Jonathan Miller is a frequent speaker and guest at housing-industry conferences, but lately his presence has caused some troubling reactions.
As Miller tells it, property brokers he runs into accuse him of one of the most heinous acts imaginable.
They say, "You killed my sale.
It's not personal. Rather, the brokers are railing against his profession. Miller is an appraiser, president of the well-known New York-based Miller Samuel Real Estate Appraisers.
These are challenging times for appraisers and the buyers who need appraisals to secure mortgages, especially in markets where home prices are rising rapidly. And there are lots of those markets these days. Prices in many markets in California alone are up 25% to 30% over last year, and in Miami nearly 20%.
Viewpoint A Basic Issue
Agents and buyers are increasingly complaining that appraisals are not keeping up with the changes. About 25% to 30% of transactions nationwide in the last year have had "some sort of problem with appraisals," says Jed Smith, managing director of quantitative research at the National Association of Realtors.
"In a rising market, appraisals tend to lag the market," Smith said, "because appraisals are looking backward and the market is looking forward.
If an appraisal reflects a value that's lower than the loan amount, the buyer has to put more money down or the seller has to agree to lower the price — or some combination in between. Otherwise, the deal likely falls apart.
Sometimes a second appraisal saves the day. It did the trick recently on a Brooklyn, N.Y., townhouse contract that nearly collapsed when the first appraisal came in $350,000 below the agreed-upon price of $1.65 million. The second one came in right on target.
"Getting an appraisal these days is like rolling the dice. It's hit and miss," said the listing agent Madeline Williamson of Douglas Elliman Real Estate.
Cash Buyers Not Immune
Even when a buyer puts down a large down payment or all cash, a low appraisal can prompt a buyer to try to renegotiate the price down.
"In my office, prices on three deals had to come down recently because of the appraisals," Williamson said. "It's a really big problem.
Miller says most appraisals are valid. But he says the cause of about half of problem appraisals is due to markets moving too rapidly and too "inconsistently." Many are so supply-constrained that they've caused "irrational behavior" by buyers competing for scarce inventory.
Put another way, bidding wars have erupted in sought-after neighborhoods with tight inventory, including some in Miller's own backyard in Manhattan and Brooklyn.
In such fast moving markets, valuations can change "within a couple of weeks," Miller says. Listing prices can be "the starting point.
Appraisers are supposed to take into account multiple factors. Closed contracts on comparable homes are high on the list, but they're also meant to be supplemented with some data on pending contracts and listing prices, plus information about market conditions.
Local-market knowledge is considered crucial. But often it's lacking, and that is the other main reason appraisals may come in low, Miller says.
Since the housing crisis, a lot of appraisers' local-knowledge expertise has been lost due to huge changes in the appraisal industry.
Miller and other experts trace the changes back to May of 2009. That is when former New York Attorney General Andrew Cuomo (now governor), in an attempt to rectify conflicts between brokers and appraisers during the housing boom, forged an agreement with Fannie Mae (FNMA) known as the Home Valuation Code of Conduct. The HVCC essentially became a nationwide blueprint.
During the bubble, about two-thirds of residential mortgage volume flowed through mortgage brokers, who brought deals to banks and often ordered the appraisals. That was seen as an inherent conflict because the broker would get paid only when the loan closed.
As noble as the attempt was to right the wrongs, it backfired, Miller says.
Who's Doing The Work?
Banks had already been closing in-house appraisal departments. Meanwhile, the HVCC's goal of assuring appraisers' independence unintentionally "opened a Pandora's box" by prompting the rise of appraisal management companies, Miller says. Until then AMCs were a small slice of the business.
"Think of them as very large, quite often national entities that are a clearinghouse for appraisers," Miller said, adding that appraisers working for them on fees often agree to quick turnaround times.
"The practice falls short because it encourages a lot of cutting of corners," Miller said. "Many are effectively an army of what I call form fillers.
"In Manhattan we're competing with upstate New York people who come down here and do a dozen appraisals in 24 hours and go home," he said. "There's a built-in bias to be conservative because you don't understand the market. And if you don't know the market or you're not comfortable in the market, it's going to be a lot harder to keep up with the market when it's changing rapidly.
Miller says AMCs account for about 90% of appraisals done on mortgages from big banks such as JPMorgan Chase (JPM) and Citigroup (C). His own firm has moved away from appraisals for commercial banks into other areas such as litigation support, estate trusts and foreclosures because the business has become "a commodity rather than a professional service.
Local and regional banks are more prone to use a panel of approved appraisers with local-market expertise, however.
While there are competent AMCs, others cut fees and offer quick turnarounds to gain business, practices that encourage appraisers to skimp on performance, says Richard Borges, president of the Appraisal Institute, a global association of professional real estate appraisers.
Borges says some appraisers err on the side of caution due to their concern about liability or possible loss of work from certain AMCs.
"It's a very difficult climate because you have a changing market," he said. "And changing markets are always more difficult to both sell in and to appraise in than markets that are flat and stable.
But lagging appraisals may fade before long, he suggests, "as the evidence mounts that the market is moving positively.
"Part of it is caution, waiting to see the evidence," he said.