Is MLS Crippling the Appraisal Industry?

MLS Myths, Measurements and Mistakes

MLS is crippling the appraisal industry. There’s no easy way to say it. It is a growing problem which is changing collateral valuation, the calculation of listing prices, CMA’s, AVM’s, and appraisals. The bottom line; the misinformation being reported in MLS and in the public record systems across the country is crippling the real estate and appraisal industries. Homeowners are left out on a limb. Who’s measuring America? Not who you think.

Many national leaders are calling for a complete overall of the appraisal system, stating that the entire process is “ineffective.” Financial institutions that have depended on the appraisal industry are now turning to BPO’s and AVM’s. We are currently in a real estate crisis and if this trend continues, the crisis will continue and worsen. It’s simply a matter of time.

Appraisers now have management companies to make their schedules and tell them their fees. Most require daily updates. Most appraisers spend a great deal of time “checking in” before they ever start working on an appraisal. Maybe we should try this with attorneys or home inspectors or insurance companies. What is currently happening to the appraisal industry could never happen in any other industry. However, when you have a problem of this magnitude you have to have someone to blame. We have to appear to be fixing the “problem.” We certainly do need to fix the problem, but we currently are not even working on the right profession. By the way, I am a Realtor® and an appraiser.

The MLS Meltdown

Every CMA, AVM, and appraisal contains mistakes. They are all based on one of two sources. Either information from the MLS or the county tax records, and both contain significant square footage errors. That should get our attention since it causes inaccurate home values in every market. But, we still seem to be missing the real problem.

Every agent that calculates a suggested listing price (or offer price) is making a decision based on flawed information. Homeowners and lenders beware! The MLS real estate information system in no longer the most trusted source of real estate info in the world.

Where did it go wrong? Access to large amounts of information does not equate to knowledge. With the explosion of the information super highway, too many agents decided to bypass the fundamentals that helped to create the largest private trade organization in the world (MLS and the National Association of Realtors®). Somewhere along the road, the fear of liability overtook the duty of responsibility and the “source” of real estate information was forever changed.

We’ve all heard the phrase “comp check. What does that really mean? The answer is in every episode of home shows on HGTV®. The first piece of information they share about a property is the total finished square footage, and then they discuss the magic phrase, “price-per-square-foot.” A “comp” check basically looks at two numbers. Ask most agents (or appraisers) and they will tell you the first two numbers they look at on any closed sale are the sales price and the size. This simple formula of dividing the sales price by the square footage gives us the all-powerful PPSF (price-per-square-foot) formula. Although many will argue it’s just not that simple, in real estate offices all across America, it is actually just that simple and the way most agents are taught to calculate home values. Could it be that the classroom is to blame and not the students? In a word, yes. Most agents have been taught this method to create value, but have not been taught that if two numbers control the value of real estate, those numbers better be right. The sales price is easy; it’s a verifiable fact. The second number, the size or square footage, is provided by a hodge-podge of methods across the country. In many cases, the measurement methods used by brokers and appraisers are intentionally different. It may only change the value by $5-20,000, but if that was my money I would want to know what method is “right.”

When a broker needs to calculate a value, they generally look at three (or more) comps and come up with a PPSF range. Let’s just say the last few houses sold for between $150-160 per square foot. So, this “comp check” simply creates this value range and then multiplies it by the square footage of your house and presto, current market value. The house is listed for sale and after a contract is negotiated, an appraiser comes in (does the math the right way) and often proves the value is fair (although less frequently in today’s market).

This formula is not something new. It’s the way it has always been done. The difference now is that most agents don’t measure houses anymore. The NAR® celebrated its 100th anniversary in 2008 and in over 100 years as the real estate experts, no one can agree on how to measure a house? No other industry has the luxury of not providing a “standard” of measurement. Even if everyone doesn’t agree with it, you must have rules; like interstates and speed limits.

100 people would likely provide an assortment of what they consider to be a “fair” speed limit. But, someone has to make a decision; the rule. Gallon, liter, cup, quart, etc… Even all the components of a house are standardized. Wood, shingles, windows, doors, flooring, even nails. But, put them all together making the most expensive item most people ever own, and something changes. This new product has no one accepted measurement method or standard.

ANSI® created a 20+ page measurement “standard” in 1996. Less than twenty pages of details to define how to calculate the most expensive item most people own. However, if you check every state with agents and appraisers, there is no accepted or required “standard.” It leaves too many areas unclear and after over a decade, this standard has not been accepted by the real estate community. Realtors® and appraisers all share MLS info, although they all do not create square footage by the same method. It is not even close to being created equal. Your house value is often calculated based on guestimates and errors. Apples and oranges is being kind.

Measuring square footage is an art, not a science. And, as such, it will never be a perfect system. However, this art can be taught in one nationally approved and mandated system. There simply must be rules applied throughout the industry. Consumers and mortgage lenders should demand it. Too many agents and appraisers are forced to turn to public records for square footage information. The public records that were never designed or intended to be used as a source of detailed square footage…only as an estimate of size for assessment purposes only. All measurements are created from an “exterior only” view and the amount of errors are staggering (1,000 to 2,000 square feet mistakes are common). But, from the tax assessor’s perspective, they are not errors at all.

The hard truth is; MLS is broken. Our real estate market is in crisis. While certainly not the only reason, the “size crisis” did play a part in our current market meltdown. And, if agents don’t start taking responsibility for measuring and reporting a home’s size again, this crisis will continue to escalate. Realtors® and the MLS must go back to their roots, professionals sharing information (information they created, not that they took from the local tax department). Does Size Matter? You can count on it!

Right now, in every CMA and appraisal there are one (or more) square footage mistakes, which are significant enough to change the value. Any talk of “reform” might want to look at this issue and not call for another appraisal form, which few seem to understand anyway. It’s time to standardize square footage! Consumers deserve to know the fair size of their homes. The appraisal industry is only as good as the information they use in the calculation of values. The quality of the appraisal industry is in direct correlation to the quality of information reported through the local MLS.

What’s the only thing Realtors® have that Google® and Yahoo® will never have? Property information; accurate information. If brokers don’t remain as the “source” of real estate information, then they lose their power over the industry. If everyone has access to the same property information, the real estate information system may be in for some major changes. MLS was created so that professionals could share their information. “The most trusted source of real estate information in the world?” It may not be the MLS any longer unless they take action soon. A little common sense could go a long way right now.