In an industry where technology is changing the way we do business minute by minute, one of the most important factors when purchasing a home is done in an archaic fashion. The residential appraisal process is one that I still find myself scratching my head over and saying, “There has to be a better way.”
When qualifying applicants for a loan, lenders use an underwriting program. These programs are designed to take a consumer's various mortgage applications and determine certain stipulations that will be necessary for them to qualify for a particular mortgage. Loan originators and underwriters gather this information and supporting documents for each applicant.
In the stock market, every company uses proprietary algorithms to help advise clients on what stocks appear to be a good buy or sell. Trends, analytics, you name it — there is a program for it. In real estate, new companies use proprietary data to collect information to ensure the offering price meets certain guidelines, so they can secure a home at a good value to then sell that home on the open market at a profit. The world uses programs except in one critical element in the home buying experience: the appraisal process.
Imagine this: A lender sends an appraisal request to their appraisal management company. This company will contact an appraiser from their preferred list, and that appraiser will then make an appointment to conduct an inspection. Many times, this appraiser has no expertise on the particular location or submarket. They rely on comparable sales that can be provided by tax records and MLS.
However, that isn't enough in a lot of cases. One cannot ascertain the true value of a home from just a few sales without understanding why that property sold for that price. There are breaking points in a market. Sometimes being north or south of a road can impact values by 20% or even 30%. What if that appraiser is unaware of this?
How can one appraiser say a home is worth $550,000 and another say it’s worth only $475,000? Because they base an opinion of value off assumption. These subjective values are then sent to the lender to be used as a threshold in the purchase price or refinance. Yes, one person’s opinion of a home's value makes or breaks another person's purchase or refinance.
Isn’t the true definition of “market” supposed to be what someone is willing to pay for a product or service?
Now, there are those who say the process is in place to protect from fraud in the marketplace. I understand the argument. However, if the lender sees that a buyer is putting 10%, 20% or 30% down and can qualify, then this so-called true appraised value should not be a factor. When a consumer is putting a certain amount of money down, it alleviates the liability of the lender because the majority of the risk is in the consumer's down payment deposit. If the buyer winds up defaulting, the lender is still able to turn that around and resell. This protects the lender against fraud.
How many thousands of appraisals a month occur that are simply not adequate? Is one person the best and educated enough in that specific market to get the closest and most accurate number possible? I don’t believe so.
Where I find myself becoming especially frustrated is with the amount of money wasted every single year on appraisals that come in below value for good borrowers, and the loan doesn’t close. This happens more often than you may think, and the only person who actually benefits is the person writing the report. Go figure.
But it goes even deeper than that. Most buyers are also paying for inspections because due diligence typically expires before the appraisal comes back. These inspections become unnecessary if the home will never close. The average home inspection is around $350. For 712,000 low appraisals, that’s $249,200,000 additional wasted dollars.
Oh, and most of these folks that drop out of escrow buy a different home and do this all over again. The lender has to spend more time and effort, and let us not forget the real estate agents, who now have to find another property in a seller’s market that meets the needs of the client — all because their first purchase appraisal got crushed by subjective opinion.
Want a solution?
Every home price should be based on an algorithm to determine value, weighed by such factors as market data, two appraisals, the borrower's risk tolerance and loan-to-value ratio. Let’s take a percentage of each and determine a market value based on facts and the borrower’s ability. Accounting for the human element, a 30% fluctuation can be built in. The definition of an appraisal is an opinion of value. We simply cannot let one person’s subjective opinion of value make or break a sale. And for the hundreds and thousands of people who have worked hard to buy a new home, they deserve a better process.
Having a reputable real estate group that evaluates every appraisal, asks the questions as to why the home was appraised at that price and submits a rebuttal if necessary can lead the industry down the path toward a lasting solution.
What would it take for this to become the new standard?
This process being adopted by a larger lender and proving that the model works would start the flow of every other lender going to that model. The savings to the lender and the borrower would be substantial, and ultimately the buyer would close on the home. Talk about a scenario in which everyone wins.
