Geographic Competence as a Function of Location

The oldest saw in real estate is that "location, location, and location" are the three most important factors in the value of real property. That is, of course, a bit of an exaggeration, but it is true enough that the URAR grid has, among the top factors on the grid, "location", "site", and "view". Those items are located toward the top of the grid because they have been shown to be significant reasons why a buyer might pick a particular home. In the middle of the grid are "condition", "room count", and "GLA", which have been deemed, by those who study buyer psychology, to be lesser factors. What strikes the reviewer who is cognizant of these things is that the majority of appraisal reports will have the bulk of adjustments in the mid-section of the grid, with few at the top.

"Ah-ha!" says the reader as he leaps to a hasty conclusion that I am about to say that the adjustments are up-side down. Not really. The best arguments for a preponderance of adjustments in the mid-section are that (1) they are quantitatively easy to develop, and, (2) if the appraiser has followed common sense and the guidelines set down by FNMA for choosing comparable sales, all of the sales used will be nearby and locationally similar. There should be no need for substantial adjustments for location if all the sales are within a half mile of each other and in the same Census Tract. There should be no reason to make an adjustment for lot size when all of the lots have the same frontage and about the same area. If the subject and comparables are all on quiet residential streets, why should a view adjustment be needed?

When the market is active and there are plenty of sales to choose from, there is generally little difficulty in providing a credible opinion of value for a home in a given neighborhood. In that situation, difficulties typically arise when the lender says, "I need $xxx to make this deal go." (According to Ohio Attorney General Mark Dann, such a statement is prima facie evidence of appraiser coercion -- a misdemeanor under the Ohio Revised Code -- and he has urged appraisers who receive faxes or emails with such statements to forward those items to him for prosecution of the senders!!) An appraiser who would prostitute his or her services under such a condition might well choose sales in locations beyond the recommended distance guidelines, ignore differences in appeal (and thus value) due to location, and "hit the number." This is, too often, a problem where a local appraiser is involved, but is almost always a problem where an appraiser who is based some distance away commutes a long way to the subject neighborhood.

This is not to say that such a commuter cannot learn the nuances of the subject's neighborhood and proceed to do a credible job of valuation. The difficulty lies in the time and effort needed to become competent, and the very little amount of money that most lenders are willing to pay for an appraisal (although it has been my experience that the more times a lender has been told a particular number is not feasible, the higher the price they are willing to offer for the appraisal, and conversely, if the appraiser does not "hit the number", the greater the likelihood that the lender will ignore the appraiser's invoice).

In a "down" market, the use of an appraiser who is not very familiar with the subject's neighborhood is a prequel to appraisal fraud. In a declining market, good sales comparables become hard to come by. As data in the immediate neighborhood of the subject becomes scarce, it is necessary to reach out to other, "competitive", neighborhoods in order to bracket the subject for all features. It is highly unlikely, however, that even "competitive" neighborhoods will have exactly equivalent features and appeal. Especially in suburban or rural neighborhoods, use of a sale from an adjacent town or township may become necessary, and if a location adjustment is NOT made in such cases, the appraiser has some explaining to do.

A geographically competent appraiser will be able to make appropriate adjustments, and explain why they were made. The problem, again, is that the appraiser is faced with a changing market, it takes time and effort to dig out and analyze the sales statistics, and the fee for the appraisal is usually not worth the work involved, unless the appraiser needs simply update his files with the most recent data. Many appraisers, however, are still using neighborhood descriptions that were cooked up (or copied from somebody else) by their supervisory appraiser when they were trainees. Relatively few appraisers have actually taken the time to compile their own neighborhood statistics.

Even those appraisers who use data from the MLS may be fooled into using statistics generated by Realtor associations, without thinking that those figures may be biased in favor of convincing buyers and sellers to enter the market. There are other appraisers who buy their statistics from national services without bothering to consider the underlying assumptions that need to be made to properly interpret that data. The dangers are manifold.

So what triggered this rant? I had two recent phone calls, one from a lender, and one from a salesman hoping to sell me a listing at an appraisal directory. The loan officer asked if I could tell him whether a particular value for a home on Roslyn Avenue in Akron would be feasible. I told him that in order to make such a determination, I would have to do an appraisal. He then asked what the market was like in Akron; I told him that we had an increasing number of foreclosures, and that there were quite a few more listings in the MLS than there were sales. He thanked me and hung up. If I were to buy a lottery ticket, my odds of winning something would be smaller than the odds that he promptly called another appraiser, hoping he could find someone who would be willing to violate USPAP for him. If it were legal to record phone conversations, and Mark Dann paid a bounty for violations submitted, I could make more money doing that than appraising.

As to the second call, the salesman directed me to the web page for his directory. In order to be listed there, his company charges a fee. All you need to do, if you are looking for an appraiser, is click on the county and a list of appraisers with their contact information comes up. There are directories such as that which also offer free listings, and I am on about a half-dozen of those. The biggest problem with all of these directories is the deception inherent in all of them. The potential client is usually looking for an appraiser who is local to the subject's neighborhood. This salesman said that he was looking for an appraiser in Kansas City, and my web page came up. While I may travel up to 20 miles west to the rural Wayne and Medina County portions of my service area, I have no desire whatsoever to go outside the areas in which I feel competent. However, if you bother to click on his directory's map of Summit County, you will find that of the 14 firms that are listed, four are in Summit County, four are in Cuyahoga County, one is in Lorain County, two are near Columbus and Dayton, and the remainder are out-of-state management companies. Another directory lists appraisers by ZIP code; there are out-of-county appraisers who have several listings, each of which has a fraudulent ZIP so that they are shown as being "local" to the ZIP code a client may be searching. So much for truth in advertising.

So why is there a credibility problem with the appraisal profession? I submit that it has to do with the marketing of appraisal services, and the choosing of appraisers for the assignment by the very people who are paid a bigger commission if the loan amount is higher. If lenders were forced to be liable for the quality of the loans they made, they might be more careful about who they hired to evaluate the collateral. That is a problem that was created by Congress. If that is too hot a potato for the pols, they should consider setting up a Federal agency that would dole out the appraisal work on a rotational basis, just as the VA Fee Panel does, without any say by the lender as to who the appraiser might be. Part of the criteria might be a requirement that the appraiser's office be located within a certain distance of the subject property. A variation on such a scheme is used right now by the U. S. District Court, Northern Ohio Division, for foreclosure appraisals; the Master Commissioners are required to use a state certified appraiser whose address in the Federal registry is in the same county as the property being foreclosed.

Over twenty years of licensing has not solved the problem of appraisal fraud. The politicians created the environment for the current mortgage lending crisis. It is time the denizens of the Capitol tried a different approach to clean up the mess they made.