deal dead in its tracts.
It’s just like Humpty Dumpty, and no matter how hard you try you just can’t get the buyer and seller back together again. All that time you’ve invested, gone in an instant. The closing and your check (which you already had plans for) just disappears. Sometimes you sell the same buyers another house and sometimes you lose them forever. Since this problem happened while they were working with you, it has to be at least partly your fault, right? A sad reality of the real estate business.
You will remember that appraiser; “never again if I can help it!” Funny how quickly opinions and perspectives can change in this wonderful world of real estate. It truly is a profession like no other. For ten years (working only as a broker) I only saw one point of view. But, after receiving an appraiser’s license, suddenly my perspective dramatically changed. There were so many things I had assumed about the appraisal industry, I quickly discovered that were just flat out not true. For ten years I had been taught a particular set of facts about appraisers that I instantly learned were not true the moment I became one. I’m not sure how some of these misconceptions got started, but I hope we can clear up some of these myths and misinformation.
One thing you definitely need to understand is where an appraiser gets most of their information; from YOU! Appraisers generally use the same source of information agents use when they create a CMA. The information agents use to create their professional opinions is based on the information provided by their direct competition. Experienced agent, broker-in-charge, board president; or, newly licensed agent, part time agent who just wants to “give it a go,” or the old school agent that just doesn’t see the need for one of those newfangled computers; each listing agent is equally powerful.
Once any information is recorded in a closed MLS listing, it instantaneously turns to gospel! No other business works that way. On Monday you’re competing for a listing and talking about what they said, or did, or how they got that listing you know should have been yours. Or, you hear about the CMA they created that was not even in the ballpark. You think they just tried to “buy” the listing. You tell your co-workers “just wait and see, they’ll never sell that house for that much.” It’s interesting to watch how every real estate professional seems to have very strong opinions about value. And that’s the way it should be; learning to estimate a property’s value is an important part of the job. Each agent creates a suggested listing price, the seller(s) agree and the home is listed for sale. Eventually, a buyer(s) agree to a price and a buyer’s agent; and then after at least four people have already agreed to this price, the ball moves to the lender and appraiser.
This one line (the power line) often defines the appraisal and the appraiser. If I brought out an appraisal right now, how many of you would know exactly where to turn to find the value? Do you really ever think about the rest of the report? Other than that one very important number, is there any part of an appraisal that impacts your closing? Do you really know what time and effort went into creating that number? Who cares? We are scheduled to close next Friday, and I need my check. Sometimes, the facts of life outweigh everything else. Since an appraisal is just an opinion, should you lose your hard earned check based on this one person’s opinion of value? The buyer’s and seller’s opinions and two professional brokers’ opinions aren’t enough?
If appraisers were taken completely out of the loan process tomorrow, would it make Realtor’s jobs easier? No matter where I ask this question, I get the same results. It seems that my profession (appraisal), especially in the recent past, is often viewed less than favorably by others involved in the home-buying process. The hard truth is that many local lenders and brokers believe they would get along just fine if all the appraisers just went away.
They would function just fine using automated valuation models (AVM’s) and Broker Price Opinions (BPO’s). Lender’s opinions generally don’t change until they are asked the question about having an appraisal done if they were loaning their own money. When it’s your money being invested, the appraiser’s opinion seems to become more important. Try and think about an appraiser the same way you would a city or county building inspector. No matter what the profession, a system of checks and balances is always a sound practice. Whether it’s building a house or buying a house; with something this important it’s just a smart business practice to confirm every detail.
When investing such large amounts of money, you can be sure that every step in this system was created for a purpose, and has been reviewed, revised, and reconsidered over and over again. The home valuation system will never be perfect, but there is a logical order and a very specific method to what sometimes seems like madness. Appraisers were introduced to the home buying process to ensure consumer protection and to protect the mortgage investor.
Let’s face it. Most of the time we never look past the value line in an appraisal. When it works, it’s tucked away in a drawer and forgotten. It is only of great importance when it doesn’t do what we perceive as its job. Its sole function is to support the value and verify the collateral is secure so the buyer can get a loan. No loan means no closing; no closing means nobody gets to move, nobody gets paid, and the nightmares are about to begin. Even if you’ve had ten offers, if the house won’t appraise it can destroy the whole process. If you’ve been around the business long, you’ve had at least one of these experiences. They tend to make an impression on you that you don’t soon forget.
The only time we really check out the “comps” or talk about adjustments and details in an appraisal report is when there is a problem with the value. The power line serves like a massive “on” and “off” switch for the loan process. If the value turns out good, the light turns to green moving the loan conveyor forward. If the value comes out lower than anticipated, the loan light turns red, sirens roar through the air, and the home-buying process comes screeching to a stop. The buyer’s agent is on the phone alerting every one of the trouble ahead. The appraisal report is now scrutinized with a fine tooth comb. When most people ask about the appraisal on any specific house, what do they want to know? It’s an unwritten language and when most people ask this question, they don’t want to know the square footage or the number of bedrooms, they don’t want to know what comps the appraiser used.
They are asking about one line on the appraisal report; one line and one number, the “power line.” The appraised value controls a great deal of power over the buyer’s ability to get a loan and the seller’s ability to sell a home. It also influences what will happen in the near future of many people’s lives. The appraised value is extremely important to the home-buying process and no one understands that better than the residential appraiser.
Being a professional real estate practitioner requires the ability to form an opinion of value and once you make that decision, you must be prepared to defend it. And occasionally you get the opportunity to say “I told you so.” Come on, admit it; sometimes it’s very satisfying to watch a listing expire. You tried to tell them the price was too high, but they just wouldn’t listen. Now they’ve wasted six months and will end up selling it for less. We all like to have our opinions validated in the market. While you didn’t make the sale, it still provides just a little smile to know you were right on target with the value.
The MLS Power Line
One listing. One agent. Starting from point “A” and going literally around the world; not in 80 days, but in a matter of seconds, the information each listing agent enters in the MLS for a closed sale is reported and utilized by many industries. It is used in statistics for more things than you can imagine. From the census department to your local insurance company and a thousand places in between. This simple form you fill out and submit to the MLS (once a property has closed or settled) will affect the lives of many people in the future. Think that sounds a bit extreme? It can’t be that big of a deal, right? Wrong.
It can be and is a very big deal, and any incorrect information may cost your neighbors their next vacation or reduce the kid’s college fund. That’s not overkill to make a point; it’s just the facts of this business. But, it’s safe to say that the information contained within your local MLS carries more power than most people ever imagine. The information reported in MLS influences every CMA and appraisal.
Appraisers are dependent on the MLS for the majority of their comparable data. Better details in MLS means better CMA’s and better quality of appraisals. Agents have control over much of the appraisal system as they provide the main source of information. The MLS is one of the most powerful databanks in the world. It’s a private real estate information source, created one sale at a time. The “most trusted source of real estate information in the world” is created one sale at a time, by each listing agent. MLS equals power.
Do most appraisers have any idea what it takes to get that contract negotiated, signed, and ready to email them a copy? In a word, NO. However, they completely understand the significance of an appraisal brought in below the contract price.
Like all other systems, the appraisal system is not perfect. However, appraisers are the most highly trained and federally regulated members of the home buying process. If it’s your money, there’s no replacement for a traditional appraisal.
