Residential real estate appraisal going away?

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Many auctioneers are also appraisers. As such, we have endeavored to keep an eye on the future of our business here in the United States. Despite searching for years … I still can’t find a working crystal ball. However, I do have some observations, as most of us have.

First, I am an auctioneer and appraiser and serve as Distinguished Faculty at Hondros College where I teach law, appraisal and other related topics. I also teach numerous auction pre-license and continuing education classes all across the United States.

The residential real estate (real property) appraisal business in the United States is big business. In 2018, about 6 million homes sold with the vast majority requiring some sort of third-party evaluation.

Appraisers also appraise homes and the like for civil lawsuits, eminent domain valuations divorces, feasibility studies, bankruptcies, insurance claims, estates, guardianships, dispute resolution, trusts, impact studies, zoning changes, tax matters and construction or remodeling projects.

Why do we appraise a home in a financed transaction? The lender wants to ensure there is sufficient collateral in the event of default; further if this “paper” is then being sold on the secondary market, it must conform to certain standards including equity ratios.

What are the odds of borrower default? In 2018, about 3% — suggesting that probably 97% of all finance-related real estate appraisal was a waste of time and money. If the borrower is paying the payment, why does it matter what the collateral is worth?

Would the potential loss regarding this 3% default rate be outweighed by the savings gained by not appraising every property? Without question. In other words, does it cost $3.6 billion dollars to foreclose/repossess 180,000 properties? Further, is the potential loss on that 3% amount to 100% of loan value? Of course not.

Another argument appraisers sometimes make is that buyers and sellers are ignorant of market values — and as such, appraisers are needed to ensure those parties are properly informed as to what the subject property is really worth.

I would submit most all buyers and sellers have information at their fingertips regarding the value of virtually any real property, and when there’s a ready, willing and able buyer and seller, that’s a better indicator of value than anyone else’s opinion.

Are some estimations of value found online erroneous? Yes, just like MLS, and any other basis used for valuation. Buyers, sellers, agents and others are advised to view any data with a discerning eye and most do.

Many analysts have predicted the demise of the real estate (real property) appraisal industry for over 25 years. Here’s one such article from 1995: https://www.washingtonpost.com/archive/realestate/1995/03/04/technology-clouds-future-for-real-estate-appraisers/1f3bdefb-1384-4b8f-b976-ca77c3f26887/.

For now it’s fair to say that most are concluding we are in for the most transformational 10-year period in the real estate industry [and possibly the auction industry] (2020-2029) — not merely in the reduction of appraisals, but likely “click-to-buy” and click-to-sell” platforms and 24-hour real time (instant/continuous) loan approval.

We previously wrote about the changing real estate landscape: https://mikebrandlyauctioneer.wordpress.com/2018/03/14/the-future-of-the-mls-for-auctions/. Since this 2018 article, some of these predictions have actually come to exist in the marketplace.

Lastly, how’s the future of real estate appraisal look for commercial, industrial, special use and other non-transaction properties? It would seem bright for now as subject property uniqueness is heightened, higher values increase potential loss from default and/or there’s no buyer and seller.

Mike Brandly, Auctioneer, CAI, CAS, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, RES Auction Services and Goodwill Columbus Car Auction. He serves as Distinguished Faculty at Hondros College, Executive Director of The Ohio Auction School, an Instructor at the National Auctioneers Association’s Designation Academy and America’s Auction Academy. He is faculty at the Certified Auctioneers Institute held at Indiana University and is approved by the The Supreme Court of Ohio for attorney education.