Introduction:
Can realtors, mortgage brokers, and investors contact appraisers and try to change the transparency of the appraisal process? Can borrowers harass appraisers to increase the appraised value to obtain larger loans?
The answer is NO, but that does not stop many overly zealous borrowers and brokers from spoon-feeding the appraiser with chosen comparable property sales to substantiate their hyped opinion of value. Usually, the conformity and similarity of the comps are questionable and incorrect.
Appraisers:
Independent third-party appraisers, chosen for their licensure, certification, and strict adherence to professional standards, bring a sense of reassurance and confidence to the appraisal process. They certify their competence to perform an assignment, render opinions regarding the value of the real property, and maintain a neutral stance with the borrowers, advisors, or directors.
An appraiser must engage in broad educational coursework, including finance, economics, area demographics, construction technology, income and expense analysis, and computer technology usage, such as automated valuation models. Appraisers learn to base their opinions on the highest and best use legally permitted and segregate each real property component to create a correct value. Standardization of the process ensures an opinion of value products that can be relied on. Good old-fashioned experience helps.
The appraisal property valuation consists of developing an opinion of value for real property. Subsets of assignments may include as-is vs. as-completed, upon rent stabilization, pre-entitlement vs. post-entitlement, fee simple vs. leasehold interest, and the purpose of the appraisal, to name a few. Appraisals may also be ordered to settle family estates and divorces, determine the amount of insurance, or determine equity for judgment liens or bankruptcies.
The completed appraisal is directed to the mortgage broker or lender as the customer. The appraiser will state who may rely on the content and conclusions in their appraisal. At the same time, a mortgage broker who represents third-party trust deed investors who will purchase parts or all of the proposed loan as an investment must be able to rely on the content and conclusions. This is done by adding the reliance issue to the appraisal order form. The mortgage broker's role is crucial as they often order the appraisal and must ensure that it is conducted impartially and accurately, as they are responsible for presenting the appraisal to potential investors. They are not just a middleman but a key player in maintaining the integrity of the appraisal process.
Example of the conflict from a borrower-ordered appraisal:
I will use an example of an appraiser tasked to appraise a family dwelling and having to tolerate unwanted interference from the pesky borrower/realtor:
A prospective borrower, an experienced realtor, approached a mortgage broker to obtain a second trust deed loan on a non-owner-occupied rental home. The borrower/realtor represented that they had a fully upgraded single-family home recently undergoing an exterior and interior renovation.
The borrower/realtor represented the market value as $2,600,000 because they had an appraisal done for their divorce settlement (appraisal #1). They had a current $1,000,000 first trust deed and a $320,000 second trust deed recorded against the property. The total liens were $1,320,000. The request was to refinance the second lien to lower the interest rate and monthly payments while they listed the property for sale on the open market.
A mortgage broker/lender expressed interest in procuring an investor to fund the new junior lien because the combined loan-to-value ratio was only 51%. The protective equity of 49%, if reflected in the equity valuation over the combined liens, is more than enough for the mortgage broker/lender's risk standards.
The mortgage broker chose a licensed and independent appraiser and provided the borrower with contact data so that the appraiser could enter the property and collect the service fee.
Guess what? Upon meeting with the appraiser at the property, the borrower explained that they were a seasoned realtor and would help supply comparable sales figures to justify the desired preconceived (wishful thinking) value. After the appraiser received payment and proceeded to collect data to arrive at a value conclusion, he was approached by the borrower with handpicked comparables. The problem was that the borrower/realtor selected properties in dissimilar neighborhoods because they were in a more luxurious tract on larger parcels where the average homes were of higher quality construction.
The borrower/realtor's conversation with the appraiser resulted in a heated verbal exchange. The borrower/realtor insisted he use the chosen (wishful thinking) comps, but the appraiser told him they were not comparable and could not be used for the valuation. After multiple heated interfaces, the appraiser called the mortgage broker and notified him that he was essentially being harassed or bullied into submission. The appraiser refused to bow to the pressure.
The professional mortgage broker, understanding the importance of maintaining professional standards, played a crucial role in this situation. He reassured the appraiser that he should not submit to verbal pressure. The appraisal was completed using comparables selected by the appraiser and sent to the mortgage broker for review, instilling confidence in the process and highlighting the broker's pivotal role in upholding professional standards.
Remember that the prospective borrower had a preconception that the property value was $2,600,000. The actual appraisal came in at $1,600,000, about $1,000,000 short of the borrower's (wishful thinking) representations-(appraisal #2). This significant difference in valuation could have led to severe consequences if the loan were made, as the combined loan-to-value would not be enough to protect the lender or trust deed investor who tentatively agreed to purchase this loan investment. This scenario underscores the importance of maintaining professional standards in the real estate industry. The potential consequences of a biased appraisal are grave, highlighting the need for all stakeholders to uphold professional standards and ensure the integrity of the appraisal process. A biased appraisal can lead to financial losses, legal issues, and damage to professional reputation. It can also lead to a potential collapse of the real estate market due to inflated property values and subsequent defaults on overvalued loans.
Professional Mortgage Brokers:
A professional mortgage broker who comprehends the real estate marketplace, licensing, regulatory requirements, and fiduciary responsibilities will typically and respectfully decline the loan request, reduce the loan amount, or ask for additional collateral from such a delusional borrower. This reiteration of the importance of maintaining professional standards should impress upon the audience the gravity of their responsibilities. The mortgage broker plays a pivotal role in ensuring the integrity of the appraisal process, as they often order the appraisal and must ensure that it is conducted impartially and accurately. They act as a gatekeeper, preventing biased appraisals and potential financial losses.
To borrow a phrase from Ex-President Richard Milhous Nixon (January 20, 1969-August 9, 1974), let me clarify: I am not suggesting that appraisers are necessarily competent or render quality appraisals (opinions of value). Quite the opposite! Appraisers (some but not all) can be careless and incompetent, use inaccurate comparable properties, incorrect reporting of sales & listing data, misstate income or projections of future income & expenses, make false assumptions, add incorrect hypothetical conditions, make clerical errors and suggest blatantly incorrect capitalization rates. A lack of comps is no excuse for not completing an accurate appraisal using alternative methods such as income capitalization or replacement cost approaches.
The loan underwriter, who is responsible for assessing the risk of the loan, plays a crucial role in the real estate appraisal process. They review the appraisal report to ensure it is accurate and unbiased, using this information to make informed decisions about the loan.
When a loan underwriter receives an appraisal, they should review it for completeness and correctness. It is appropriate to call the appraiser to discuss similarities and age of comps, neighborhood differentials, and amenity value adjustments. High-value amenities such as location within the city and views of mountains, parks, golf courses, rivers, or oceans can be highly subjective. Also, the underwriter can adjust the valuation upward or downward for lending purposes, a standard action taken when questionable deviations are identified.
Uniform Standards of Professional Appraisal Practice (USPAP)
Each state regulates the appraisal practice. The Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA) is a federal law in the United States that demands that all states develop systems for licensing and certifying real estate appraisals. This was done to create commonly accepted standards and uniformity. The Appraisal Foundation, a national organization, is the primary standards body. Appraisal Standards Board created and updated best practices as codified in the Uniform Standards of Professional Practices (USPAP).
The Uniform Standards of Professional Appraisal Practice (USPAP) has created quality control standards for appraising real property, intangible assets, business valuations, appraisal analysis, and reports in the US and its territories. The standards were initially written in 1986-87 by an ad hoc committee representing various appraisal organizations in the U.S. and Canada. They were the foundation for USPAP. The standards and methods are upgraded on a two-year cycle. New versions are available at www.appraisalfoundation.org.
Most appraisers are trained in USPAP methods and are members of nationally recognized appraisal societies such as the American Institute of Real Estate Appraisers (M.A.I.). The organization, headquartered in Chicago, IL, is an international association of professional appraisers. It was formed by merging the American Institute of Real Estate Appraisers and the Society of Real Estate Appraisers in 1991-www.appraisalinstitute.org.An appraiser may pursue multiple areas of specialization and property types relating to expert services.
An appraisal and the choice of appraiser should be based on full transparency and independent of outside, subjective influences.
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