Dispute rages over methods of appraisal

Nation's housing

January 19, 2007|By Ken Harney | Ken Harney,earthlink

With home prices stagnant or declining in dozens of markets around the country, a bitter dispute has broken out inside the property appraisal industry - a fight that could affect how millions of houses are valued.

On one side are traditional appraisers, who render estimates based on interior and exterior inspections, and research of current market conditions and the recent selling prices of "comparable" properties.

On the other are data companies who vacuum up vast quantities of publicly accessible property information and help create "automated valuation models" (AVMs) that many lenders now use for home equity loan transactions and increasingly are consulting to make primary mortgages.

Traditional appraisals cost anywhere from $300 to $500, and can take days - sometimes a week or more - from the request by a lender to final delivery. AVMs, by contrast, are available almost instantaneously online and might cost a lender $25 or less. AVMs power the valuation estimates anyone can obtain online - free - from Web sites promising to tell you how much your house is worth.

Appraisers have resented encroachments by AVMs for years, in part because they have lost some of their business and revenues. They also have challenged the accuracy of AVMs, arguing that too often the estimates are off the mark, especially when price patterns are changing rapidly.

But now many appraisers are upset about something they view as even more threatening: They claim that their appraisal reports are being systematically looted of key information without compensation or permission.

Appraisers say that one of the dominant electronic real property data companies, FNC Inc. of Oxford, Miss., is "extracting" proprietary data compiled by appraisers and reselling it to lenders and others who may load it into AVMs. To add insult to injury, appraisers say, they are forced to pay FNC $5 per report when they send valuations to lenders in electronic form using FNC's online platform, AppraisalPort.com.

"We are paying them [FNC] and they are stripping out our work product without paying us a dime," said Patrick Turner, a Richmond, Va., appraiser.

Angela Atkins, public relations manager for FNC, said the firm is fully within its legal rights and extracts only property description data from appraisal reports, not proprietary narrative analyses or actual valuation estimates. FNC is building a national property data repository - analogous to the three national credit bureaus' files on consumers - for its lender customers, most of whom are among the top 30 highest-volume mortgage companies in the country, according to Atkins.

"We are not an AVM company," she added, "and we could not exist without appraisers."

Turner charged, however, that the physical descriptions that he and thousands of other appraisers include in their reports - square footage of interior space, numbers of rooms, floors, bathrooms, bedrooms, lot dimensions and the like - are proprietary because they often are more accurate and up to date than publicly accessible records.

He gave the example of an appraisal he completed recently outside Richmond, where the publicly recorded data indicated that a house had 1,100 square feet of habitable space, whereas his own measurements showed it had 2,900 square feet above ground plus a newly renovated basement of 1,200 square feet.

"Imagine the difference in [appraised value] between a 1,100-square-foot house and a 2,900-square-foot house," said Turner, who holds a coveted Senior Residential Appraiser designation from the Appraisal Institute, the main professional group representing the industry. Computerized valuations "can't be accurate when the public records they are relying on are out of date or wrong. That's why everybody wants to strip out our data - it's valuable because it's accurate and current - but they don't want to pay us for it."

Turner says he and other appraisers are discussing what steps to take to better control the use of their key data - copyrighting appraisals is one possibility, legal or regulatory relief are others.

In the meantime, he urges consumers to pay closer attention to the appraisals used in their real estate transactions.

Computerized valuations "can't smell, can't see, can't hear" and might be based on outdated information in fast-changing markets, he says.

That, in turn, can cause buyers to overpay by thousands of dollars or sellers to cut prices when the data used for a computer-assisted valuation come in with an inaccurately low number, causing the lender or borrower to balk at the contract price.

Turner also advises buyers to demand a copy of the full appraisal to make sure it was done by a licensed, professional appraiser and not an electronic black box.

"Nobody should pay $400 for an appraisal that was done by a computer somewhere and cost $25." Not only is that a violation of federal rules banning "markups" of real estate settlement services, "it's just another form of stealing," Turner said.

kenharney@earthlink.net

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