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New Home Valuation Code of Conduct cures some ills, creates new ones

Builder Charlie Hannah thought he was being generous when he agreed to sell a new 5,000-square-foot home for $1.15 million in the Tree Tops neighborhood near Tampa's Westchase.

But the appraiser returned an appraised value of $1 million on the lakeside house in June. Two months later, the sale remains in limbo and Hannah remains indignant.

Four other homes Hannah built in the same neighborhood recently sold for much more per square foot than the $1.15 million home. But the appraiser found a comparable home sale miles away in Odessa to justify what Hannah considers to be a low-ball valuation.

"I was floored by this. I still don't know how the appraiser could have done this," Hannah said. "I'm trying to rescue the deal now. But it's requiring 10 to 20 times the work it used to."

That message has reverberated through the Tampa Bay real estate community ever since the government's antifraud rules went into effect in May. The reform, though well intended, has inadvertently made it harder to sell and refinance homes in the Tampa Bay area. And it couldn't have come at a worse time as the housing market tries to shed the lead boots it has worn since 2006.

The new rules, called the Home Valuation Code of Conduct, forbid mortgage brokers, banks and Realtors from working directly or sharing information with appraisers. They typically work through appraisal management companies, middlemen whose job it is to hire appraisers from a pool.

Real estate professionals complain that appraisers have become discount commodities who are strangers to the neighborhoods they're evaluating. And since they're often allowed only 48 hours to complete an appraisal — about half the average time compared to before the reforms — the result can be hack work that ends up squelching a home sale.

"Appraisal management companies, with very few exceptions, select by price and turnaround times," said Frank Gregoire, a Pinellas appraiser with 30 years experience. "Rarely is their highest criteria the quality of the appraisal."

No one denies that reform was needed. Manipulation, and sometimes bribery, of appraisers helped doom the real estate market to its prolonged purgatory. By working too closely with appraisers, con artists stole billions of dollars through mortgage fraud during the years of the real estate boom. Tampa has ranked among the top 10 cities for mortgage fraud, represented by criminals such as Matthew Cox, serving a 26-year prison term for stealing $12 million from lenders.

"There was an egregious wrong perpetrated on the public," Hannah said. "The reforms were done for the right reasons. But we need a more thought-out system to do what it was intended to do.''

Residential appraisers work by tracking similar property sales — called comparisons or comps for short — to suggest the market value of a home that is for sale. Usually they use at least three comps; the more recent the sale the better. Factors weighed include age of the home, size, location and condition, but also whether the sale involved a foreclosed home or a non-distressed property.

Since the new rules took effect, the law of unintended consequences has upended real estate deals. St. Petersburg Realtor Nancy Riley blames sloppy appraisals. She had a buyer for a sixth floor Feather Sound condo overlooking the water and golf course. Both parties agreed to the $200,000 purchase price.

But the lender, using an appraisal management company, got an out-of-county appraiser. The disappointed buyer and seller learned the condo appraised at only $157,000. As two of his comps, the appraiser used a unit in a former assisted living facility and a single story condo without a view.

Riley tried to challenge the appraiser's findings — which included wrong photos attached to the wrong properties — but got a cold shoulder from the bank. She's still trying to salvage the deal.

"I sent them two pages of things wrong with the appraisal. They refused to listen," Riley said. "I got one or two snippy responses."

Mortgage refinancing — the centerpiece of the government's antiforeclosure efforts — has also suffered. Gregoire noted a case involving a house in upscale Tierra Verde. The home owner sought a reverse mortgage to pull cash from the home. Taking into account the recent depreciation, the home owner estimated the 2,000-square-foot home at $400,000. The initial quick-hit appraisal, using a $10 computer-generated valuation that isn't as good at distinguishing some of the nuances of real estate valuations like the differences between nearby neighborhoods, delivered a market price of $252,000.

When a real appraiser went to work on the house after driving up from Fort Myers, he, too, concluded the house was worth $252,000. Gregoire assumes the appraiser shoe-horned in comparable sales to make his numbers match the computer-generated price.

"That happens with appraisers who lack geographic confidence,'' Gregoire said. "I've been doing appraisals 30 years, but I don't go outside of Pinellas County. The most important thing is to know neighborhoods and submarkets.''

Safety Harbor-based appraiser Ed Walter blames part of the problem on rookie appraisers who work for peanuts. Walter charges $325 for his work. The appraiser management companies charge more, sometimes hundreds of dollars more. But they share only $150 to $200 of their fee with the appraiser from the pool. The consumer pays more but gets cut-rate work.

"The industry has lost a lot of good appraisers. There are lots of newbies willing to work for cheap and travel 50 to 100 miles," he said. "They're coming from Citrus County to do an appraisal in Hillsborough County. It's making a big difference.''

Disgruntled real estate professionals are proposing reforms to the reforms, including an 18-month moratorium on the Home Valuation Code of Conduct. Hannah would like to build a database, fed by Realtors, to ensure accuracy.

For example, some homes with dead lawns and ratty roofs sell cheaply, but by the time the appraiser uses them as comps they've been repaired. The appraiser might assume the home was pristine at the time it was sold, and that it's low price was reflective of the overall market.

One further wrinkle: To win the business of banks, some of the appraisal management companies offer clients guarantees that homes they appraise won't fall into mortgage default. That means it's sometimes better to err on the low side.

"It seems to me like the banks don't want to lend in Florida," Riley said. "We're being red-lined and boycotted.''

New Home Valuation Code of Conduct cures some ills, creates new ones 08/22/09 [Last modified: Monday, August 24, 2009 4:25pm]

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