The real estate appraisal business has taken a pretty big hit since the mortgage debacle. It used to be a good and well known appraiser could get referrals. In any profession, referrals are not only a good idea, but referrals became a major source of business for established pros. Referrals have been a good idea for consumers because you don’t choose by trial and error but by someone’s good experience, which is a good indicator that the person is honest and competent. And referrals were good for appraisers, because it is the least expensive and most effective way to get new business.
With the mortgage meltdown it was learned that a very very small number of appraisers had yielded to pressure from mortgage companies and banks to appraise homes above their fair market value in order to close loans. No one has come up with a statistic, but I think it would be reasonable to state that the vast majority of appraisers are honest and practice with integrity. It is probably less than 1% of the entire profession that would violate their oath by over valuing real estate. I think it’s fair to say that the small number of over valued homes was not the cause of the mortgage meltdown. If blame is to be assigned, it would better find its place in the mortgage industry and on Wall Street.
Unfortunately, it appears that the vast majority of honest appraisers are now being severely punished, and it is breaking many of them financially. It is now impossible to refer a client to an appraiser. Banks and mortgage companies now must appoint an appraiser, but not based on experience or even upon the fact that the appraiser lives in the area, but based upon compliance with new laws and regulations that seek to eliminate the possibility of a referral that could create a conflict of interest.
Let me try to put this in perspective. Imagine that there was an earthquake in New York, and the Empire State Building was damaged. In their zeal to protect tenants and consumers who use the building, regulators decided to pass numerous amendments to the building code and fire and safety codes of New York City. As part of their zeal, the regulators discover a very small colony of ants in the basement of the Empire State Building 7 floors below the surface, which they claim could eventually create an unsafe building for a variety of complex scientific reasons. In their wisdom the regulators pass a new comprehensive regulation, part of which requires the immediate extermination of all ants in the continental United States. Eliminating the good ants will have many bad consequences to the ecosystem and consumers. Now apply all of this to the appraisal industry today.
Consumer advocates are out in full force, once again telling us they have created laws and regulations to protect consumers, but again they have done the opposite. To facilitate this new system of appointing appraisers objectively, there are appraiser management companies. An appraiser must be authorized by the management company and contract with them. Many management companies are squeezing low appraisal fees out of the appraisers and keeping the difference. Under these new rules, all of this “underhanded” nonsense is legal.
Since we all know you only get what you pay for, some appraisers are now popping up with new business models: take any low fee appraisal and only produce an appraisal report worth that fee. That means inferior appraisals. Good appraisers with integrity are not doing this, but isn’t it interesting that the politicians who seek to pass new laws to eliminate fraud by the few end up hurting the many honest appraisers out there and create new ways for the less honest to manipulate the system. By the way, do you suppose the very appraisers who were involved in malpractice by over valuing homes two years ago are also the same kind of appraisers who will now do dirt cheap appraisals for $250 and not spend the time to do a competent appraisal?
So is the consumer the winner? Absolutely not. Consumers who buy and sell homes are getting appraisers who do not even practice in the real estate market they are being asked to appraise. Consumers are getting inexperienced appraisers, because consumers no longer have any choice in who the appraiser is. And consumers are getting appraisal reports that could be in violation of the appraisers’ own code and are inferior reports that may not even provide an accurate appraised value. Regulators haven’t promoted the appraisal business–they have sent it back to the days of the cave man.
Meanwhile, the best appraisers are finding that their businesses have been decimated by these new rules. No one can refer business to the best appraisers. The new system does not allow it. The best appraisers who are honest and competent have to try to work within a new system that is full of gamesmanship, irregularities, manipulation, and does not function in the consumers’ best interests. Don’t be fooled by those who say that all this was necessary to eliminate all the fraud and cheating in the appraisal business. Dishonest appraisers were so rare, no one I know even knows of one who over valued a property in the past two years. We have read about it in the newspapers, but the truth is that a dishonest appraiser is extremely rare. The truth is the regulators have created a much bigger problem than the one that existed.
What is the answer? I’m not an appraiser, but it is obvious that appraisers are being subjected to grotesquely unfair industry standards and processes. Perhaps the only answer is for an entire nation of appraisers to stand up and expose the system for what it is, and to demand that consumers be placed at the center again.
Last Updated on July 27, 2012 by Chuck Marunde
