No appraisal needed. In case you haven’t heard, last year Fannie Mae introduced Property Inspection Waivers, which means an appraisal is not required in certain situations. Is this a good thing? Well, here are some thoughts swirling through my mind. Anything to add?
1) The automation trend: Automation is happening all around us. Right or wrong, machines are taking human jobs, and the world is changing. Elon Musk actually warns that machines will eventually be able to do everything better than humans, which is a scary thought (way too much like The Terminator). Anyway, machines are starting to be appraisers as property inspection waivers are a growing phenomenon in the marketplace. Some loan officers I’ve spoken to have said they’ve only seen a few while others are reporting about 15%+ of their deals are having waivers. How will this trend unfold? That is the question.
2) Systems of checks and balances: Appraisal waivers are going to make sense in some cases with very low-risk Borrowers, but I find myself concerned about the narrative that we need to use alternative valuation products for the sake of a more efficient mortgage. Let’s not forget the profound greed in the banking world and the important role human appraisers play in being the voice of reason in a transaction. Please forgive me if I’m not optimistic when I hear things like, “Trust us, we have big data. We want to save consumers money. We don’t need appraisers.”
3) Cat urine & big data: We put so much weight on big data, but it’s not always right. It’s like we think something intelligent must be happening since math and computers are involved. Google Flu Trends is a perfect example because Google tried to predict flu patterns, but the project ended after being very inaccurate compared to CDC data (Center for Disease Control). Anyway, there is a place for big data in real estate, but let’s remember valuing properties doesn’t always fit into a neat little equation. Algorithms cannot smell cat urine, know about condition or quality of upgrades, understand layout, analyze the impact of non-permitted additions, etc…
4) Uh oh, hybrid valuations: There is a hybrid appraisal product being pushed right now, and here’s how it works. Someone else does the inspection for the appraiser and then the appraiser will do the value part. Will this inspector have adequate training, report deferred maintenance, understand what appraisers look for, know how to measure square footage, or be paid enough to even care? My struggle in thinking this is a good idea is that assessing the layout of a house, location, quality of upgrades, deferred maintenance, etc… is such an important part of value. It sounds easy to split the inspection with the research, but the inspection actually is research. Relying on someone else to do the “inspection part” seems like a step back when it comes to credible valuations.
5) Next in line for automation: I’m not trying to add stress, but I have to ask an important question. Who in real estate is next in line for automation? Real estate agents? Loan officers? Title professionals? Right now we are at the beginning of talking about how digitizing valuations is good for us because it’ll make the mortgage more efficient. Here’s the question. If this happens to appraisers in mass and we’re okay with it, will it be easier to see happen in other niches of real estate? In short, if you belong to an organization and it is within your power to advocate for appraisers, it may be a good time to speak up.
I hope that was helpful or interesting.
Questions: What do you think of appraisal waivers? Is this a good thing or bad thing? Anything I missed? I’d love to hear your take.
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Speaking of automation in the mortgage world –
Day 1 Certainty is a first step toward eliminating the loan officer, or at least a lot of the support staff. “Fannie Mae’s automated DU® validation service electronically validates income, assets, and employment in order to close loans faster and deliver an optimized borrower experience – free from cumbersome paper-based processes.”
Wow, that’s wild. I’d love to hear from loan officers on that too. Chime in.
It is easy for me to see a day in the near future when AVM results can be shown statistically better than an appraiser’s results, especially if appraisers do not use technology to up their game. It is a like self driving cars, they don’t need to be perfect, just better than people. There are a lot of appraisers who are honestly not that good bringing down the stats for the appraisers who work harder and are more educated. I hope that I’m one of the better appraisers, but I have made many big mistakes along the way. My thought is that there will be a need for appraisers in the future to do complex stuff, but there will not need to be anywhere near the numbers and only the best of the best appraisers will survive.
I totally agree with you Gary!
Thanks Gary. I appreciate your take. If that’s how it goes, I hope to be left standing also. In the mean time I’ll keep fine-tuning my woodworking skills just in case… 🙂
I’m a broker…I think we all need to be aware that changes are coming to all our businesses.
There’s a home in the neighborhood where I work that smells of cat urine. The sellers tried to sell for $275k and couldn’t and now have the home off the market. That floor plan in good condition normally would sell for $310k. I’d hate for an automated appraisal to come up short on the $310k home. At the same time there’s no scratch and sniff on our MLS so there’s not an easy way for a human appraiser to understand how bad the smell was to gauge the effect on sales price.
For point #5- It really surprises me there aren’t more people trying to disrupt the title business.
Thanks Eric. I appreciate the cat urine example too. From the numbers it looks like the smell is worth 11%. 🙂
Great post as always Ryan, Happy new Year to you and your family! 😉
I’ve had this feeling for a long time that this was coming! But i thought it would be the real estate agent replaced by automation before the appraiser!
I think there’s nuance in every aspect of the real estate transaction, but it seems that automating the loan, title and escrow process would come before the appraiser and agent.
I guess it will depend on the buyers and the banks to decide(?)
Thanks Bev. Happy New Year to you too. If I can just get over this cold…. I’ve been leveled for the past couple of days here.
I didn’t mention this in the post, but Fannie Mae had been collecting data from appraisal reports for a number of years. This collection of data helps pave the path to automate the process to a certain extent, though clearly they still need human appraisers for their Collateral Underwriter system to still have data. There is definitely a list of when an appraisal waiver can happen right now, and it seems pretty strict. Though the thing is about rules is they can change or be bent over time. Let’s keep watching.
Title ppl are probably dinosaurs.
“No appraisal” doesn’t, necessarily, mean “no valuation” as I’ve done many standard equity “no appraisal” interior BPO valuations.
I did one BPO where another person did the photos – it was awful – I felt very unedcuated about the property, it’s location and whatever little weirdness or greatness that affects its value.
Bankers and asset mgmt company owners literally lay awake at night, thinking of ways to reduce our fees and/or hijack our careers and profit off our labor and knowledge. We don’t. That’s the problem.
Thanks Anne. I appreciate the example too. Yeah, that’s the problem. These costs can be cut, but at what expense in the total scheme of things? I heard a mortgage CEO talk about cutting the fat of the appraisal cost, but the irony is the mortgage company is eating the steak in the transaction compared to the fat of what the appraisal costs.
Great post, Ryan. I do think this type of streamlining is coming to agents. Amazon is trying to get in the real estate game and it is my understanding that an agents only task may be to show the home at a very reduced fee. I think that the powers that be have probably calculated acceptable loss levels from AVM mistakes and as long as the numbers stay within these parameters then they will be okay with some overvaluations and subsequent losses that may occur. This is definitely a game changer for appraisers and we may see our roles for mortgage appraisals change in the future. If we choose to forgo this type of work we must do more private work like I believe you do Ryan and which I am also trying to develop more of.
Thanks Tom. Yeah, I keep seeing commercials about a middle man company to eliminate the agent in the transaction. The problem is some of these “no agent” type companies say there are no agent fees, but there is a huge processing fee that is basically the same thing. Or I know of one online auction site that has been used in my market where agent fees are paid on top of the final auction price.
Overall… feels bad man.
I mean, after the absolute catastrophe that was the 2008 Recession, you’d think us stupid humans would’ve learned our lesson, right?
Guess again!
History repeats itself, because humans on the by and large are dumb and apparently have an extremely, extremely short term memory.
If robots ever do decide to rise up against, we’re screwed. We simply can’t think long term. We don’t learn from our mistakes. And that 15% figure will soon grow to 30%, 45% and so on.
As for who will be automated next, I think the key guideline is to either “Use tech, or let tech use you.”
Our startup here in Phoenix is battling against agents being replaced… you can check out the plan here:
PlanToSaveRealEstate.com
The average agent is a 55 year old lady… and she certainly isn’t the type to be inventing any revolutionary tech soon lol.
But our industry, along with others such as appraisals and lending, must fight back against the big push of tech and automation. The big wigs need to realize that cheaper doesn’t always equal better.
And when it comes to appraisals, we don’t want efficiency… we want accuracy.
When you automate something, humans have a tendency to no longer keep watch over it. The “Set it and forget it!” showtime rotisserie being the prime example.
Overconfidence and greed creeps in, and before you know it no one is checking on the appraisal values anymore and we end up with another real estate bubble where no one goes to jail despite bankrupting the economy.
Scary thoughts… are there any appraiser associations taking a stand against this?
Thanks Wes. Yeah, money tends to blur wisdom in our society in many cases. To be fair, the big banks really weren’t held accountable in the past though, so I really cannot blame them. Right now the rules seem pretty rigid for when an appraisal waiver is needed, but my big concern is when the rules are relaxed. This is why it’s a red flag in my mind.
I don’t know if it’s the same company you are thinking of, but I keep seeing an ad on TV about not using real estate agents.
Unfortunately appraisers do not have one national organization that speaks well for all appraisers. This is a major weakness in the profession right now. It seems in recent years this is starting to change, but having a group like NAR would be ideal.
As an appraiser Ryan, I feel like we are hired to find that one in four home that is the issue (value, cracked slab, converted garage, permit issues, tax record errors, etc.), however to find the one in four, all four need to be looked at.
Thanks Bill. We certainly do discover issues in homes. That’s for sure.