The Fine Art of Appraising What is it Worth?


The buyer signed a contract on the northern Anne Arundel split foyer for $155,000. Closing would be in about a week, so Joe Minnich had only a couple of days to figure out if the home was really worth that much.

Mr. Minnich, an appraiser for more than two decades, hadn't seen the house yet, but he was professionally skeptical as he pored over the multiple-list database he had dialed up from his Catonsville office.

A split foyer in the same subdivision sold in July for $152,000. Another one sold for $149,000.

"Here's one at $142,000," he said. "It's not looking good," muttered the appraiser as he gathered up his records and prepared for the midmorning Beltway drive to the Magothy River neighborhood.

According to Mr. Minnich and other appraisers, the databases only hold some of the clues, and occasionally misleading ones at that. At a time when powerful computers are being unleashed in real estate transactions to pull together megabytes of information required by lenders, the appraiser has become one of the last flesh-and-blood links in the data-gathering chain.

Ever-more-sophisticated software can fetch astounding amounts of information from credit agencies, courthouses, title companies and a myriad of other public and proprietary databases, but most lenders still want someone like Mr. Minnich -- with his experience and an alphabet soup of professional and state certifications -- to go out with his clipboard and do a look-see.

"I don't think our profession will be eliminated, but it will change," says Steve Muller, president of the Maryland chapter of the Appraisal Institute, a national professional accrediting group.

In most cases, the point of the appraisal can be boiled down to this Muller maxim: "Our responsibility is to make sure the real estate serves as sound collateral for the loan."

In other words, how much cash can the lender eke out of a foreclosure sale if the loan goes bad? For that opinion, appraisers charge between $275 and $325 for a typical home.

The savings and loan debacle of the 1980s drove home the importance of competent, honest and thorough appraisers, appraisal industry spokesmen say.

Critics of the banking deregulation of the 1980s say that billions of dollars in loans teetered on inadequate and sometimes fraudulent appraisals. Waves of foreclosures on major commercial and residential developments revealed inflated appraisals. Properties were sold for disastrously less than their mortgages, bringing down savings and loans throughout the country. Taxpayers were stuck with the tab as the federal government paid off depositors of failed thrifts.

While federal regulators argue that the savings and loan crisis stemmed from problems with large-scale projects and not with typical home loans, appraisers say that the public should be wary of those who want to reduce the thoroughness of valuations in order to cut costs and speed up closings.

Mr. Muller, Mr. Minnich and other appraisers -- trying to defend their industry during a time of unprecedented pressures from lenders and federal regulators -- warn that corner-cutting carries risks for the public: It's not just that some loans will be approved that shouldn't be; some will be denied that should be granted.

A case in point would be the Anne Arundel home Mr. Minnich appraised in Boulevard Park, a community of nicely aging houses built within the past two decades, with boats seemingly in every other driveway. The longer he spent poking around the )) home last week and viewing residences that had sold recently in the community, the more comfortable he grew with the sales price.

He spent roughly 45 minutes climbing up and down stairs, checking for corrosion in the ducts, measuring rooms, fiddling with appliances and opening closets, looking for water damage. (People who paint over water stains sometimes forget the closet ceilings, he explains.)

Then Mr. Minnich, 43, a Baltimore native, started the more tedious process of looking at "comps," comparable homes in the area that are crucial to the final value opinion. Using his access to the Anne Arundel multiple-list database -- STELLAR -- Mr. Minnich had already identified some potential comps, but he couldn't tell what kind of shape they were in. Databases like STELLAR are designed to do deals, not appraisals.

"Multiple list can't tell you the condition. We always do an interior inspection," said Jeanne Chandler, president of Benchmark Appraisal, an affiliate of Mercantile Mortgage Corp. Or, as appraiser Michael Casella of Towson, Mr. Muller's partner, puts it: " 'Needs some TLC' could mean 'Listing heavily to one side.' "

After checking the house under appraisal, Mr. Minnich began cruising up and down tree-lined streets, trying to make sense of the range of values that buyers had paid in the past six months.

Potomac Road. South Carolina Avenue. North Carolina Avenue. At each house, he would make notes to himself on a yellow pad and take pictures with his digital camera, later to be downloaded at the office and integrated into the final report -- because lenders like to see pictures. Seven comps later, Mr. Minnich had an overlay of logic to the housing market that is Boulevard Park.

He found some more-expensive homes that were moderately superior to the one he was appraising. He found some less-expensive homes that were inferior to the eye. And the home he was appraising had appealing features that weren't as obvious to the scanner of STELLAR.

"If we did pure stats, this house would not have appraised for what it sold for," said Mr. Minnich. "But now that you're here, it's in good shape, it

has a lot of land, it has the deck, the pool. I'm more inclined to find that this property is at least in the ballpark."

But he wouldn't commit himself yet.

Credible appraisal

"There's a certain amount of time that it takes to do a credible appraisal," he explained.

He needed to talk to Realtors who sold the comps. He needed to fill out the paperwork and make adjustments to the comps.

Because these are only similar homes and not exact clones, traditional appraisals require that adjustments be made in the sales prices of the comparable properties. For example, the recent sales price of a four-bedroom Colonial on an acre is adjusted to derive some meaningful idea of the value of a three-bedroom Colonial around the corner that sits on a half-acre.

Adjustments are also made to the comparables to compensate for differences in condition, age, landscaping, view, energy-efficient items, fireplaces, decks and other items.

Experienced appraisers say these are some of the easier adjustments to make. It's more challenging and time-consuming figure out the less

obvious but perhaps more meaningful factors that accounted for the sales price of a comparable property.

For instance, if the sales price of a home has been inflated by special financing (such as the buyer paying little or no closing costs), that needs to be spotted. Also, if the owner was pressured to sell because of a transfer, a house can be priced low and sold quickly.

Gathering all this information was easier in the days when appraisers had several weeks to do a job.

But those days are history. The fax machines at appraisal offices spit out orders with increasingly shrinking turnaround time.

"There's a move industrywide [among lenders] to lower the transaction time," Mr. Minnich said. "He who closes the loan fastest, wins."

First National Bank of Maryland, for example, wants "hard copy" of the appraisal within three business days, said Ted Parker, senior vice president and group head of the consumer loan division.

"I was talking to the president of a mortgage company," recalls Mr. Casella, an appraiser for 12 years, and the lender said financial institutions had let appraisers take too long in the past. "He said the reason it took three to four weeks for an appraisal is 'We let it happen.' "

With clients insisting on quick turnaround to meet demanding closing schedules, but unsure if Hurricane Felix would make it impossible for him to get out later in the week, Mr. Minnich did two more visits for appraisals in other neighborhoods on the day he went to Boulevard Park. If the weather got too bad to drive, he could do paperwork. He also did a field review that night of another appraiser's work as part of a client's quality assurance program.

At the York Road offices of Muller-Casella Associates, the lights stay on well into the evening. Long hours are routine, Mr. Muller said.

Financial institutions have traditionally been the leading users of residential appraisals. Members of the Appraisal Institute said in a survey two years ago that lenders made up more than 60 percent of their client base.

And the lenders -- and the federal agencies that regulate them and buy their home loans -- are making life ever more challenging for established appraisers. In some respects, it is a buyer's market. Many new appraisers flooded the business in the past decade, particularly when interest rates declined, sharply increasing housing sales and spurring demand for appraisals.

"There are an overabundant number of residential appraisers in the marketplace," observed Claude Mascari, president of Fountainhead Mortgage Group Ltd.

In Maryland, there are more than 2,800 appraisers with licenses or more advanced certification from the State Commission of Real Estate Appraisers, according to Commission Executive Director Charles Kazlo. That doesn't include individuals who perform appraisals that can be done without a license -- estate appraisals, and certain types of real estate transactions, for example.

In 1989, in the wake of the S&L; collapse, Congress passed legislation that, while overhauling the regulation of lending institutions, required states to license and regulate appraisers. Many appraisers who had professional certification were rankled, because they felt the public might equate an easier-to-obtain state license to the more difficult-to-come-by professional designations.

"Complete contradiction"

Then, in something of an about-face last year, federal banking regulators joined to issue rules allowing lenders to use unlicensed appraisers for home loans up to $250,000.

"A complete contradiction coming out of Washington," is how Mr. Muller described it. "But it hasn't affected what we do," he said. Most lenders continue to use licensed appraisers for home mortgages because they are required by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). They are the two major purchasers of home loans for resale on secondary mortgage markets

These and other agencies buy some 63 percent of all mortgages made on one- to four-family dwellings in the U.S.

At the same time, however, Freddie Mac is promoting a new program, called Loan Prospector, which can allow a lender to dispense with the full appraisal if a loan applicant has good-enough credit and a large-enough down payment. The system uses a database of millions of transactions to provide comparables. And Fannie Mae, as well, is also examining how it can reduce the cost of home sales.

"Depending on what Freddie Mac and Fannie Mae do, there may be a choice of two or three appraisal products," said Ed Ritter, senior vice president of Nationsbanc Mortgage Corp. in Dallas.


Here is a look at the membership of one of the nation's largest appraisal trade organizations, the Appraisal Institute.

Median age: 43 years old

Appraising for more than 15 years: 47.2 percent

Self-employed: 65 percent

Appraise single-family homes: 41.8 percent

Appraise industrial properties: 11 percent

Appraise multifamily residences: 9.6 percent

Appraise office buildings: 9.4 percent

Major clients: Financial institutions (60.9 percent), federal government agencies (8.2 percent), individual property owners (6.9 percent), law firms (5.4 percent).

Education: 46 percent four-year bachelor's degree, 15.4 percent master's degree.

Earnings: 62 percent earned less than $70,000 in personal gross taxable annual income from appraisal services in previous tax year. 77 percent earned less than $90,000.

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