What consumers are never told is that big banks often have the loan “in house” for over three weeks before they even start to think about ordering the appraisal. A home inspection is ordered within days from when a contract is signed. As soon as the contracts are signed most everyone involved in the transaction gets busy; attorneys, termite inspectors, home inspectors, insurance agents, utility companies, moving companies, etc.. Everyone is contacted timely except the appraiser. Th appraiser knows nothing about the contract until they get the order, often from an Appraisal Management Company who blasts the order out to 10, 20, or even 50 appraisers trying to get the cheapest price. The lenders can waste another week or so trying to negotiate the best deal. They are not trying to save the consumer money, just making sure that they get the majority of the appraisal fee for themselves. So when the appraisal is finally ordered, it can be from a few days to a week before the bank wants to close the loan and now all of a sudden the appraiser is holding up the loan. And don’t forget, most lenders collect the fee for the appraisal the day they take the loan application. They’ve already held this money a month before they even think about calling an appraiser. And, they can wait up to 30 days after the report is delivered to pay the appraiser. 60 days free money – not bad.
Just imagine if banks ordered the appraisal the same day they collected the fee for it. There would be no need for a “technology” discussion and no need to improve the appraisal system with big data. Not to mention that most home buyers would not be happy to learn that the bank is having their home appraised by the cheapest appraiser in town (who evidently has no work and time to rush this order) to give them a value for their largest, lifetime investment. The current appraisal ordering system is NOT consumer friendly.
Now we get to the “Big Data” myth. It’s all smoke and mirrors when it comes to real estate valuation. Pricing homes is not like pricing “widgets.” They are not all easy to compare and only come in a few colors and or sizes. There are so many influences on property values it takes years to learn the nuances that impact the values. No computer in the world can properly price real estate, except for large urban markets where thousands of sales are available every month. Overall, that is less than 20% of the country. Real estate is NOT a perfect data system that can be tracked with big data. Overall trends, yes. But not individual property values. Online valuations with big data are great for fun, but not for determining real values that means real money to the sellers.
So, how do these technology companies do it? If you take away all the secretive info and get down to the nuts and bolts, the fancy algorithms and so-called proprietary data systems used, they do nothing more than calculate a price-per-square-foot formula, often using inaccurate information. Price-per-square-foot calculations are created by using only two numbers – the sales price and the home’s size or square footage. Most big data systems use the square footage details taken from the local tax assessor, who never enters the home. In the case of homes with upper and lower levels, they are forced to guestimate what’s on the interior as far as square footage and room counts. Remember, the tax department does not need precise information. Only the real estate industry does, but yet they want to rely on the tax records so they don’t have to measure homes without a standard. These errors are easy to find for anyone willing to look, but these companies don’t want to talk about that mysterious, taboo subject of square footage. Nobody wants to really talk about it because there is NOT a mandatory measurement standard that agents and appraisers agree on. In this day and time, it’s hard to imagine there is not an authoritative way to measure a house. Every component in that house is measured by a formal standard. But, once you put all those parts together to make a house, there is no mandated measurement standard. Consumers are the mercy of the agent they hire, and how they were taught to handle square footage. Far too many agents use tax records, or don’t know how to measure, or just ask the owner the size. MLS is full of square footage errors. All these things I’m saying are easy to see if anyone cares to find the answers. But, when large amounts of money are involved, most people seem to care more about getting their share. Accuracy or consumer protection in the real estate industry is totally lost. All in all, it is a sad state of affairs in the real estate and big data businesses. Smoke and mirrors paraded to consumers and government agencies to see who can capture the most money. Buyers beware!
Technology companies flaunting their real estate valuation products show us lots of pretty color charts and graphs and sell us on their products. But what would happen if someone were to ask a simple question of these technology companies… how did you determine that value? Technology companies are simply selling a modern day version of a Pet Rock. They sell a product that is not real. They sell the idea of big data, hoping people assume more information is always better. The pet rock and automated valuations both have created millions of dollars using nothing more than consumer marketing of a questionable product. At least the pet rock was only $3.95 and provided a bit of fun. An incorrect automated value could cost you tens of thousands of dollars… An automated valuation product for estimating a real estate price is just about as reliable as the flip of a coin. People in the business understand that when you have junk data going in, you get junk data coming out.
A professional real estate appraiser can never be replaced by a computer program, no matter how much data they have or how fancy the formulas. But that’s okay. We only need to give appraisers the orders the day after the contracts are signed, and then watch our system work (just as it was designed). The only reason there was a demand for big data and replacing appraisers is because big banks thought they found a way to eliminate appraisers and keep that money for themselves. You can only fool people for so long and the time for big data (at least in real estate valuations) has had their chance, failed to function as promised, and it’s time to disappear. It’s time to get back to reality and consumer protection, especially at a time when trust, knowledge, and experience will be needed more than ever, in a post COVID-19 real estate market.