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Prepare for Change
by Richard Hagar, SRA
In my career I’ve been through four major changes in the market and our business, so what’s about to happen isn’t my first rodeo. I’m going to point out some things that will make a few people angry. However, I’m trying to help by pointing out how you can become better and profit from the change.
What’s Causing the Change
Interest rates: The Federal Reserve has stated that it plans on increasing interest rates 2 to 6 times this year, and even more next year. With each increase in lending rates, the number of people qualified to buy or refinance a home declined. The result? Fewer appraisals will be ordered. While this has happened before, this time there’s more issues that will impact our business than simple interest rate hikes. We are about to be hit with a quadruple whammy.
Both Fannie Mae and Freddie Mac allow “appraisal waivers” (loans where no appraisal is required) and in the past waivers were limited to fewer than 5% of the loans they purchased from lenders. However, over the past year their waivers have increased to 48% of their loan purchases. Imagine that 48% of the loans no longer require an inspection or appraisal. That’s a mind-boggling number (for more details read Massive Expansion of Appraisal Waivers here). Prior to 2022, Fannie Mae’s UAD system was reviewing approximately 20,000 appraisals a day produced by approximately 40,000 appraisers. This indicates that appraisers were providing one appraisal every other day. Now, consider that waivers reduce the rate to an appraisal once every 4 days. Ouch.
Their excuse for waivers is a “lack of appraisers.” I agree, there is an appraiser shortage in some areas. However, in other areas the “shortage” is due to lenders being unwilling to pay an appropriate fee. Numerous times a day we receive appraisal requests offering $475-$550. Our starting fee is $850, and we go up from there, then are booked out 3 weeks. There’s no reason to accept such a low fee when we have clients paying more. In my opinion, this shortage is self-fulfilling, brought on by lenders unwilling to pay the going rate. Then they claim a shortage which in turn allows them to obtain appraisal waivers from Fannie Mae or use other types of appraisals that aren’t as finicky about a property.
Automated valuation modeling (AVM) is where a computer takes all of the information appraisers have supplied over the years to lenders and Fannie Mae, runs the data through artificial intelligence (AI) and out pops a value. For the most part, these AVMs can be accurate, but not for complex properties that involve waterfront, view, outbuildings, conflicts with zoning (a highest and best use issue), sub-dividable acreage, wetlands, “mother-in-law” units, etc. Over the years these AVMs have become more accurate and are used by lenders on a regular basis for reviews and yearly loan portfolio analysis. While an appraiser was used in the past, the AI of today is reducing the need for appraisers for many of these simple valuation questions.
Both Fannie Mae and Freddie Mac announced that on March 19th, 2022 they will start allowing “desk appraisals” instead of the full inspection 1004 appraisals. According to them, this step will allow fewer appraisers to complete more appraisals. Some estimate that an appraiser will be able to create two-plus appraisals a day. Before there was a need for 40,000-plus appraisers, but at this new rate the system will need fewer than 20-30,000 appraisers. And while not stated, you and I both know this means lenders will be pressuring appraisers for lower fees for houses that are simple to appraise. However, desk appraisals won’t work on new construction, “fix & flip” homes or complex properties. The only saving grace here is the fact that many lenders won’t use the desktop option for their loans.
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Reason for Waivers, AVMs and Desk Appraisals
Many lenders (as well as Fannie Mae, Freddie Mac, the VA, and FHA) are tired of paying for appraisals where the appraiser has lied about performing the required scope of work. Examples include:
- Appraisers certifying that they have driven by each comparable and taken “original” photographs, then turn around and use an MLS photograph in reports. Fannie Mae has an incredible system that knows when MLS photographs are being used instead of an original. They know when they are being lied to and it has only been tolerated due to the large volume of loans.
- Appraisers certifying that they have measured the house, but the drawings match exactly what is in the county records. I’ve measured hundreds of homes, only three times did the drawings and measurements match the county records. The odds of a drawing matching the county assessor is a 100 to 1. Since the Collateral Underwriter (CU) keeps track of every appraisal, it knows when something’s fishy. In the case of a complex house in Prescott, Arizona eight appraisers had identical incorrect drawings and used the incorrect square footage supplied by the county. However, one new appraiser to the area took the required steps and measured the homes and provided accurate square footage (Wow, what a concept!). The accuracy of this appraiser has made it clear that eight other appraisers were inappropriately using the county information. The CU knows who’s doing the job right. And, by the way, I did confirm the accuracy of the lone appraiser’s work.
- Appraisers measuring homes and rounding to the nearest foot and not properly accounting for areas below grade, or stairs. Appraisers then justify their rounding method by stating that using the county’s square footage (SF) makes the house like the comparables and the value more accurate. So, in their world, inaccurate SF of the subject coupled with inaccurate SF of the comps makes a value more accurate?
- Appraisers failing to list problems that impact the subject: never mentioning that the subject is next to a gas station; unfinished basements shown as finished or above grade; C6 homes being listed as C3; undervaluing ADUs; adjustments based on an appraiser’s opinion instead of being properly quantified; and the list goes on.
In other words, lenders, and the Government Sponsored Enterprises (GSE) know when they’ve been lied to, so why should they pay full price to an appraiser that isn’t doing the job as required by the agreed upon scope of work? If they can’t trust the information from an appraisal inspection, why pay for the inspection? So, now we have desk appraisals which will likely be as faulty as full inspection appraisals, but delivered faster and for less money. Now looking back, has the failure to measure correctly, or inspect and photograph a comparable, lead to more money or the downfall of 1004 appraisals and lower fees? While we can try to blame AMCs and lenders, sloppy appraisal practices are the appraiser’s fault, not theirs.
There is going to be less work for appraisers due to increasing rates, more waivers, desk appraisals, and AVMs–we brought it upon ourselves with the help from lenders and AMCs that used appraisers producing poor quality work. There are going to be fewer appraisals ordered for properties located in subdivisions and places where a computer or desk appraisals can be used. As things slow down this year, the easy appraisals of yesterday will become fewer and fewer due to the appraisal waivers.
So, What Can You do About It?
AVMs, appraisal waivers and desk appraisals won’t work for: complex properties: waterfront; view; acreage; C5 and C6 homes; properties with extra buildings like barns, and accessory dwelling units (ADU). Appraisers that have the ability to appraise complex properties will be in high demand and garner higher fees. As an example, our fee for a waterfront home with an ADU is triple our normal bank appraisal fee– you can earn this fee as well, even in LA, Phoenix, or Missouri. Sweet!
How to Profit
Appraisers will have to determine individual adjustments for size, topography, neighborhoods, outside influences, and view. Learn how to measure homes using the ANSI system and be accurate down to the inch. Learn the system and use new tools to properly measure homes. Take classes that teach how to properly determine adjustments, stop using MLS photographs, learn how to properly determine the value of ADUs (they add more value than you think, and desk appraisals won’t do it right). Learn how to value waterfront and view properties. Finally, brush up on the requirements of highest and best use “as if vacant” and “as improved” because that’s going to be one more requirement on FNMA’s new form.
Appraisers that learn how to value complex properties will be the winners next year, and beyond. I want you to be among the winners, so go take classes that help you become better at your craft. I created the following classes to help you become better and thrive through what’s coming:
- Identifying and Correcting Appraisal Failures• How to Support and Prove Your Adjustments• Appraisal Adjustments II; Solving Complex Problems• Determining Market Value and Adjusting for Concessions
I’m trying to keep you safe and profitable out there.
Webinar: Introducing ANSI—New Requirements for Appraisers
Fannie Mae will start requiring appraisers to measure and calculate square footage using the ANSI system on April 1st, 2022—or appraisals will be rejected. Come learn quick and solid information that you need to do right away. Click here to purchase and replay the webinar that aired live on March 29th, 2022.
About the Author
Richard Hagar, SRA, is an educator, author and owner of a busy appraisal office in the state of Washington. Hagar now offers his legendary adjustments course for CE credit in over 40 states through OREPEducation.org. The 7-hour online CE course How to Support and Prove Your Adjustments shows appraisers proven methods for supporting adjustments. Learn how to improve the quality of your reports and defend your adjustments! OREP insureds save on this approved coursework. Sign up today at www.OREPEducation.org.
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by Thomas Carver
This is Truth! Lenders have no loyalty to or even want appraisers.. Back before AMC’s were so much required, I have seen major lenders go from sending no orders to wearing out the ink on a fax machine sending orders over a change in appraisal price of $1. Back in the early 2000’s, we dropped price from $250 to $249. Over 1$, it went from no orders to to many to handle, all over $1. So, please please do not try to blame appraisers for the fact the banks and secondary markets are greedy! The banks complain and want to pay and do even less. Lenders are only paying in the hundreds of dollars for an appraisal for added risk benefit on loans in the hundreds of thousands of dollars! They hire non appraisers to review work but the lenders do not make it easy for trainee work or to provide more appraisers themselves.. Now, I have always said: appraisers never have to feel bad where our money comes from working for the banks lol they make you earn it and tight with money”! So, you do not blame appraisers; the banks and markets are just greedy and Do Not Remember 2008! The 4 measures you mentioned are proof; they did nothing to make loans less risky ( even rates so far so fast is lender greed) Its not using MLS pics, its Greed why the are wanting to pay and do even less to ‘manage the Risk and Moral Hazard of the Housing Market! 2008 should be a Big ringing bell! The crash might be worse next time as lenders are bigger, and bigger they are, the Harder they Fall especially causing “more moral hazard’ and ‘risk’ doing less! The ordering and requiring an appraisal in the hundreds of dollars to help secure loan in the hundreds of Thousands of dollars is the least they can do and have any moral ethics. They make the forms a data entry contest and then complain it takes so long the get them so perfect a ‘scanner’ can mine the data. Hell No! This is not appraisers fault, its the Greed of Lenders hoping to rely on numbers on a sheet and not paying for a person to see something they will loan hundreds of thousands of dollars! Its a disgrace after 2008 fiasco they went from 5% to 48% waivers. That is nothing but moral hazard and greed!-
HAHAHHAAAA, the fees are lower due to lying? I do appreciate your articles but if the pay was limited due to lies, the regulators and creators of these standards would be on food stamps. If they were a real issue, they would make an example out of those who are not doing their job. I do not see a huge wave of appraisers losing clients. They do not set the fees, the fees are set when an appraiser accepts that fee. We shoot our own foot enough to keep the appraisers on a leash.-
by John M Pratt
I agree with what you have said in this article and I did watch the webinar on 2/29/22. I have been saying for a long time that many of these changes which are coming will reduce the number of appraisers needed to meet future demand for appraisals. The number of appraisers in the future will adjust to the demand, that is a fact of life in the business world. If an appraiser cannot make enough money they will find another profession.-
You mentioned the problem with appraisers taking shortcuts by not driving the comps and measuring the subject correctly. I agree that some appraisers are not driving the comps, just how prevalent is this? Measuring the subject incorrectly, I would like to know just exactly what Fannie is finding that the appraisers are doing? Are the appraisers including areas that are not GLA, basement, unfinished area, enclosed patios, rooms with sloping walls or are they just measuring the walls incorrectly. In many counties in California the Assessors office will not even let the appraiser view their files without written permission signed by the owner and in some case they require the signature of the owner to be notarized. How much of a difference in GLA between 2,3,4 or 5 different reports does Fannie consider that is a problem, 1 foot, 5 ft, 10 ft, even with ANSI the different appraiser will not arrive at the exact same square foot.
Measuring and following ANSI standards is not really a problem. I would like to see some guidance from Fannie regarding how they would like the appraisal report, 1004, completed when there is below grade finished area where the local market see it as part of the GLA. How should it be reported on page #1 in the improvement section, rooms, bedrooms, baths and GLA and in the Comp Grid in room count and GLA area. If all of the comps show the above grade & below grade as one total for GLA and the subject has it separated in the grid would it not look confusing to many readers of the report?
Fannie needs to provide guidance.
by Pat Turner
Richard, as always, well done!!-
Thanks for letting all of us know the way to be the best professionals we can be.
I still need to get the book. Hopefully this weekend.
Stay safe and we’ll!
by Coleen Courtney-Morrison
If FNMA and the GSE’s feel appraisers are lying and not doing what they are supposed to, then the solution is to not use them or take those appraisers off the approved appraiser lists kept by banks, lenders and AMC’s. The answer is NOT to develop “half-a..” appraisals by cutting corners, which, in my opinion does nothing but increase the lender’s risk, as well as the appraiser’s liability, which will become quite extensive. Waivers, desktops, hybrids, etc. all have a place in the lending world, just not the forefront of lending/appraising. Borrowers with strong credit scores and low loan to value ratios, are the ones to get waivers, etc. I don’t believe the majority of the market has strong credit scores AND low LTV’s.-
by David Eigenbrode
It still boggles my mind how appraisers accept the AMC excuse. The ONLY reason AMCs get inferior appraisers is because they seek out and hire the cheapest. If the lending industry wants high quality appraisals they should be willing to pay for them. But what do I care? I had enough of the BS and retired!!!-
Why is it that every time I see Mr. Hagar’s name, my blood pressure rises? I realize that he is selling education, but damn. Must there always be such doom and gloom?-