Another nail in the coffin for appraisers. Death to consumer protection and mortgage investment security.

In one swoop of the pen, the Federal Deposit Insurance Commission (FDIC) Board of Directors, decided that home mortgages will no longer need to obtain an appraisal for loans under $400,000. With this increased threshold, apx. 72-75% of all home mortgage transactions will be exempt from the Dodd-Frank Act’s rules protecting the integrity of appraisals. The vote raised the existing threshold for mandatory appraisals from $250,000 to $400,000. Think about that. With the average price of a home in the United States at $229,000-$310,000 (depending on who’s numbers you believe), we are talking about the majority of mortgage loans. Who benefits from this change? You guessed it, big banks.

This change will allow banks to use mostly unregulated “evaluations” instead of federally regulated real estate appraisals. All I can think about is “Here’s Your Sign.” Bad things are destined for the American home buyer.

The bottom line is, appraisals protect consumers, mortgage investors, and the economyWithout them, consumers are at the mercy of big banks and people who are most often paid based on the size of the loan. It is an open invitation to fraud and corruption. When all the curtains are lifted, this new change was inspired by greed and profits. Consumers will pay the price and within a few years the results will be devasting. Is the sky falling? Today it may very well be…

 

MiniSplits and GLA

So, you find a large Bonus Room above the garage and it is heated and cooled with a large hotel type system mounted in the wall. You wonder to yourself, is this space the same as if it had a traditional heat pump with vents in the floor or ceiling? The owner tells you “we put this unit in because it was so much cheaper than putting in a heat pump and for the room upstairs it really doesn’t matter if we lose a little wall space.” So, is this a question of whether we count this space as GLA or heated living area, or do we just think of it as a quality difference and make an adjustment for the difference between having a heat pump and vents vs a wall mounted minisplit? Wonder how we could prove that adjustment, cost difference? Does the typical buyer pay less for this house because the minisplit heats and cools the bonus room?

What about these two examples – each upper level has one wall-mounted HVAC unit. The one on top is a Bonus Room. The upper level on the bottom has two bedrooms, a full bathroom, a hallway and a play space. Are both spaces considered GLA? ANSI only says a space has to be “suitable for year round use.” Is the space on the bottom equal to the main level living area with a traditional heat pump or gas system?

Sure, this is a loaded question. Any time I ask this question I get bombarded with strong opinions on both sides of the issue. Of course, a true minisplit system has a similar definition to a heat pump, each was an interior and exterior unit. But, there is a big difference between spaces that have different heating/cooling methods. When I think of a $400,000 house, I don’t see a minisplit as being “typical” in that market, with a lot of “it depends” in between. Where do we draw the line? Ask ten different buyers and you’ll get 10 different answers. These systems are becoming more prevalent in certain markets and appraisers need to find a way to handle these spaces consistently.

If appraisers can’t agree on these spaces, how are consumers going to be protected? What’s fair? It depends on whom you ask… Who do you think should make the “rule?”

Texas Square Footage Case a Huge Loss for Consumers

When it comes to Realtors® and square footage, they have the public totally fooled. The mystery over measuring square footage allows them to price homes based on inaccurate square footage, using their all-powerful price-per-square-foot formula, and no one seems to be talking about the problem or trying to help consumers. It appears that’s just the way they want it.

Many of you have heard by now about the appeal and reversal of the case filed against Ebby Halliday Realtors® in Texas. The case stemmed from a 2015 condo sale where the MLS used a drop-down menu with auto populated information from the appraisal district record, or what I would call their local county assessor records. In this case, the tax records reflected 1,178 square feet, which turned out to be only 885 sqft, or a difference of 293 sqft. Living in our price-per-square-foot world, that is a HUGE different in square footage. The question arises as to if a reasonably prudent real estate agent would recognize a difference in sqft of 293 feet out of a reported 1,178. In my opinion, if they can’t see that difference, they should find another job. Licensed Realtors® are supposed to be the ultimate real estate experts. Consumers rely on their expertise to make their largest, single lifetime investment. We expect every other professional to be competent in their chosen profession. Why are Realtors® different. They are the only industry in the real estate world without “standards” to work from. For all their talk of consumer protection and putting their clients first, when it comes to square footage they hide behind the door and claim “we don’t want to talk about it.” According to many real estate professionals, there are no required measurement standards so we just use the tax department’s information since they use professional appraisers to properly measure homes. WRONG! The vast majority of Realtors® know the square footage details contained in tax records are in error a very large percentage of the time yet they continue to use this inaccurate information on an unsuspecting public.

The county assessor has no need for precise square footage data and they never enter any dwelling. Without entering a dwelling, it is impossible to get an accurate home measurement and square footage total. They are the first to tell you their information is an estimate, for assessment purposes only. Realtors® have promoted the great myth that tax records contain the “Official Record” when it comes to square footage. That is simply not true and this myth has been abused by the real estate industry to try and reduce agent’s liability for square footage errors. From 1908 (when the Realtor® organization was founded, until the mid-nineties, when tax records became available online), every listing agent was responsible for either measuring a home’s square footage or having it measured by a qualified agent or an appraiser.

The vast majority of CMAs (Competitive Market Analysis) are created using a price-per-square-foot formula. If that sqft number is wrong, then the home seller is very likely going to lose money. But, the listing could be easily under priced or over-priced depending on the amount of a sqft error. Using the square footage from tax records almost guarantees (especially in homes with upper or lower levels) a home will be priced inaccurately.

In this example, there’s almost a 25% error (1,178 – 885 = 293 sqft error)! So let’s look at the magic price-per-square-foot difference. Option “A.” Let’s just assume a sales price of $150,000. $150,000 divided by 1,178 sqft equals $127.33 per-square-foot. Option “B.” $150,000 divided by 885 sqft equals $169.49 per-square-foot. If you were the buyer would you be upset? No agent prices their personal home based on the square footage details in tax records. Why are they so quick to do it for their clients? Hm…

How can a professional not see that twenty-five percent of the house is missing? In North Carolina, the Real Estate Commission set their error limit at 5%. Five percent is reasonable, not 25%. Yet the appeals court overturned the lower court’s decision and the agent and company were not held liable, and the consumer (that they claim to protect) lost huge. In what business is that fair?

That is real money to someone. A professional who truly cares about consumer protection understands the power of price-per-square-foot and would never price a listing without first having the home measured. In markets where they have discovered this to be true, homes sell faster and for closer to the list price. The MLS database in more accurate and it is a win-win situation for everyone. The Realtor® organization has spent a great deal of money fighting this issue, when they should have spent that money educating their members. I am hopeful that attorneys will find a way to stop allowing Realtors® to cheat home buyers and sellers, and shirking their responsibility of providing accurate square footage details. No agent has to personally measure a house. However, they must be responsible for providing accurate information in order to protect the seller and the home buying public. Inaccurate square footage, knowingly advertised, is a far cry from a consumer friendly business. This has gone on far too long and its time to put some professionalism back in the Realtor® logo. If not, they just as well close their doors and turn it all over to Zillow®.