It’s happening. It might not be an appraiser who shows up for the appraisal inspection. I’ve been talking about the potential of “hybrid” valuations like this, and now they’re here.
The gist is somebody besides the appraiser inspects the property and then gives the inspection details to the appraiser to do the “value part” (without seeing the property). Last week Chris Little, a Realtor friend, was talking to me about his first experience with a non-appraiser inspecting one of his listings, so I asked him some questions.
Ryan: What gave it away that this person wasn’t an appraiser?
Chris: When he called and asked for an appointment to access the property he identified himself as a property inspector working on the appraisal. I asked if he had a lockbox key (every appraiser I know has one) and he said he did not. We agreed to meet at the property. At the house he gave me his card which said he was a project manager for a company in upstate New York. There was no mention of appraiser on his card.
Ryan: What did the inspector do at the house? Did he measure it?
Chris: He came in and took a bunch of photographs which he said he would upload to their portal so the appraiser could look at them. He went outside and measured the home.
Ryan: What price was this house?
Chris: The home was listed in the low $800,000’s. The buyers sold their former home and were renting on a short term basis. They were putting down 55% of the purchase price.
Ryan: Did the inspector say he would pass along information you gave?
Chris: Yes, he asked a few questions and said he would include that in his report.
Ryan: What are your concerns about this new process?
Chris: My overarching concern is the validity of the “appraisal.” The buyer was charged less than a traditional appraisal and in my view received less. The proper valuation of a property is essential for many reasons. Inaccurate or incomplete information can effect value and that can effect a transaction, both during the transaction and later on if there is ever a question about value resulting from loss bankruptcy, foreclosure.
Ryan: Anything else to add?
Chris: In my view, this “hybrid” appraisal is meant to streamline the lending process yet puts homeowners and lenders at risk. I don’t think there is a lender out there who would use a discount Cardiologist or Oncologist if they had heart problems or cancer. Why would you underwrite a loan based on an unlicensed individual snapping pictures and taking measurements? One thing that particularly concerned me about the house in question was at almost 4,900 square feet it was more than twice as large as any other home so developing comps would take someone with real knowledge of the market to develop the appropriate value. This unusual Sacramento home doesn’t seem like a good fit for a watered-down process like this.
Ryan: Thanks so much for your time Chris.
Now a few quick things.
MY CLOSING THOUGHTS:
1) This is a move that diminishes the role appraisers play in the housing market for the sake of so-called convenience. Banks are saying, “Don’t worry. Trust us. It’s all good…” While there is a place for big data in real estate, let’s not forget the crucial role appraisers play as a systems of checks and balances. Do we really trust banks to do the right thing?
2) Value isn’t just about size or bedroom and bathroom count. There is so much more an appraiser observes while walking through a house and talking with the agent. To be fair it seems like this would less of an issue on a cookie cutter house, but on something unique it could be a disaster waiting to happen.
3) If the inspector does not have adequate training, there could be a legitimate issue measuring the house accurately (and we know how important that is).
4) Could this become risky for the rest of the market if inflated appraisal waiver or “hybrid” sales become the new comps?
Communication advice for Realtors: It’s going to be key to ask for a business card and be sure you know who you are talking to. My advice? Show up with my appraiser info sheet filled out so an “inspector” can hopefully pass along relevant details to the appraiser. Remember though, the appraiser is getting paid very little do this type of report (I hear $100 to $150), so the “hybrid” system is not designed to encourage appraisers to spend lots of time on the appraisal…
I hope that was helpful or interesting.
Questions: What do you think of “hybrid” valuations? What are the positives and negatives? Any stories to share?
If you liked this post, subscribe by email (or RSS). Thanks for being here.
These people being hired do not have our expertise and most likely miss things that add value. Is it waterfront? Are there riparian rights? A dock? Measured? Seawall? Were there non permitted additions? Not having this info, then expecting that an appraiser will look into all of it for a whopping fee of $55? Ummmmm no.
Thanks Helen. I share your concern. The problem becomes just because a person is putting lots of money down does not mean a more limited product is automatically viable. Moreover, when we pay people peanuts for anything, we cannot expect to attract the best of the best. So in some senses I wonder how this will all shake out. Yet if this is the way all lending work goes, appraisers will simply have to adapt or be weeded out.
There are many limited appraisal products, but I guess we have to know where to draw the line. I sometimes get orders to to drive-by appraisals on properties where that just won’t work. So if someone wants a drive-by on a 5-acre custom home (when I cannot even see the home from the street), that’s just not going to cut it. But if someone else did an inspection, could it be done? Maybe. But I’m still very hesitant to trust another person’s data collection, perception of quality, camera lens, etc… Call me old school. If I cannot render a credible opinion of value, I better be cautious about accepting a limited scope of work.
In this situation above it sounds like a more complicated appraisal, and I’m a bit surprised to hear of a “hybrid” here. But hopefully on the appraiser on the other end was able to handle it well…
With 55% down, in the past this might have been a desktop or a drive-by appraisal. Is this hybrid inspection better or worse than a desktop inspection? Just playing Devil’s Advocate. Why not have a hybrid if the scope of work is sufficient to match the risk involved? I know that some of the final appraisal reports produced in conjunction with a hybrid appraisal inspections are poor in terms of analysis, but I think that is a problem with the appraiser performing the analysis or the client accepting the lower level of analysis. Just talking about the inspection, I think it is best to have the appraiser view the property if you want the most credible results but if you’re dealing with a very low risk loan, why not send in someone who specializes in the inspection portion? I see this as similar to a doctor that might let the nurse visit a patient or even chat online if the condition is not serious. Times are changing. The hope is that this is not a slippery slope where at first it is just the 55% loan, then it becomes the 90% loan. If that happens, then the inspectors must be highly trained to pass along accurate and important information to the appraiser.
Thanks Gary. Fair point for sure. I think the key is that the person specializes. It may be hard to find someone who knows what they’re doing and is committed to doing a great job for lower pay. I do wonder if these inspectors will end up in large part being appraisers eventually if traditional mortgage work keeps drying up. At the same time I have several agent friends who have considered doing this. We’ll see.
Like I said, there is definitely a place for big data (or products like this) in the real estate valuation space. I think your last point is exactly the bigger issue. It can start out with Borrowers who are less risky, but then extend to everyone eventually. It reminds me of the appraisal waiver system and how it was rolled out. “Dude, don’t worry man. This will be for refinances only and probably only 10% of them.” As of now waivers are regularly happening with purchases and a few loan officer friends tell me they’re happening on about 25% or more of their deals. Thus we see how strategic these roll-outs can be. People are thinking this through, setting up a system, slowly turning up the heat, and changing the game….
I concur with your last line on highly-trained inspectors. That will absolutely be needed if the market keeps evolving in this way. We are only as good as our data collection and our ability to analyze data. I think the appraisers doing these are going to have to figure out their part too and hopefully identify if the scope of work is adequate for the property at hand. Just because it can be done technically does not always mean it should be done. So we probably wouldn’t want to appraise that $238M condo in New York just because it is ordered as a “hybrid”….
On a side note, for any onlookers I wanted to say I’m not shaming appraisers for doing this work. I’m dismayed this is happening because I’m a fan of the traditional product and I have big concerns for loosening up valuation. I’ve written about that quite a bit in the past and I won’t rehash that here. But that’s different than shaming colleagues. I’ve seen that too often on social media and that’s not a good thing. The reality is markets are constantly changing, and if anything you don’t want your business to be Blockbuster video in a Netflix world…. My advice? Pay attention to changes and start making decisions now to position yourself for the future – whatever that looks like. The struggle (or death-blow) is when a market begins to change and we don’t position ourselves for it.
I don’t do any lender work these days on purpose. Would I if I needed to though? That’s my decision and I know what the answer is.
Gary, does the doctor accept a third of the regular fee just because their nurse checks the patient’s vitals? That’s what we are being asked to do.
I totally get the fee issue. Appraisers need to do a better job of standing up for fees. I’m with you, I said no to all lender work years ago because most lenders only care about fee and turn time, not quality analysis.
Yep. They want cheap and quick. It reminds me of that phrase… “Good, Fast, or Cheap. You can pick two!”
Tom, such a good analogy! I’ve been trying to think of ones that convey the absurdity of this, and you’ve nailed it.
Great article Ryan! I don’t complete this kind of appraisal. In my area they pay a whopping $50-75. That’s only one reason I don’t. I’m just saying this because even if I wanted to complete these kinds of reports, I couldn’t afford to. One of my biggest concerns is when these are used for purchases. Those sales become data that the real estate world relies upon. It is my belief that they are going to create big problems for real estate down the road. I really also don’t buy that they are faster either. I think companies are using them solely because they are cheaper. Like the agent said in your interview, “ You get what you pay for”. Thanks for a great article!
Wow, thanks for sharing. I get these products coming to the market, but that’s surprising to hear. I can see this product being viable with a reasonable fee, but without that it’s a disaster.
Appraisers who take on these assignments are still responsible for their signatures of course, but can we really expect quality here? The system does not seem designed for it.
As I’ve said before, this is coming at a time where we’ve had a long run of price increases and the market appears poised to make a change at some point. Thus infusing the valuation space with appraisal waivers and products like this seems risky as well as convenient in some ways. If “customary and reasonable” fees aren’t there, then I think we can conclude this is clearly about cost and quality doesn’t matter at all.
Absolutly! I fear that with the low fees, appraisers who take on these kinds of appraisals will be so focused on getting them completed quickly that something is going to be lost in the analysis. I do also agree with you that there is a place for them in certain situations. However, now’s not the time to het reckless. Actually, there’s never a good time to be reckless!
It reminds me of BPO mills. There are of course quality BPOs, but when someone is doing an insane volume of BPOs because the fee structure is so low, there’s likely going to be a quality issue.
Definitely! I know an agent that used to complete a lot of BPO’s for REO’s. He was doing a lot of them, but from what he described, it was just adding a few sales to the grid and making some adjustments that he plucked from the air.
Health and safety….I certainly worry when I do the observation, I would doubt they would get qualified people for minimum pay. I once spotted a radon situation that was a real life saver for the home. Just saying. Push button get mortgage!
Wow, nice catch. How did you detect radon? Yeah, push button. That sounds about right.
Just a hunch, subject was in serpentine type rock with basement. My background as a Forester helped pick up the geology, the rest was a simple test and fairly inexpensive venting system.
Really nice job Mark.
Great to hear an actual example of a hybrid inspection from the realtor standpoint. Chris brings a perspective that I wish was more recognized in the real estate industry.
Thanks Joe. Chris is an extremely sharp guy (and a former president at SAR). I think he articulated some of the huge concerns very well here. I spoke in an office this morning about hybrids actually, and people are surprised to hear what is happening. This is unknown territory for the real estate community.
Good idea. I’ll bring it up at YAR and NSCAR soon. Real estate agents need to understand what’s happening.
Definitely. Good job, Joe.
I find many agents are excited about appraisal waivers. I totally get it too. I know investors are also. But there is still a place for helping buyers make a well-informed decision. I know an agent who recommended a waiver not be accepted and it ended up saving her buyer $10-15K when the appraisal came in lower as it should have. That’s a big deal. This is brand new stuff here with hybrids though, so we don’t know how they’ll be perceived in the market. If hybrids end up running smoothly, then people will love them. But if there are problems, then that’s a real issue. Part of my concern here is a Borrower putting big money down is less risky, but that doesn’t mean the property is a good candidate for a hybrid. The example that Chris shared is a little surprising to me as it seems like something that should require a deeper valuation.
Sounds like the algorithm needs tuning in this case. Clearly risk was low but the property is unusual and maybe should have gone to a full appraisal.
Great interview, Ryan. I’m not a big fan of these products but I guess we will have to see how effective they are.
Thank you Tom. I appreciate Chris sharing his perspective. It’s important to keep tabs on what is happening in the market. This is a big deal and we’re going to have to watch closely to see how it shakes out.
Hi Ryan,
Another fantastically important topic!
I’m utterly appalled that these “products” are being relied on for anything. It’s imprudent, deceptive, not in the best interest of the borrower, and profoundly not in the best interest of the country. I think these “products” will exacerbate the next (current!) housing bubble crash.
Loans will absolutely go through that should not have.
Borrowers will be left on the hook for loans where the underlying collateral was insufficient to secure the loan.
Everyone is going to be looking for someone to pay. Who is going to be on that hook?
I don’t believe for a second that the person who measured the house in this story was a “project manager”. Actual, experienced Project Managers are in high demand all over the country and command high salaries. I can’t imagine any scenario where a true Project Manager would accept this type of work for what is certain to be a very low payment per property. (If someone can prove me wrong, please do so.) Giving a card that says that is his “title” feels very much like an attempt to mislead the borrower and lender into seeing the loan through, thinking that a “professional” was sent to the home for the “inspection” for the appraisal. I suspect that “title” was selected because states regulate other professional titles, and for good reason, to ensure that people can’t put themselves forward as being qualified for a certain type of work without having undergone rigorous training for that particular type of work. Regardless, this “service” performed wasn’t a “project”, which makes that “title” inherently misleading. Which begs the question of why someone would want to mislead a homeowner and/or buyer as to the nature of their role in the appraisal process? I suspect the people being sent to “inspect” are people who don’t know enough to know the liability they are taking on when someone relies on their work product. They probably dropped of their ride share riders on the way over. I don’t think you can just disclose and disclaim this away.
I can’t even get my head around the language an appraiser would need to put in the report to basically say they didn’t see it, didn’t drive around the neighborhood, didn’t measure it, relied on untrained personnel unknown to them from a company they have no control or influence over, to relay ALL of the critical information from a physical visit to the property, then “analyzed” the data in less than an hour (to avoid receiving minimum wage), and then attached their signature and E&O to the report. For a loan? No way. Are these being certified and signed by out of area appraisers in a mill somewhere? Are they farming out the bulk of the report to India and not disclosing the assistance? How is this credible? Who are the licensed appraisers willing to risk their license for so little?
Who does this serve?
We need to remember that people have been prosecuted for sending trainees to measure houses, even when the trainee had the required training within the scope of appraisal practice. Yes, the prosecution was about checking the box that the signing appraiser had inspected when that was not the case, but this to me feels like an even worse game being played.
Suddenly, it’s okay to send someone that isn’t an inspector, isn’t an appraiser, isn’t even an appraiser trainee to gather information about a property, and suddenly it’s okay to dupe the public into thinking a home was properly “inspected” for an appraisal? USPAP might not require a physical inspection at all, but as soon as someone actually goes out and does one, then we have a whole giant pile of topics that should be, must be addressed.
Here’s what I want to know: which E&O provider is going to pay out the claims that will invariably come in the future on these assignments? I am stunned that any E&O provider will provide coverage for any of these assignments at all. They shouldn’t. And if they aren’t going to cover them, they need to make certain the appraisers they sell E&O coverage to know they will deny claims from these products. And the banks need to know it’s worthless to require an appraiser’s E&O if the carrier is going to deny coverage for these assignments.
So, who is going to be left holding the bag?
Wow Alison. Thanks for your thoughts. I appreciate the time you took to articulate yourself here. You bring up so many critical questions. This is what we need to ask. Liability is a huge issue here too that must not be taken lightly. I agree with you on the title. It sort of reminds me of a brand sales person who becomes a “Senior Associate” right away on the business card. 🙂
Hi Ryan, Item 1 did you raise a glass for me at your happy hour??? How it was good and cold. As to the world of Hybrid, Not happy but I only do about 25% lender work these days. Course some of that is because I won’t accept the other work at $50 or $250. Now I would be a little more comfortable if it was a home inspector. At least he / she has some idea as to what is going on with a home. But that said they won’t all be home inspectors. Second did he measure to Anzi or AMS. Third can the appraiser on the proprietary forms put in an extraordinary assumption to CYA. I say this because several of the programs I saw did not allow EA to be added. Their comment was it was covered in the scope of work. Well not exactly and that is another reason I don’t get involved. The last item, is does your E & O know you are doing these type of appraisals and will they cover them. I just am having a hard time wrapping my head around this whole process. They want it cheaper and faster and for most buyers this is their biggest investment of their lives. Course I love the excuse that is what the youngsters want is fast, my comment is that most of them don’t know what they want until this get French fried in a RE deal and then maybe they won’t want the next transaction to go so quickly. Last little item, so here is one for you. Agent called me today and asked some questions. She has a small house on a small lot 6,000 sf. She bundled the adjacent lot into the mix and it is a legal lot with its on APN and legal description. Now this little deal once it gets into escrow, how will that be handled. Better yet is the appraiser for $50 or $75 going to do a full HABU for excess land. I think I see a speed bump in the road here. This should be interesting. I just need to figure out how my litigation work can get a piece of this insanity. Thanks always Ryan great interview.
Thanks Brad. I did raise a glass, though I can’t remember if I thought of your name in that very instant. So for you my friend, the next beer I drink either tonight or tomorrow shall your have name on it…. 🙂
Thanks for your take. These are big issues not to be taken lightly. I have found measuring houses is something that takes a long while to master. There is lots to know and I’d be concerned if someone does not have adequate experience and/or training. I think your example of a lot is a perfect situation to consider too. I actually just had a buyer email me to ask me about how this is likely to go during an escrow for a property she is purchasing right now. I sent her a link I wrote about the issue. It just goes to show sometimes we encounter complex stuff in tract subdivisions. There are so many things to consider.
Biggest Bear on your RE blog here, Mr. Miyagi. I am officially striking down my bearish calls. With this new dovish Fed and rate compression I think there will be a big second leg of this boom and we are not in 2006 again. I think 2003/4. Total reversal yes. But thought I’d share my new thoughts :).
I was wrong, we have not hit the inflection point. I was too early in my call. Although in fairness the Fed pivot totally caught me off guard as did the extreme downward pressure on treasuries. 🙂
Hey, thanks Mr. Miyagi. I always appreciate your take and your sentiment here. Thank you. As you know, there is nothing wrong with changing our narrative. That’s what we do as we get new information. We simply have to tell a different story as new or unexpected factors come into play.
To be fair the market really started to slump. In fact, sales volume has been down for basically 10 months in a row in Sacramento. So it’s not like stats are incredibly glowing right now.
Low rates have really injected a steroid into the market lately. It’s helped “normalize” stats so to speak and create lots more competition out there. This is especially true for sales volume as we had a strong month in March (still down from last year, but so much stronger).
Yet at the same time prices don’t appear to be going crazy either. The market is very competitive, but it also feels a bit flat in terms of price appreciation in some areas as I’m pulling stats and making graphs. I’ll have my big post out next week and talk more about that (and other stuff as I delve into the stats more).
Beyond rates, I can’t help but keep watching appraisal waivers, new “hybrid” appraisals, and 0% down mortgages. These are all also “steroids” in some senses as they can help people get into the market and artificially boost prices too.
It’s interesting out there. Thanks again.