Appraisal Scoop

10 Tips for Brokers to Help the Appraisal Process - Appraisal Insight Blog

REPRINTED FROM APPRAISAL INSIGHT BLOG - AUTHOR: Vic Knight has been a licensed real estate broker in North Carolina since 1984. He's also a Certified General Appraiser in the state and is past president of the North Carolina Association of REALTORS®. He has chaired NAR's Appraisal Committee and currently is a member of the Board of Trustees of The Appraisal Foundation. 

10 Tips for Brokers to Help the Appraisal Process

 

1. Don’t restrict the appraiser from making an appointment to inspect the property (if your MLS uses an appointment system, use it. You will be notified of the appraiser’s site inspection).
2. If an appraiser calls, be responsive and provide as much information as needed. Return the call promptly even if your listing has closed. (Brokers are the expert source of information on your listing.)
3. Be as descriptive in MLS as possible about your listing and include as many photos as your MLS system will allow (include photos of: Front, Rear, Street, and ALL major rooms & property features).
4. Don’t use or reference tax records as your source of information. Do the proper legwork on your listing; it builds significant long-term credibility among your peers and local appraisers.
5. Distinguish “above-grade” living area from “below-grade” living area in your MLS, particularly the quality of finish in below-grade living area, attics, bonus rooms, decks, porches, and so on.
6. Provide an “Appraisers Package” in advance, and have it available at the property when the appraiser is inspecting the property, or meet the appraiser at the property so that you can answer any questions or inform the appraiser of the unique features of the property or neighborhood. Make sure you allow the appraiser the space and time to complete their inspection (Appraisers Package could include plats, surveys, deeds, covenants, HOA documents, floor plans, specifications, inspection reports, neighborhood details, recent similar-quality comparables, detailed list and dates of upgrades and remodels, and energy-efficient green features).
7. Provide a fully executed copy of the purchase contract, with all addenda.
8. Explain, to the seller or buyer that the roll of the appraiser is not to confirm the sales price but to provide the lender an independent, objective and impartial opinion of the value of the underlying collateral which the loan would be based on. Provide the seller or the Buyer a copy of the brochure developed by The Appraisal Foundation entitled “A Guide to Understanding a Residential Appraisal,” available from NAR to view or download at  http://www.realtor.org/appraisal/a-guide-to-understanding-a-residential-appraisal
9. Real estate salespeople and consumers can be present during the appraisal inspection. Make sure all parties allow the appraiser the space and time to complete their appraisal inspection, uninterrupted.
10. Make sure the property condition (inside and outside) is the best possible for the appraisal inspection, and inform the seller that interior and exterior photos (and measurements) must be taken by the appraiser.

 

SOURCE: APPRAISAL INSIGHT

 

Vic Knight

Vic Knight has been a licensed real estate broker in North Carolina since 1984. He's also a Certified General Appraiser in the state and is past president of the North Carolina Association of REALTORS®. He has chaired NAR's Appraisal Committee and currently is a member of the Board of Trustees of The Appraisal Foundation. Vic’s nearly 30 years in the real estate business includes owning and managing a Century 21 residential brokerage firm, extensive residential and commercial development, and residential property management. Vic is currently the owner of Appraizr.com, a real estate consulting and full-service residential and commercial appraisal firm. Vic is a graduate of the Instructor Training Institute and has authored and taught numerous real estate brokerage CE courses since 1998. He holds a BS in Civil Engineering from North Carolina State University and was a practicing professional engineer with the Bechtel Corp., an international construction company headquartered in San Francisco, Calif. Vic is chair of the North Carolina Real Estate Commission, a position appointed by the governor.

 

 

 

Real Estate Purchase Contract Scams - Tricking Appraisers To "Hit The Target"

GUEST AUTHOR: Vernon Martin, the founding principal of American Property Research, performs paid research, due diligence and valuations regarding commercial real estate
throughout the world. He has 28 years of commercial appraisal experience and has
worked in 20 countries, 39 U.S. states, and four Canadian provinces. He was  previously the chief commercial appraiser at 3 national (U.S.) lending institutions, formerly taught Real Estate Valuation at California State University, Los Angeles and has authored many professional journal articles and two books.

The appraisal textbooks don’t mention these, so I will.  Real estate purchase contracts are often
constructed to mislead lenders and appraisers.  Various ruses are used to inflate stated purchase prices above market  value, with the hope of tricking an appraiser into valuing a property at above market value and tricking a lender into offering a loan at an imprudent loan-to-value ratio.  

What the buyer and seller are counting on is a phenomenon known as “anchor bias”, the tendency of appraisers to offer an appraised value identical to the purchase price. Various academic studies have indicated that this happens about 96 to 97% of the time, although some appraisers seem to have been getting wiser lately.  Some ruses that I have recently seen include the following:

1. The “soft second” mortgage loan – forgivable seller financing used to inflate the contract purchase price.  

My last appraisal assignment presented such a possibility. It was an $8 million purchase contract which was contingent upon $4 million in first mortgage financing, supplemented by seller financing of $4 million. The buyer would have no equity in the property, a situation that presents a high risk for loan default.

I suspected that the seller financing was a “soft second”, a seller concession disguised as a fake loan. My suspicion was well supported by a contract purchase price which was $1.6 million above the listing price for a property that had been marketed for almost 3 years. I found the listing on the Internet.  

Normally, the term “soft second” in the real estate industry refers to a legitimate second mortgage loan made at a below-market rate, perhaps subsidized by a government agency or a nonprofit entity. In some cases, though, the seller financing is not meant to be paid back. It is a price concession in disguise, meant to inflate a contract purchase price.

An appraiser cannot be sure the second mortgage is real or fake, so he must look for clues, the most obvious of which is that the purchase price is not supported by comparable sales or the purchase price is above the asking price. The lack of equity contributed by the buyer should also make lenders and appraisers think twice.     One would think that some government agency or appraiser association would issue an “all points bulletin” on this deception, but this scam continues to this day.

2. Unsigned purchase agreements in draft form.

 

I have seen a proliferation of this trick in the last 2 years, and am currently witnessing it happen on a
transaction in Puerto Rico.  The buyer just says that the purchase contract has not yet been finalized and submits his own version, usually in MSWord, with a different price.  Very simple, but these deceivers are counting on appraisers or lenders who will believe anything.  

 

Normally, an application for a purchase mortgage loan comes with an already-signed purchase agreement with contingencies for financing. Why and how could there be a closing without a definitive purchase agreement? An agreement that is not written is commonly known as not worth the paper it is written on. There is no reason for an appraiser to accept an unsigned, draft purchase agreement as a reliable indication of value.

 

3. The double escrow
 
This is when there are two purchase contracts for the same property.  The first purchase contract is the legitimate one, and once closed, the buyer can then sell at a higher price to an entity he controls in a different purchase contract that he will submit to lenders and appraisers.  The latter transaction, however, is a sham "pocket-to-pocket" transaction.

 
4. Secret partnerships and "transaction facilitators"
 
In one instance I met with the owners/sellers of swampland intended for development of a marina residential community. The buyer and sellers were old friends. I was presented with three conflicting purchase contracts, and whenever the story keeps on changing, that is a good sign of deception. After four hours I asked Mr. Seller where he would  be moving to. He seemed surprised and responded, "I'm staying here, of course.  I've got a lot of work to do!" which made it clear that he was part of the development team. I looked at his wife, whose facial expression said "How can my husband be so stupid?"

I discovered  one company in Arizona that advertised "transaction facilitation" services. Step 1 is that the buyer forms a joint venture partnership with the transaction facilitator in buying the property in the guise of an LLC or Limited Partnership. Step 2 is the shell company (the LLC or LP) sells to the buyer
again at a higher price in a sham transaction designed to trick a lender and maximize financing.
 
Another type of "transaction facilitation" is those services which "rent" cash down payment money overnight to buyers while the purchase price is inflated to cover the amount of the phony down payment.  Law enforcement has been shutting down such operations in the United States.

Other purchase contract deceptions 

 

It is risky, any way, for an appraiser to automatically assume that a contract purchase price is identical to market value.  I have seen fake purchase contracts and purchase contracts which disguise the fact that the buyer and seller are one and the same. I have seen purchase prices inflated by real estate
syndicators who are compensated as a percentage of the transaction price.

 

Many appraisers are so convinced that the purchase price is real that they make the mistake of making
unconventional adjustments to sales data to support the stated purchase price. They may choose much newer properties or much smaller properties as comparable sales and fail to make adjustments for age or size.
 
Questions to ask
 
The first thing I do in analyzing the purchase transaction is to peruse the Internet to try to find the property listed for sale. LoopNet and realtor.com are good sources, but sometimes if you just google the address of the property, you can find a more obscure listing. When I find the property listed at a price below the contract purchase price, and the property has already spent a substantial time on the market, that is cause for suspicion.

The next question I ask the buyer and the seller, separately if possible, is "who were the listing broker and the buyer's broker on this transaction?" The reason why I ask is that I see so many purchase loan applications which are not represented by a broker, begging the question of how the buyer and seller found each other in a market with so many properties listed for sale. 

If there was no broker, there was most likely no listing or advertising, meaning the buyer already knew the seller, increasing the odds that the purchase transaction is not arm's length or even a
"pocket-to-pocket" transaction with the owner buying the property from himself with my client's financing. Past experience has shown me that this is a way to make the lender the unintentional buyer of a hard-to-sell property.

One tell-tale sign of a fraudulent purchase is when the buyer complains that the value is too low. In legitimate purchases, the buyer often uses a low appraisal to negotiate a better price, and they sometimes even thank me, but when a buyer starts making phony excuses as to why the appraised
value should be higher, it is a signal to me that the buyer is either already affiliated with the seller or else the buyer and seller have negotiated a separate purchase agreement and the contract I was given was
phony.

Recent adverse publicity for the appraisal profession
 
The National Association of Realtors (U.S.) has recently unleashed their well-funded publicity machine to criticize appraisers for failing to "hit" purchase prices. They publicize sob stories of realtors whose purchase deals fell apart.  "I had a bona fide purchase contract and the incompetent appraiser appraised it too low!" Such things could be said about me, too, but nothing is being said about the epidemic of deceptive purchase contracts nowadays.
 
To appraisers who think they must "hit" the purchase price:

If it was really true that the market value of a property is always the same as the purchase price, there would be no need for appraisals, would there be?

 

AUTHOR: Vernon Martin, the founding principal of American Property Research, performs paid research, due diligence and valuations regarding commercial real estate throughout the world. He has 28 years of commercial appraisal experience and has worked in 20 countries, 39 U.S. states, and four Canadian provinces. He was previously the chief commercial appraiser at 3 national (U.S.) lending institutions.  Full profile: click here

The (potential) fiction of the Sale Price/List Price [SP/LP] Percentage

GUEST AUTHOR: Dave Towne, Certified Real Estate Appraiser - Towne Appraisals.  16422 Britt Rd., Mount Vernon, WA  Phone: 360.708.1196   eMail: [email protected] Web: http://www.TowneAppraisals.com

On the FannieMae/FreddieMac Market Conditions (MC) Form there is an entry for the ‘Median Sale Price as % of List Price’ at the bottom line of the top grid section.  In other parts of a report, clients and lenders often ask appraisers to use this SP/LP percentage to ‘adjust’ listings to predict the eventual sale price.

So what is that percentage anyway?

The SP/LP percentage is a sales and marketing scheme designed to show how close a Sale Price comes to the List Price of a property.  The math is simple: Sale Price divided by List Price, converted to a percentage.  On the surface, acceptable.   However, it’s not really useful for market statistics if it’s not done correctly. 

If inaccurate, what good is it?

If it’s not accurate, or is calculated improperly, and an appraiser uses the inaccurate percentage to
justify market evidence or make an adjustment, then you have potentially violated USPAP by producing a report (or at least part of one) that is not credible.

The rub comes in the methodology used by the various MLS systems around the country to calculate the SP/LP%.  Some of the private ‘MC Form’ generating spreadsheets that are based on MLS info automatically downloaded to the spreadsheet worksheet are based on the ‘most recent’ List Price, not the Original List Price.

The first dirty little secret is most MLS systems base the SP/LP% on the ‘most recent’ List Price verses the eventual sale price.  The % is fine if there has been no List Price change during the listing period, or no re-listing after its Original List Date with a different List Price.

The second dirty little secret is that most often MLS systems track the Days on Market from the ‘most
recent price change date’, not the Original List Date.  (Thankfully the Northwest MLS serving my area is a bit more honest.  Any re-list using a new listing number within 90 days has the original listing added to the new listing – to show the Original List Price, and the Original List Date in the listing to compute the CDOM.  However, they calculate the LP/SP% from the ‘most recent’ List Price.)

The third dirty little secret is the fact many agents are in on the ruse.  Some will re-list a property within a short time of original expiration using a slightly different street address to try to fool the MLS tracking system.  This helps them ‘puff the numbers’ to their benefit.

If a MLS system does not track and report the Original List Price based on ENTIRE days on market
(typically named CDOM – Combined Days on Market) as of the Original List Date, but only tracks the ‘most recent’ List Price, you will probably find that the SP/LP% will show a higher percentage figure based on the most recent List Price change.  Similarly, the Days on Market will be shorter.

This SP/LP% percentage figure should be calculated from the Original List Date and Original List Price
instead of the most recent List Price change date.

Unfortunately, if CDOM and Original List Price are not shown on the current MLS listing you may have to
examine the listing history to make the calculation.  But if the info is shown on the listing sheet you use (on screen or printed), then you should use the Original List Price, and also the total (or combined) days on market (CDOM).

Here’s an example of three properties from a large MLS system:

The inaccurate methodology used by the MLS systems is designed to ‘puff’ the percentage figure and shorten marketing times so that the results look more appealing to consumers and give bragging rights to the RE Agents.  But that does not mean we should use them when doing appraisal reports.  You can see by the examples above that the correct SP/LP% is lower by 3.1% to 11.5%.

When including Listings in reports, this appraiser REFUSES to adjust those for the SP/LP% - because we don’t really know for what price the listed property will sell.  As the example above shows, the percentage is somewhere between 86.8% and 100% - but more accurately 86.8% to 94.4%.  But it could be above 100%.  So what figure should the appraiser use?  I have a statement on the report Listings page that states why I don’t use this percentage figure.  Only one underwriter has ever challenged this procedure – ‘because everyone does it.’  However, when the U/W read my explanation the U/W realized why using the fictional SP/LP% is improper.

Some people will claim that the methods MLS systems use to calculate the SP/LP% using the ‘most recent’ info is more accurate because that demonstrates the “realistic” market at play.  I say boloney.

RE Agents are sales people and advocates for their clients.  They list properties for the price they are told to, or for a price they figure will generate interest.  They try to sell for the highest price possible in order to generate the maximum commission.  In some cases the list price is too high for the current market.  If that’s the case, the Original List Price and Date still become the statistics we appraisers should use.  Again, the examples above prove my point.

GUEST AUTHOR: Dave Towne, Certified Real Estate Appraiser - Towne Appraisals.  16422 Britt Rd., Mount Vernon, WA  Phone: 360.708.1196   eMail: [email protected] Web: http://www.TowneAppraisals.com

NAR Adopts Broader Valuation Policy

From Appraisal Insight Blog author Jerome Nagy on Feb. 16, 2012:

The National Associaiton of REALTORS^® (NAR) continues its holistic approach to valuing real property with the adoption of its Responsible Valuation Policy. The document is the culmination of NAR’s efforts to consider all methods of valuing real property. NAR previously hosted two valuation summits and two working groups were convened. Members from across NAR’s policy structure had input in the document and included representation from the Professional Standards, Real Property Valuation/Appraisal, Federal Housing Policy, Conventional Finance and Lending, Commercial, and Business Issues Committees. Input was also provided by RPR.

The document will serve as the foundation for NAR’s policy position on the various methods of valuing and pricing real property – including appraisals, broker price opinions (BPO), and automated valuation models (AVM). The policy document also includes language from NAR’s Code of Ethics as a reminder to members that REALTORS

SOURCE: Appraisal Insight

 

Pennsylvania Gov. Tom Corbett signs AMC legislation

Originally posted by Kim Shindle On February 3, 2012 @ 6:00 am In Association News,Government Affairs- http://www.PARJustListed.com

Appraisal management companies will now be regulated in Pennsylvania, thanks to legislation signed by Gov. Tom Corbett on Thursday.

House Bill 398 [1] (Stevenson) requires appraisal management companies to be registered with the State Board of Certified Real Estate Appraisers. Pennsylvania is the 30th state to pass such legislation.

More appraisal management companies appeared throughout the country, as a result of the Home Valuation Code of Conduct [2] (HVCC). The Home Valuation Code of Conduct originated from a settlement among New York Attorney General Andrew Cuomo, the Federal Housing Finance Agency, Fannie Mae and Freddie Mac. While the HVCC was sunset, the issue of unregulated appraisal management companies remained.

“We believe this legislation is important to protect homebuyers in the Commonwealth,” said PAR President Frank Jacovini. “Research initially showed after the Home Valuation Code of Conduct was enacted, consumers were paying higher fees for appraisals that were frequently inaccurate and misrepresented the value of the property. We also saw closings being delayed as a result.”

The new law will create a level playing field for AMCs and appraisers. Appraisal management companies will now be required to work within the nationally sanctioned Uniform Standards of Professional Appraisal Practice (USPAP) [3] .

“Thanks to a collaborative group of all stakeholders providing input into this bill, this new legislation provides protection for consumers and industry participants alike,” according to Michelle Bradley, chair of PAR’s Appraisal Management Company Task Force. “Those who own or operate AMCs will be accountable to industry standards and state regulation.”

The new legislation also:

• Implements a registration and renewal fee of $1,000
• Implements a $20,000 bond or letter of credit to secure the faithful performance
• Requires all appraisal reviews to be conducted by a certified or licensed appraiser
• Requires AMCs to adopt Uniform Standards of Professional Appraisal Practice (USPAP) recordkeeping rules.

About Kim Shindle: Kim Shindle is the Manager of Media Relations at the Pennsylvania Association of Realtors®.

SPECIAL THANKS to Paul Faeder of Keystone Realty and Appraisal Service Inc. of Bushkill, PA for sending this to Appraisal Scoop!

NAR Seeks to Bar AMC Indemnification Clauses

NAR President Ron Phipps sent the attached letter to heads of government agencies today.

Here’s an excerpt :

Appraisers provide an independent and impartial analysis of the market, and a credible opinion of the value of real property. This analysis is a critical component of the mortgage transaction and, in recent months, has become the subject of unnecessary pressure. The mounting use of indemnification clauses by AMCs may be interfering with the appraiser’s independence and objectivity. In many cases, appraisers are asked to sign contracts that include language to indemnify and hold harmless the AMC against any suit, threat, or claim on any work product or service provided as part of the contract agreement. In some instances, the appraiser is even required to indemnify the lender and the AMC for amounts equal to their costs in repurchasing a mortgage loan, regardless of any proof of culpability on the part of the appraiser. 

Download Letter to Regulators on Appraiser Indemnification FINAL 08112011

If you are not comfortable downloading the attached pdf, there is an online version at this link: http://appraiseractive.blogspot.com/2011/08/nar-encourages-bar-of-amc.html

Thanks to Frank Gregoire for providing the link -

Francois (Frank) K. Gregoire IFA RAA
Gregoire & Gregoire, Inc.
Realtor - Appraiser
Office 727-344-3393
Mobile 727-420-3804
Fax 727-344-3395
[email protected]
http://fl.living.net/Realtor/gregoire
http://appraiseractive.blogspot.com

NAR Releases Statement Regarding Appraiser Independence

Today, the National Association of Realtors (NAR) released a statement regarding appraisers and appraiser independence on their appraisal web page. In the statement, NAR expresses concerns about recent attempts to interfere with the appraisal process and the independence of the appraiser.

Over the last 18-36 months a host of rules, regulations, and laws have been announced to further protect appraiser independence yet appraisers continue to be pressured. NAR believes this pressure unnecessarily adds risk to the mortgage transaction for lenders and consumers. You can read the full statement here.

Source: Appraisal Insight Blog

NAR Defends Broker Price Opinions for HAFA Valuations « HousingWire

The National Association of Realtors (NAR) is contesting claims, made by the Appraisal Institute last week, against the use of broker price opinions (BPOs) in the upcoming Make Home Affordable Foreclosure Alternatives (HAFA) short sale program. NAR asserts that when it comes to short sale valuations, BPOs are the best option out there.

via www.housingwire.com

Download the Realtor.com iPhone Real Estate App

Not only can you instantly access over 4 million homes for sale with the touch of a button, whether you are
driving or walking through a neighborhood, you can also see:

• Homes for sale nearby your current location with your GPS enabled iPhone
• Open house times, dates and locations
• Homes for sale on a map, even the neighborhood you're standing in, instantly
• Multiple photos, property details and pricing on nearly any home for sale
• More homes for sale than any other real estate site in America
• Information you can trust - because it's the official listing site of the National Association of REALTORS®

Plus, REALTOR.com® is the only site that regularly updates home sales data throughout the day. So if a home comes on the market today or if a price is reduced, you'll see it before anyone else.

NAR Survey Shows HVCC Impacting Housing Markets

"An analysis by the National Association of REALTORS® (NAR) indicates that the implementation of the Home Valuation Code of Conduct (HVCC) appears to be having adverse impacts on the housing markets. Recently, NAR Research sent a survey on this topic to a random sample of approximately 40,000 NAR members which generated 3,600 responses. An analysis of REALTOR® responses follows."

• Approximately 76% of REALTORS® representing buyers or sellers indicated that the time to obtain a completed appraisal increased after May 1.
• The number of Appraiser members reporting they obtain over 50% of assignments from Appraisal Management Companies (AMCs) increased from 13% to 40% after May 1st.
• Similarly, 71% of REALTORS® noted an increase in the use of out of area appraisers.
• Approximately half of NAR Appraiser members reported a reduction in fees received by them.
• More than 70% of NAR Appraiser members reported that consumers were paying higher fees.