This article is contributed by Sarah Scrafford, who regularly writes on the topic of luxury homes for sale in Florida.
It’s a question of ethics again, as we ask what happens when those who are supposed to set the standards are tempted or coerced to break or bend the letter of the law for their own purposes. Real estate appraisers must be totally unbiased when evaluating properties that come under their scanner, but that’s not the case with the recent slump in the realty sector. The sub prime crisis is taking its toll not just on homeowners, lenders and investors, but also for real estate appraisers who are increasingly coming under pressure to bend to the will of lenders, mortgage brokers and sellers.
Appraisers are being asked to submit reports with predetermined values that are much higher than the actual market rates, with the promise of having more business sent their way. Mortgage brokers and lenders are using this tactic to ensure that prospective buyers go though on their loan agreements. The higher the loan, the more the interest paid, and thereby lies the lenders’ interest in the whole shady dealing. The mortgage broker takes a percentage of the loan amount as his share of the pie, and that’s reason enough to ensure that the loan amount is higher than it should be.
The issue of ethics in real estate appraisal will have serious repercussions on the market if not addressed with the importance it deserves because:
- Independent appraisers who are desperate for business in these lean times are dependent on the clients that lenders refer them to. If they are true to themselves and their clients and provide judgments on the true value of the property, they soon find that they are mysteriously running out of further clients, thanks to the notoriously close-knit community of mortgage brokers and lenders.
- The unchecked continuity of this kind of over-valuation will lead to an artificial inflation of real estate prices.
- The situation is being made worse by the current downward market and the sub prime crisis that has seen a sharp decline in the sale and refinance of homes in the US.
- With the rule stating that appraisers are required to know the contract price beforehand, it’s not uncommon for brokers to send the figure they want to more than one appraiser with the implication that the one who complied would get the contract, or to choose the highest appraisal and refuse to pay the others.
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Appraisers know it’s illegal to provide biased or one-sided reports on the value of a piece of property. But the law itself provides loopholes that are exploited – appraisers use tricks of the trade to come up with inflated values by using comparisons that are six months old rather than more accurate, recent ones, since the letter of the law says that they are allowed to use values as old as six months. They sometimes ignore the state of repair of the age of the house and consider only the neighborhood it’s in to jack up the value.
Besides this, when you consider that books like “The Complete Guide to Financing Real Estate Developments” by Ira Nachem have complete sections entitled “Influencing the Appraisal” (thanks to Jonathan Miller’s blog Soapbox for this bit of information) where the author actually says it’s ok for brokers and lenders to play on the desires of appraisers to satisfy them by getting them to produce reports with higher or lower values than the norm, you know the industry is in for more than a bit of trouble.
The National Appraisal Survey of 2007 (click here) that 90 percent of appraisers surveyed said they felt pressure to manipulate values (the figure was only 55 percent a year ago), with 71 percent being coerced by mortgage brokers and 56 percent by real estate brokers and agents. The sad part of this is that 68 percent reported losing clients and 45 percent said they were not paid when they held on to their ethics and refused to comply.
With federal and state laws on this issue set to be stricter in the near future, we’ll have to wait and see if this is a trend that will continue or die out due to the threat of possible imprisonment and professional suicide.
This article is contributed by Sarah Scrafford, who regularly writes on the topic of luxury homes for sale in Florida. She invites your questions and writing job opportunities at her personal email address: [email protected].
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