With the new expectations that are placed upon the real estate appraisal, Real Estate Appraisers are becoming very familiar with change. First of all, it generally describes the type of money found most prevalent in our wallets, purses or bank accounts. More importantly, it describes the only thing that is considered constant in this ever evolving industry.
At a certain point in time a real estate appraisal was looked at as a tool to decide if a particular property, or collateral, was appropriate to support a loan. Appraisals of course, are not just used for mortgage lending purposes, but for the purposes of this rant, I am going to focus on mortgage lending. How many reading this blog can remember when a real estate appraisal was placed on an index card with a Polaroid of the subject taped to the back? Ok, so how many people had to Google Polaroid to see what I am ranting about? I digress. Lenders once were quite careful to evaluate the capacity, character and collateral of a potential borrower to make sure the loan was sound. The collateral process was almost an after thought because the lending standards were tough and credit was a privilege of careful consistent money management and not a “right to all Americans”. If the idea was to better the lives of Americans and provide a more equal base of opportunity, then the solution was to first educate us all to be better money managers. It is odd that we learn so many things in school, but there is no mandatory class or curriculum to teach us how to manage our money, develop and maintain good credit and the like. Again, I digress.
In order to affect changes that are beneficial, there needs to be a unification of thought and purpose. If real estate appraisers are to act as more than the eyes and ears of the lender, then there needs to be re-education. With the introduction of the Market Conditions Addendum, as discussed in a previous post, many clients seem to believe that appraisers are now expected to forecast values and demonstrate the direction of the market so that the lender can determine if prices will continue to decline or continue rise within a given market area.
Of course, it is possible to forecast prices using models of data to demonstrate trends and predict future happenings. The predictions are of course no better or worse than the sampling of data that was used to develop the model. The further out the forecast predicts, the less reliable the prediction becomes. Am I suggesting that appraisers should now focus on the micro-economics of the subject’s market area? No. I am suggesting that there is an indication that many clients are changing their marketplace expectations. In response, real estate appraisers need to change their ability to understand the client expectations and fulfill these expectations.
The challenge is to continue to present a report that will be easily understood and will not mislead the user. If any information is presented in the appraisal that may be less reliable because the conclusions are based upon a sampling of data or because like with the market conditions report, as mandated by Fannie Mae, the appraiser is asked to report a portion of a cycle in real estate instead of the complete cycle the conclusions can lead to erroneous results.
We must take the time to explain the full impact not only of the information that is recent and relevant to the subject appraisal, but now we must also take the time to explain the full impact of the data that is mandated by the use of forms that by their very design are misleading to the appraisal process.
Mark my words, there will be much more to this as this saga unfolds before our very eyes.