On Dec. 6, 2014, USA Today published an article titled, “Appraisal Hypocrisy Hits Home“. It offers some insight into the harm done to home buyers and sellers.
What are AMCs?
If you read the article, you’ll notice the author refers to AMCs without overtly defining them. AMCs are appraisal management companies. Lenders are required to ensure that appraisers are independently engaged and lenders must not unduly influence appraisers.
The AMCs act as middle men that handle the ordering, completion and delivery of the appraisal. AMCs hire appraisers so lenders don’t have to. As Lazerson notes, appraisals are more expensive because the AMC middle men add a mark-up to appraisals to make money. The National Association of REALTORS® has published a helpful NAR Issue Brief on appraisal management companies.
Mr. Lazerson’s article is written from a lender’s point of view. If you speak with appraisers, they raise issues created by lenders. An example is lenders limiting the area in which comparable properties can be found to support the valuation of a property.
As Lazerson points out in his article, though regulation is intended to separate lenders from appraisers, lenders are still able to own appraisal management companies. One could argue this gives them direct influence over the livelihood of the appraisers.
The Challenge of Code-Plus Homes
Building codes should always be considered a minimum standard. It can be a challenge to establish the value of “code-plus” homes built to a higher standard than building codes. These homes include properties built to voluntary green building standards like the National Green Building Standard, EarthCraft, LEED for Homes, etc. They include properties built to government code-plus programs like ENERGY STAR. They also include FORTIFIED Home properties built to provide a higher level of protection to home owners in disaster-prone areas.
Appraisers that aren’t familiar with these programs or standards won’t know how to properly assign value to these properties and they won’t know how to find appropriate comparable properties. Code-plus homes are popular for a variety of reasons. We shouldn’t abandon our progress toward healthier, more comfortable and safer homes because of appraisal issues.
The Appraisal Institute has published a Residential Green and Energy Efficient Addendum to help collect and communicate information about a property. It’s especially helpful for establishing the value of code-plus properties.
Qualifying Lenders and Appraisers
It’s important to qualify both lenders and appraisers. Many people don’t know some lenders offer options like energy efficient mortgages (EEMs) and energy improvement mortgages (EIMs). They’re designed to recognize the value added by code-plus construction that’s more sustainable and will ultimately deliver a higher value over time. You can qualify lenders by looking for those who offer EEMs and EIMs – they’re paying some attention to the code-plus construction market.
There’s some confusion about the contact that parties can have with the appraiser of a property. A buyer, seller or their real estate agents can be in touch with the appraiser to ask if they have any experience appraising code-plus homes built to a particular program. If they don’t understand the standard of construction and elements of the Residential Green and Energy Efficient Addendum, you can request a qualified appraiser.
Appraisers can encounter a staggering number of variables when visiting a property. There are a significant number of code-plus programs, challenges from foreclosed homes sitting empty and many other issues to be addressed. We should expect some specialization from appraisers as we do with architects, contractors and other professionals.
The Appraisal Institute has a series of credentials in its Find an Appraiser webpage to help identify the appropriate appraiser. Please note the “Sustainable Green Buildings” choice under the Residential Property Types pull-down menu are appraisers who have identified sustainable properties as a specialty. What you really want is the list of graduates from the Appraisal Institute’s Valuation of Sustainable Buildings Professional Development Program. You can further qualify them by asking how much experience they have valuing properties similar to yours and how many they’ve valued in the area of your property.
Though it may seem like Lazerson lays the bulk of problem real estate transactions at the feet of appraisers, his underlying message is a need to focus on the challenges created by government regulation. The purchase of a home represents one of the largest single investments most consumers will ever make. Appraisals of our homes, especially code-plus homes, are too important to ignore.
Home owners shouldn’t have to settle for low appraisals because of regulatory issues and a lack of education. Lenders, appraisers, builders, architects and other housing market professionals must do a better job communicating the value of homes and the need for responsible regulation. To Mr. Lazerson’s point, the burden of all regulation is eventually passed on to home owners.
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Image by Bex Ross used under creative commons license.