The current real estate appraisal system is not set up to effectively and efficiently provide current market value to mortgage lenders and investors. This system is based on the same outdated methods that have caused the current mortgage crisis.
Realtors, lenders, investors, and all the other players in the mortgage lending chain are constantly looking for ways to improve their processes and make them more efficient. One way they do this is by bringing in more knowledgeable and trained appraisers.
The whole current system is based on appraisers that are typically hired by Fannie Mae and Freddie Mac who have very little or no past appraisal experience. They are generally part-time appraisers, and many of them have yet to complete an appraisal as a professional. Having a good system is important, and this system, while being primarily voluntary on the part of Fannie Mae and Freddie Mac, is failing these companies’ biggest customers-the investors and the mortgage lenders-to approve loans in a timely manner.
The investors and lenders are the ones who hire the appraisers and let them complete their work. The problem is that what they are hiring is a part-time appraiser who may not have the knowledge and experience it takes to complete an accurate appraisal. The investors and the mortgage lenders are the ones who have to live with the results of the report. Investors and mortgage lenders need to know the value of the property.
As an appraiser, the report has to be completed and delivered to the investor or mortgage lender. The problem is that the return to the investor or mortgage lender takes time, and consumers are not willing to wait.
Technically, the system should be turned on so that the lender places the order, gets the appraised value, and a professional appraiser arrives onsite. The problem is that the system does not work in most cases because the appraisal was not done by a skilled professional.
The investor or lender has no idea that the appraiser rearranges the property, takes out comp listings, houses that wouldn’t have been added, and other things that Yello does not want to be known for. In this scenario, the investor buys a property that is actually below market value. This is true as of May 21, 2007.
Incomplete appraisals cause a number of other problems. When a bank or investor is trying to show potential investors that they are in trouble, they will frequently use empty homes or other distressed homes as a prop. Buyers will initially see a finished property that has no listing. The investor will buy this property once the offer to the seller is substantially below the comps—even by as much as 15%. Then, the listing is rearranged and the property is completed by the distressed homeowner, and the result is an unfinished and unappealing property.
Realtors and lenders are both losing money as a result of this problem. Sellers, buyers, and investors all lose money as a consequence of the failure of this system. Given the amount of money that has been lost on real estate, the problem is magnified.
If the mortgage crisis becomes something to worry about, let’s solve the problem by counting the losses that will be seen in the future. There are 2 ways to turn this problem around.
- Include an extra turn with a full appraisal.
- Use a bottom-up approach where each transaction has at least one agent or broker.
If the first option is used, the majority of the appraisal is probably done for the investor and for the mortgage lender. If this is the case, the transaction should have an independent appraisal done to protect the investor. This option ensures that the investor, the realtor and the lender all agree if the property is worth the contract price and the investor actually puts up cash. The losses for the investor wouldn’t be realized until a second transaction with the mortgage lender.
To account for the amount of money that would be transferred, the investor would have to have a closing agent or payroll representative that knows how to complete these 3 steps properly, thereby ensuring that the investor gets compensation for the problem they caused by driving down the comps.