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Bad appraisals hurting sales and costing consumers

Two years ago, Florida regulators permanently revoked the license of Clearwater appraiser Larry Holzer because he had approved a home appraisal that contained glaring errors:

It said the house was on an asphalt road when it was really on a dirt road.

It said the house had public water and sewer when in fact it had a well and septic tank.

It said the property was in an area 75 percent developed, not the actual 25 to 50 percent.

The license revocation barred Holzer from appraising property in Florida. But it hasn't kept him out of the appraisal business.

Last year, Holzer started Global Appraisal Solutions, one of a growing number of "appraisal management companies'' that hire appraisers to determine market values. Though the appraisers are licensed, the management companies are totally unregulated. And they are at the heart of a controversy over a new federal policy that critics say is costing borrowers more money and resulting in rushed, poor-quality appraisals that can thwart home sales as the market struggles to recover.

"The agents I talk to, a lot of us are bemoaning the fact that we're finally putting deals together only to have them blown apart by appraisals,'' says Lance Williams, a Tampa real estate agent. "That's discouraging, especially at a time when the government says it's here to help us.''

Fast and flawed

Although they've been around for years, appraisal management companies are profiting from efforts to prevent the kind of appraisal-related fraud that contributed to the real estate bust. In 2007, New York Attorney General Andrew Cuomo filed suit alleging that Washington Mutual had pressured appraisers to inflate home values so WaMu could make bigger loans.

The suit led to a Home Valuation Code of Conduct that took effect May 1. With some exceptions, it bars direct contact between appraisers and loan originators, meaning appraisals must now be arranged by a third party — typically, an appraisal management company.

Under the new code, the lender contacts a management company, which then hires the appraiser. The borrower pays the appraisal cost, which is divided between company and appraiser.

"The whole goal of the code is a laudable one — to prohibit pressure on appraisers to achieve a desired valuation,'' say Francois Gregoire, a St. Petersburg appraiser and former chairman of the Florida Real Estate Appraisal Board.

But Gregoire and others say the top priority of most management companies is maximizing their fees, not getting the best-quality appraisal. As a result, they often hire less experienced appraisers and require them to rush their reports.

"There's no way in the world I'm going to do work for a (management company) because I don't believe you can turn around an appraisal report in 24 or 48 hours even if you're intimately familiar with the market and do a credible job,'' Gregoire says. He has taken as long as 11 days to put together a report, which includes photographs, market analyses and interviews with buyers and sellers.

Critics say appraisers hired by third-party companies often know little about the area where the property is located and come up with appraisals wildly out of whack. Some examples:

• Although there are many appraisers far closer, an appraiser from Crystal River went 50 miles to Tarpon Springs to value a unit in a new townhouse development where frequent "flipping'' suggested mortgage fraud. He appraised the unit at $1.2 million — nearly $800,000 more than what an identical unit had recently sold for.

• In another suspicious case, an appraiser sent by a management company from the Fort Lauderdale area all the way to Key Largo appraised a unit for $750,000. Other units were listed at no more than $299,000.

• At the other end of the spectrum, Wells Fargo bank recently agreed to take $290,000 for a house that originally cost $420,000 in a prime area north of Gandy Boulevard. But the appraiser, from Pasco County, set a value of just $245,000 by using "comparable'' sales from a less desirable area south of Gandy.

Wells Fargo agreed to sell at $245,000 "but mercifully that was a case where we could put a deal together because the bank just wanted to be done with it,'' said Williams, the Tampa agent. "But when you have a seller who is the primary owner of the property, that deal's probably not going to go through.''

By steering more work through third parties, the new code of conduct is also increasing costs to consumers because both the appraiser and the management company are getting paid. However, borrowers don't know that because the closing statement shows only the appraiser.

"I think the consumer needs to know that they're not paying Joni's Appraisal Service $500 for an appraisal but maybe $250, and that the rest is going to a management company,'' says Joni Herndon, current chairman of the real estate appraisal board. "It has to be a profitable business venture or they wouldn't be in it.

Improper pressure?

Critics say the problems with management companies are epitomized by firms like Global Appraisal Solutions and its founder, Holzer.

Holzer, 41, ran afoul of state regulators for inadequately supervising a trainee who had done a flawed appraisal in 2003 on a $250,000 Lake County house. Full of errors, the report didn't even have photos of the right house.

In an affidavit, Holzer said it was an isolated incident that occurred at a time he was "impaired'' because of treatment for depression following a divorce. Nonetheless, he surrendered his license, which was permanently revoked in 2007. The trainee and other employees under Holzer's supervision also lost their licenses.

A year later, Holzer started Global Appraisal Solutions. Touted on its Web site as "one of the most trusted providers of real estate valuations in the nation,'' it promises "guaranteed same-day inspections'' by certified appraisers with delivery of reports "within 24 hours.''

A veteran Illinois appraiser, Donald Martin, says he refused an assignment from Global Appraisal Solutions because he felt Holzer was pressuring him to come up with a certain valuation on a house — something the new code of conduct was specifically designed to prevent.

"They asked me to call them if the value wasn't going to be there,'' said Martin, who spoke with Holzer by phone. "In my opinion he is shopping for an appraiser that will make his client happy. It's because of appraisers like he was that we now have the code of conduct.''

In another recent instance, Global Appraisal Solutions e-mailed an appraiser in Colorado with this request: "We need you to take a look and see if an additional $5,000 in value is justified.''

Holzer says there is nothing improper about his business practices.

"The reality is that many appraisers are not competent, and many are undervaluing properties to the detriment of consumers,'' he says. "The job of the appraisal manager is to hold appraisers accountable.''

Holzer also says that problems in his background are irrelevant to his current work. He has a long arrest history that includes convictions for marijuana possession, harassing phone calls, obstructing an officer without violence and violating a domestic violence protection injunction.

"Because I had a successful appraisal company, the state of Florida wanted to crucify me,'' he says. "They see if you're successful at what you do and they crucify you.''

Neither federal regulators nor the New York Attorney General's Office returned calls seeking comment on whether the new code of conduct is working as intended. But a bill now before Congress would regulate Global Appraisal Solutions and similar companies — a move long overdue, critics say.

"I think it goes hand-in-hand with the regulation of appraisers and also the licensing of appraisers and Realtors,'' says Herndon of the state appraisal board. "These are third-party brokers of appraisal services, and consumers should know who they are.''

Susan Taylor Martin can be contacted at susan@sptimes.com.

Bad appraisals hurting sales and costing consumers 05/15/09 [Last modified: Wednesday, May 20, 2009 3:51pm]
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