2) a lender lacks the ability to disccern an obvious lie about of sales price and appraisal. Don’t underestimate how dumb some appraisers and underwriters can be at times.
An example – around 1991 or 1992, I was a staff appraiser for a large bank. I was given an assignment to appraise a home in Fairbanks Ranch with a contract price of something like $2.7M. When I researched the property, I found that it was not currently listed, but had been listed about a year ago, for something like $1.7M. So I figured that unless they had done a complete remodel, and added a couple of thousand feet in the past year, it was likely a fraudulent sale. After I inspected the property, and looked at all of the sales in the area, it became apparent that it was probably worth something like $1.7M. So I told my supervisor what I found, and our bank cancelled the loan.
About 12 or 18 months later, I was doing an appraisal in the same neighborhood, and I saw this same property listed for sale as a bank REO. I don’t remember what it was listed for, it may have been $1.5 or $1.8M. When I looked at public records for this property, I found that it had sold the year before for $2.7M, and there was an 80% loan done by California Federal, which was a large S&L at that time. So they had appraised it for $2.7M the year before, and the bank probably lost $500,000+ on the loan.
They probably used an appraiser that did not know the area well, or otherwise didn’t have the experience to appraise this property. In that area then, and now, two 7000 s.f. houses on the same street can vary in price by $1,000,000 or more, depending on their overall quality and amenities. The appraiser probably used much nicer homes that really weren’t comparable to the subject property to justify the
higher sale amount.
The same thing is happening now. I do appraisal reviews for one bank from time to time, and the quality of some appraisals is really bad. There are thousands of newer appraisers in California that have never been through a down market, and who obviously had very poor training. Some of these new appraisers were probably trained by new appraisers who just got their license, and they really don’t know what they’re doing. It’s common to see appraised values on a refinance to be higher than what a very similar house is listed for in the same tract.
The more I read and learn about the real estate industry, the more faith I lose in it. After reading Steve’s post, the appraisal process seems to be almost entirely subjective and open to a substantial amount of error. Maybe it’s my background in working with databases, but I feel that the current system can, and should be, improved.
I have started a topic here for anyone interested in volunteering their time to help in conceptualizing and creating an open-source, open-to-the-public online database of properties.
I think something can be created that can do better than what’s currently available – and we have enough brainpower on this forum to do it. Let me know if you’re interested.
