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.
Tips for Smoother Appraising
Presented by: Richard Hagar, SRA
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