The Real Estate Sales Industry and Low Appraisals

Appraisers are an easy target, but the real estate sales industry is a huge contributor to appraisal problems. Appraisers are downstream from the sales process; working with the data produced while writing reports that must conform to underwriting requirements. Appraisers use what data is available, they have no control over any of it. That data stream is controlled by the real estate industry and the multiple listing service. The economy  the volume of sales, agents influence the quality of information in the multiple listing service; which is the primary information source for appraisers. 

Why Are There So Many Real Estate Agents?

How can there be more agents than homes for sale? Consider this…

Then consider that not all agents are members of the National Association of Realtors. Some estimates put this number at over 2 million. Why? Consider that the real estate machine runs on agent fees. Brokers, local boards, state boards, national organizations, training firms, marketing, etc etc etc… Whether or not an agent actually does any business doesn’t matter as long as they pay the fees. To maintain this bloated buffet, standards to entry are laughably low and once licensed, sales aren’t needed as long as fees are paid. This process is ever replenished; those that leave are quickly replaced. These agents are unleashed and told to "work their sphere of influence". Experienced, seasoned agents have a fraction of the appraisal issues that hobby agents do. If the sales industry instituted performance levels based upon tenure and production, perhaps the bar would be raised to the benefit of all.

The AMAZING, COMPLETELY RENOVATED Home

It’s understandable that listing agents want to attract attention to their homes, but the nonsensical, hyperbolic listing descriptions are reaching new heights. Agents need to remember, appraisers pulling comparables use this information as well. So the home that is completely move in ready due to new paint, or “completely renovated” because new carpet and appliances were added, will appear that way to the appraiser. Homes with “sweeping mountain views” (when the leaves are off) will be noted as such. That lake front listing...it's really the community retention pond. At what point do descriptions become purposely misleading? And what of convenient omissions? A gorgeous wooded yard (on a cliff) or one with room to roam (under the power lines) sounds great until it's not. It's reasonable to assume that agents are being accurate and honest in the descriptions. Agents should understand that those listing descriptions will be used by appraisers. When a listing agent complains that "these comps don't have great views", "haven't been updated" or "aren't the same quality" as their listing, the appraiser need only show the complainant the listing comments in the MLS. When everything is "amazing, stunning and never before seen", nothing is.

MLS Fees and Off Market Transactions

In Metro Atlanta (and in many parts of Georgia) the best exposure tool is the First Multiple Listing Service (FMLS). Homes not listed in this system won’t get the maximum exposure to the buyers. FMLS charges a fee to list with them of 0.12% of the sale price of the home. In this market, many agents and owners are selling homes off market; not using the FMLS and avoiding the fees. This fee is typically absorbed by the agent and they can save money, sometimes a lot of money by not using FMLS. The buyer's agent is also subject to this fee and like listing agents, the can save money by finding homes "off market" for their buyers. There is debate within the industry about all of this but the fact remains, homes continue to be sold off market. The primary data source for appraisers running comparables is the FMLS; off market transactions won’t be found. A strong case can be made that sellers get the best price with maximum exposure, but off market transactions are common.

Appraisal Fees and Minimal Effort

The savings and loan crisis in the early 90’s resulted in creation of appraisal experience classifications; appraisers are classified based upon experience. After the crash of a decade ago, the idea of appraisal management companies was introduced. This was intended to prevent influence or collusion on values between lenders and appraisers. Major reductions of appraisal fees led to a major exodus of veteran appraisers, work started being offered to the lowest bidders. The result is mass produced appraisals; many appraisers no longer look for off market sales, call agents, drive multiple comps to develop the best report. Reduced fees mean meet the minimum standard and move on to the next one. Since the pandemic, appraisals are getting further modified and in some cases, eliminated.

No Easy Solutions

Appraisal issues didn't just start over the last few years. However, both industries have dramatically changed over the last several years fueled largely by the internet. The wall of secrecy that the sale industry maintained was destroyed by Zillow and others, now Zillow and other iBuyers are jumping into sales. Automated value models like "Zestimates" are being used to reduce or even eliminate appraisals. The industry changed more in the last decade than the previous five or six decades. What the future holds is unknown but professional agents and appraisers are the key. A great first step would be the sales industry establishing performance levels. Another might be making agents employees of their brokerage. An agent can only hang a license with one firm so the idea that they are "independent contractors" seems contradictory to the IRS definition. If brokers had to carry hobby agents as employees with associated expenses, it's likely there would be a bit more scrutiny. Given the power of the industry, that's not likely to happen any time soon. In the meantime, business rolls on.

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