Ok, so I’m kidding. But read further.

In my previous post, I address the swirl of interest in the appraisal part of the home sale process brought about by NAR’s Existing Home Sale press release yesterday where they blame appraisers for preventing the housing recovery.

On the same day, the National Association of Home Builders issue a press release specifically addressing the need for new appraisal guidelines. Betting money says the two organizations (NAHB & NAR) coordinated release to get more bang for the press buck, so to speak.

Did you ever think something was terribly wrong, but you didn’t understand why? If you haven’t, then you should definitely read NAHB’s press release.

I’ll lay it out here commenting on each paragraph. It you find it to be too much (most sane people), skip to the conclusion at the bottom.

> Using foreclosed and distressed sales as comparables with appraisals on single-family homes without adequately reflecting the differences in the condition of the respective properties is needlessly driving down home values, according to the National Association of Home Builders (NAHB).

If foreclosures are competing with the open market sales in the neighborhood – guess what? That’s the market at that point in time. I strongly agree with their point that appraisers need to confirm condition of foreclosure sales if they use them as comps. It’s not that hard. AN APPRAISER SHOULD NEVER USE A COMP UNLESS THEY KNOW SOMETHING ABOUT IT. Otherwise, it can’t be comparable, by definition. Of course, the caliber of appraisers performing mortgage lending appraisals is falling rapidly with the proliferation of AMCs. That’s the real issue here.

>“Any home buyer can recognize the difference between a well-kept home and a distressed property that is damaged or not properly maintained. So it only makes sense that an appraiser should be required to consider the overall condition of a property and the specific factors related to a foreclosure or distressed property sale when selecting and adjusting the value of comparables,” said NAHB Chairman Joe Robson, a home builder from Tulsa, Okla.

We already are required to verify the sales to be able to make adjustments but the Cuomo/Fannie Mae deal called Home Valuation Code of Conduct (HVCC) has enable a whole army of inexperienced or incompetent appraisers at the expense of competent experienced appraisers who can’t afford to work for half price and turn around assignments in 20% of the time without verifying the data.

I was told by a senior risk officer at a national lender that the bank uses several hundred appraisers in Manhattan. There are less than a half dozen long-time Manhattan-based firms here (with more than 1 employee). Where do all these companies come from? Out of state and up state New York. These appraisers will drive 3-4 hours to come to bang out a dozen reports in a day working for half the market rate.

>Appraisers are often only required to conduct exterior inspections of properties that are being used as comparables because they are normally unable to enter these homes and examine their interiors. Too often, properties that have been subject to foreclosure or distressed sales have issues related to deferred maintenance or internal damage that an external inspection simply cannot reveal.

Think about what NAHB is saying here in the first sentence. We are not required to inspect the interior of the comps nor can we be made to. Do we have the right to go in all the comps? Simply walk up to the house across the street and say: “I am doing an appraisal of that house over there and the bank requires me to go inside your house and see what you have.” Good grief. A very poorly worded press release.

The actual point they are making here is that they want the appraisers to consider the condition of the houses being sold at foreclosure and adjust for their inferior condition. NAHB is absolutely correct.

However, the alternative bigger picture, between the lines, inference being delivered in the release is: ALL foreclosure sales are INFERIOR in condition to the house being appraised – that’s why they sell for less. That’s simply not true. Are they more likely to be inferior in condition than houses sold that are not foreclosures? Yes. The seller of a foreclosure is often a large institution not as close to the property as an owner occupant would be and may have a different objective/time frame than a typical seller might.

>“While most appraisers do a fine job, there needs to be proper regulatory guidelines for those who use distressed or foreclosed properties as comparables when determining home values,” said Robson. “It is essential that appraisers have the proper experience and guidance to accurately assess values in distressed markets.”

You can’t mandate what comps to use, if they are “comps.” I don’t want the FDIC mandating what wattage of light bulbs I can use in my upstairs hallway either. However, I agree completely with the second point. NOTHING has changed to improve the quality of appraisals since the financial meltdown began. HVCC was intended to remove the high bias in valuation caused by the mortgage brokerage industry’s 60%+ market share of origination controlling and ordering the appraisals. That was removed with HVCC. The growth in mortgage broker market share of bringing business to the banks allowed lender relations with local appraisers and the existence of inhouse appraisal review departments to whither and die. The bank solution appears to be to use AMCs to order appraisals, a process which was enabled by HVCC, which is an accident waiting to happen. While mortgage broker ordered appraisals were biased high, AMC ordered appraisals are biased low.

What about a neutral middle ground? Good grief.

>In neighborhoods where comps include a large number of short sales or foreclosures, appraisers should have the option of expanding the geographic area or extending the time frame for eligible sales to get a more representative basket of the value of homes sold in the area, Robson added.

They basically want appraisers to ignore all foreclosure sales because they are “low” and be allowed to expand search guidelines to find higher sales. Property values in a neighborhood that are hurt by rising foreclosure activity isn’t caused by appraisers. They are competition to the non-foreclosure homes (and should be properly adjusted for condition). If the appraiser is determining market value of a property, he/she can’t cherry-pick the high sales. Their logic is a fall-back to credit boom reasoning which was all about finding the highest sales to make the deal happen.

>Currently, improper or insufficient adjustments to the comparable values of foreclosed and/or distressed homes often results in the undervaluation of new sales transactions.

The best message in this release and it is absolutely true. Condition of the comps should be discovered and adjusted for. Otherwise they aren’t comps – they are merely sales.

>“This practice must be corrected because it contributes to the continuing downward spiral in home prices, forestalling the economic recovery,” said Robson.

Overstated but not entirely incorrect, due to the growing AMC issue. The legion of incompetent appraisers being enabled through HVCC and AMCs are resulting in less accurate valuations. This problem sticks like a sore thumb in a declining market with low sales activity, compromising the public trust.


>Foreclosure comps are like the new breed of appraisal management appraisers proliferating in a down market.
* The quality of appraisals should be much higher than it currently is, whether or not the housing market is rising falling or flat.
* Nothing has been done to address the poor quality of appraisals performed for lending institutions.
* National retail banks have all gone the AMC route to get their appraisers.

If the user of an appraisal report (bank, Fannie/Freddie, secondary market investor) doesn’t care about the quality and reliability of the valuation process, then the use of AMCs are enabled and becomes the new market for appraisal services, damaging the livelihoods of competent and diligent appraisers.

The use of AMC appraisers is beginning to sound a lot like the way foreclosure comps are being used in an appraisal.


  1. […] [NAHB] New Guidelines For Appraisers: Break Into Houses? Matrix, June 24, 2009 http://matrix.millersamuelv2.wpenginepowered.com/?p=4853 […]

  2. Edd Gillespie June 24, 2009 at 11:18 am

    I am making the extraordinary assumption that we appraisers will live long enough to see the end of this madness.

    While the condition of a residence at the time of sale is important, it simply does not explain all of the differences in prices I see here. I decided long ago to write off foreclosure sales for use as com parables, but what about REOs? A huge percentage of those also show depressed prices. Then I stumbled on to something. REOs are selling to investors who either have “hard money” or can borrow it collateralized by other properties or a hand shake. For the most part those who intend to occupy the residence cannot obtain financing for purchase because the lenders won’t consider the home for collateral. From what I can find out some of that is born of habit – it’s just always been that way – and some of it is due to the fact that the foreclosing entity wont warrant title.
    Anyway the lower price paid for REO properties is ubiquitous here and using an REO for a comp requires careful consideration of how much value is effected by affordable and available financing. Condition of an REO may also be a consideration, but not the only one. It is that effective arm of the demand side we touch on from time to time that is the real culprit.
    I locked horns with the Colorado regulators, and they blinked when I told them about this phenomenon. The regulators insist the REOs belong in market analysis for residences. I say not automatically.
    Isn’t NAHB the people who hold that cost is market value?
    Maybe NAHB has noticed something, but they don’t know what it is so shoot the messengers. Course the messengers they deal with may not be able to provide them with detailed info in an overnight appraisal and then there is the reluctance that NAR and NAHB have demonstrated by not weighing on on the lender bubbles. Anybody know why that is?

  3. Edd Gillespie June 24, 2009 at 8:18 pm

    With NAR and NAHB spinning their webs to ensnare appraisers and lenders quoting them with their cheapskate AMCs it’s a wonder anybody has the courage to even admit they appraise. Maybe appraisers will become known as gluttons for punishment. Either chronic victims or the stuff true unsung heroes are made of. But, who are we supposed to save from their own self destruction? I know what we’re ethically and competently supposed to do, but where do we fit when we do it?

  4. alex pereira June 25, 2009 at 10:52 am

    I agree and disagree with all parties. Having been in the lending industry in excess of 8 years and now benefiting from this mess by acquiring foreclosures I can tel you homes right now by appraisers are severely undervalued. I am in michigan and 50% of the market is foreclosures. The problem is that appraisers will use the most recent data (and often times a foreclosure) to compare valuation. The solution is simple:

    if a market has a 12 month marketing time… um use comps up to 12 months to determine adequate valuation. If a market has 18 month marketing, do the same. I buy foreclosures in real bad shape and the fact those are used as comps without properly adjusting for conditions is appalling. A foreclosure is not an adequate comp. Most people do not buy foreclosures because of deferred maintenance.

    To say that a foreclosure is equally marketable to a normal sale is like saying a used car that has never been in an accident and is in good shape is as marketable as a car with an accident and missing bumper. Sure you can fix the car and make it look new, but it still is a car with an accident record that a buyer must be willing to overlook and get fixed. Sometimes having the money (particularly for a new home buyer) to fix the problems is the reason people do not buy foreclosures.

  5. annonymous June 25, 2009 at 11:05 am

    How do you adjust values according to the
    condition of the houses, if you don’t have access to the houses sold? Even if you do,
    do you do an inspection like a home inspector?
    Appraisers simply can not come up with an
    accurate value of a house. Otherwise, all house sale can be done according to the
    appraisal and there is no need of realtors,
    which will save us a lot of money. The
    problem is that mortgage companies rely
    too much on appraisals!

  6. Behind The Mortgage » Blog Archive » Defending the Scapegoats: What is ‘Wrong’ with the Appraisers? June 25, 2009 at 12:25 pm

    […] on this topic since forever but before you read another word of mine, go read Jonathan Millers fabulous post on this issue from today.  He’s responding to recent press releases from the National […]

  7. Living for Seniors June 25, 2009 at 7:56 pm

    A main difference with a short sale or foreclosure sale is that the transaction does not meet the long-time definition of a market transaction- a willing buyer purchasing from a willing seller. In both a short and REO, one party is in distress- either the private owner or the bank that must unload the property for their own economic reasons. The distress has meant it is a less than market transaction- at least that has been the definition in the real estate world I have done business in for 30 years. Because there are more distressed sales now shouldn’t redefine “the market”. The stock market based mentality of “mark to market” has inevitably permeated the appraisal process. It is self-limiting and misses the unique valuations of real estate. Chicken little is running the hen house.

  8. Craig June 29, 2009 at 9:27 am

    There is STILL more than (a) condition, (b), financing and (c) distress to be considered when using an REO as a comp-sale. To learn what that factor is you should, yourself, go out and buy an REO. You will discover that an REO cmes WITHOUT warranty, WITHOUT disclosures, WITHOUT a CLUE report, etc. No sane person would pay the same for otherwise equal houses if one had a warranty and the other didn’t.

  9. Schlager July 12, 2009 at 10:28 pm

    I’m surprised Mr. Miller that you don’t consider the premise of fair market value more important. As has been pointed out, a fair market value transaction involves two parties under no compulsion. Distress sales, by definition, involve a seller under a compulsion.

    You can use distress sales as comps. If you do, however, you should adjust the price based on average discounts for distress sales. The economic research is available (13-20%).

    • Jonathan J. Miller July 12, 2009 at 10:42 pm

      Who determines if a sale is under duress? What about house where a seller is being relocated and the house was sold “low” by the 3rd party relo company? What about an estate sales which can often be sold low (after adjusting for condition)? What about someone who needed to sell so they could move into their new house in time before the kids have to go to school in the fall so they sold it very quickly? What if someone wanted to sell faster than the prevailing market time conditions. Do we exempt all of those sales too? Who makes that decision? The way you suggest would mean all of those sales are under duress too. Where do you draw the line? Your definition isn’t fair value, its a value in a vacuum.

      If my house is for sale and I am competing with 12 other foreclosure sales, then my house value is held down during the period it competes with those units – while they competed with potential buyers of my home. That’s the market that was in existence as of the effective date value is estimated. Value is a volatile thing – its not a number that gathers dust – its always moving around.

      It cuts both ways – if someone pays a crazy high price for a sale because they grew up in the house, wanted it at all costs for whatever reason, won the house in a bidding war, etc. – do we exclude those sales too because they are too high?

      Of course not. This kind of discussion is a result of all the pain that so many are going through.

      If you want the mortgage lender when considering the value the house as collateral for a mortgage wants the appraisers to ignore competing properties, then call this exercise something else but its not “fair” value in the way you suggest – you are thinking about this only from the sellers/brokers perspective.

  10. Schlager July 13, 2009 at 9:08 pm

    First your answer veers off as non-responsive. The definition of distress is a sub-issue which needs to be resolved.

    Who decides what is a distress sale? The answer is found in your appraisal standards. One of the elements of fair market value by definition means a willing buyer and willing seller both typically motivated. If the buyer and seller are not typically motivated then questions exist as to proper modification of value to correct the sale price for such fluctuations.

    No matter what happens in a market, there will always be distress sales and every distress sale will sell at a discount to the market. If you want to use distress sales as a determination of value, then you are not looking at fair market value. In a business valuation, I believe you’d be looking at something more akin to liquidation value.

    Real estate appraisals, quite frankly, are much too casual to be considered highly accurate. The low price of appraisals prevents appraisers from spending the time and diligence required to consider all factors. (Consider the cost of a business valuation versus a real estate appraisal).

    You ask about high prices. I agree that atypical high sales also need to be eliminated or adjusted. Appraisers need to follow up on comparable sales to determine factors that skew the price away from fair market value.

    I think in your last paragraph we hit on some common ground. Fair market value is actually irrelevant to banks as they don’t care what the property will sell for when the buyer resells in a typically motivated transaction. What the bank cares about is what they can recover in a distress sale (foreclosure, REO). Call it what it is though and banks need to be realistic about their goals. If the distress sale price is sufficiently above the loan amount, who cares what fair market value is.

    However, the research is out there that no matter what the fair market value is the typical discount for a distress sale is approximately 20%. The figure has been challenged by research which seems to indicate approximatley 7% of the 20% is accounted for by lower than average condition. No matter how low the fair market price goes, distress sales will always go lower. By claiming to be using fair market value when actually determining liquidation (lets call it liquidation unless you have a better name) value it creates a false expectation and artificially deflates prices.

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