Great interview with Mark Ratterman about Home Appraisals and what agents can do to prepare buyers and sellers if there are issues.
Mark Ratterman, MAI, SRA
Real Estate Appraiser
Indiana Real Estate Appraiser
- Communication can go along to resolving issues without having to file a complaint.
- All appraisers must be licensed or certified.
- Lenders look at the comparables. Age and distance make a difference.
What Real Estate Agents need to know about Home Appraisals Podcast Transcript
Adam Small: Hello and welcome to the Real Estate Marketing Minute, I’m your host Adam Small. And with us today is Miss Kimberly Small.
Kimberly Small: Hi. How are you?
Adam Small: Doing well, thank you very much. And we have in the studio a special guest, Mr. Mark Ratterman. Hi Mark.
Mark Ratterman: Hi.
Adam Small: How are you doing today, sir?
Mark Ratterman: I’m doing just fine.
Adam Small: Great. So Mark is a certified appraiser here in Indiana as well as the Indianapolis representative on the Appraiser’s and Licensing board. Today we’re going to be talking all about appraisals today. Before we get started Mark why don’t you tell us a little bit about yourself and how you got into doing what you’re doing now, and a little bit about that.
Mark Ratterman: Well, it goes back quite a few years. Back in 1978, I decided that real estate seemed interesting. After getting a broker’s license I tried for about a year and a half to sell houses and found that I was not very good at it. So being a little bit more analytical and less personable I guess, I ended up moving into the appraisal business, which is again well suited to my personality. I started out when appraisers were only required to have broker’s licenses at that point. And since I had one I was already licensed to do that. I worked in the residential area for about 15, 20 years, and then started doing commercial work as well. And that’s what I do today as probably half of my business is residential and half of it is commercial.
Mark Ratterman: I spent about 15 years writing text books and teaching classes. And I can say I’ve taught classes in about 30 different states, and about seven or eight different foreign countries. My text books have been translated into three or four different languages. So I’m fairly well versed in appraisal techniques, and I currently sit on the Appraisal Institute’s body of knowledge committee, which is the committee that works on text books and decides what kind of policy’s, and what procedures should be used for the Appraisal Institute, which is similar to what the National Association of Realtors is. I’m on the board of directors of the Indianapolis Board of Realtors. The Board of Realtors has a seat specified for appraisers. So there’s always one appraiser on the board of directors to make sure that any decision made at that level is well suited for, and complements the appraisal industry, but it’s also to prevent appraisal issues from causing harm to the real estate business.
Mark Ratterman: So as the Indianapolis representative of the licensing board, my job there is to administer over issuing new licenses, as well as, unfortunately in some cases, having to sit in judgment of other appraisers who have had complaints filed against them. In our state, like the real estate commission, complaints against appraisers are prosecuted by the Attorney General’s office, and the decision maker is usually an administrative law judge, which is normally one of the Real Estate Appraisal board members. Or in our case, all of them.
Adam Small: No, it’s not a not light thing to have that complaint against you, then.
Mark Ratterman: No, it’s actually an excellent question. Most of the time, if a broker has a complaint filed against them, the public just doesn’t really know, because the public doesn’t usually research their complaints against real estate brokers. But in the appraisal business, and residential, every lender checks the status of every appraiser on every job. And so, consequently, if there’s a complaint filed against them, it can impact their business significantly.
Adam Small: So that’s a big thing you want to be real careful with that.
Mark Ratterman: Yes. And where as anybody can file a complaint, we do have a screening process to make sure that frivolous complaints are not prosecuted against appraisers.
Adam Small: Right. Well that’s good to hear, because sometimes people just get angry about things, right?
Mark Ratterman: Well, yes, and most of our complaints are residential oriented and a large portion of them are home owners that are upset with the appraisals, and-
Adam Small: Because it doesn’t match what they want to sell for.
Mark Ratterman: Well, that or don’t forget refinances.
Adam Small: Right.
Mark Ratterman: Refinances are another issue, because depending on what they interest rate climate is, maybe half of the business is refinances.
Adam Small: Right.
Mark Ratterman: And so, if you can’t get the mortgage you need to pay off the other one, or to get credit card debt coverage, or whatever, it can cause people to be very irritated with their appraisers.
Adam Small: Right. So kind of jumped ahead a little bit there, I was actually going to ask you, what are the minimum requirements to be an appraiser? You said when you first started, all you had to do was be a broker, and that was it. But now apparantly, there’s an entire licensing board and everything.
Mark Ratterman: Well, you may remember back to what was called the savings and loan crisis back in the late 80s, and at that time, the federal government passed a law called the Financial Institutions Reform and Recovery Enforcement Act, FIRREA, we call it.
Adam Small: That’s a mouthful, that’s for sure.
Mark Ratterman: It is. And it’s still enforced today, and the Dodd Frank bill, which was passed in 2010, I think, also modified that law, and that is a law that essentially required appraisers to be licensed or certified.
Adam Small: Mm-hmm (affirmative).
Mark Ratterman: And if they’re doing work for federally related transactions, which is a very well defined term, so essentially, an appraiser that is doing work for banks, savings and loans and credit unions above a certain level must be a licensed or certified appraisers. Fannie Mae, Freddie Mac, FHA and VA then also adopted the same criteria saying that we will only use licensed and certified appraisers. So that’s kind of where we’re at today.
Adam Small: So that really drove it.
Mark Ratterman: Yeah, if you were an appraiser and you wanted to continue to do appraisals for a living, you had to become licensed or certified.
Adam Small: Right, right. So what are some of the common limitations that an appraiser should consider, must consider, when doing an appraisal from [inaudible 00:06:27]?
Mark Ratterman: As far as the lenders themselves have created a whole lot of rules, and of course, FHA and VA, Fannie Mae and Freddie Mac have their guidelines and rules as well. And so, the most difficult part for a lot of appraisers is knowing what rules to follow, and to make sure that they do. And so, when a residential appraiser completes a report, many of them go to an intermediary called an appraisal management company. Appraisal management company then reviews them for compliance with the rules that they have been given by their client. And so, in the case of FHA and VA, they’re looking for does the appraisal comply? Fannie and Freddie, it’s something slightly different. So complying with the rules is a big deal and it causes appraisers to have to modify and edit their appraisals one, two, three times, in many cases, because in some line or rule tells them that they got to do something they didn’t do.
Adam Small: So when you say they have to edit it, do you mean necessarily changing the value of it? Or change the wording, or to be more compliant?
Mark Ratterman: Many times, it’s change the comparables.
Adam Small: Okay.
Mark Ratterman: So they may say, well this particular letter won’t accept any appraisal if the comparables are all older than a year. Or this particular lender wants to see a discussion of this, or-
Adam Small: So it’s not necessarily changing the appraised value, I guess.
Mark Ratterman: No. I would say that a few times it might be, but most of the time it’s not a value question, it’s some … the reviewer appraiser that works for the appraisal management company or the underwriter might have said, “Look, there’s an airport nearby. Did the appraiser comment on air traffic noise?”
Adam Small: Right.
Mark Ratterman: And that’s the kind of thing that … or the subject backs up to a busy street, did they talk about that?
Adam Small: Okay.
Mark Ratterman: So they’re looking to make sure that things that should be considered were considered.
Adam Small: Understand.
Kimberly Small: So let’s talk about some of the common questions that agents have when it comes to appraisals. You talked about comparables. Is an agent able to submit to an appraiser a list of comparables? And if not, how are those comparables determined and how many are generally used in order to do an appraisal?
Mark Ratterman: The answer to that question is pretty easy. Yes, the brokers are allowed, and I personally recommend, that they do prepare a list of comparables that they’d like the appraiser to consider. The appraiser can not say … let me rephrase. The broker can not say they have to use those, they can only say please consider these. The appraiser can then go, “Okay, let’s look at what the broker gave me and I’ll look at what I researched to come up with a list of fair comparables would be.”
Mark Ratterman: One of the funny things that we find to be true, and very few people disagree with me on this, is that if I run the BLC computer to find comparables, and I get a long list of them, two hours later, I’d run the same thing, and I get different answers. And it’s not that the computer’s wrong, it’s somehow, some way, things are just slightly different and you get different answers. And for that reason, that’s why I say it’s a good idea for the brokers to submit some comparables because they may found something that the appraiser didn’t because we do everything on computers now.
Mark Ratterman: And so I also recommend that the appraisers as well as the brokers look at Realist, and the reason for that is … Realist is a thing that’s on our BLC system. And it allows brokers and appraisers to find comparables in some cases that are not actually published as closed sales. And the way this happens is that the broker sells the property, places it as pending, closes the deal, gets their check, closes the file, sticks it in the file folder, and never changes it.
Mark Ratterman: Exactly. Never changes it from pending to closed, it expires, and it’s gone.
Adam Small: right.
Mark Ratterman: It’s not a closed sale, published, and nobody knows it closed, but actually it did, and there’s one place you can find that. And that’s in Realist. Because Realist doesn’t use the BLC data, it uses public record data, so the sales disclosure information now is published on a map. They put it on a map in Realist. So you can actually find comparables that no one else will find.
Adam Small: Right.
Kimberly Small: So you mentioned BLC. Is that specific to Indianapolis? That’s the MLS number, correct?
Mark Ratterman: Yes. Yes.
Kimberly Small: And then, the Realist, is that specific to Indianapolis as well?
Mark Ratterman: It’s actually statewide now. I think it’s … I don’t know how many different boards use it, but I think several boards in Indiana use it, so it’s actually a good tool. Different states have different criteria, different ways of reporting sales. For example, I think Texas is a non-reporting state. So everything in Texas either comes through the MLS or you don’t get it. In the case of Indianapolis, where we are, we are a reporting state, so sale prices are actually reported to public record.
Kimberly Small: Okay. So in a hot market with low inventory, there’s a lot of properties that get multiple bids and sometimes the appraisal’s not going to reflect that. What can an agent do if they have multiple bids and the appraisal’s not coming in that align with that?
Mark Ratterman: Well, sometimes the appraisers are able to find comparables that show how hot this market is and they are a reflection of that. In many cases, if there’s a spike in the market, yesterday’s comparable sales are not going to be representative of today’s sale prices by definition. If there’s a spike and it jumps up ten percent, you know, in a month, it’s very difficult to find comparables that support that. Which is not to say that it doesn’t happen, just that it’s much more difficult to find them. And so, an appraiser can do two things. A broker can do two things. They can prepare their client for, in this super hot market, we may not be able to get the appraisal may not come in this high. Which is going to be a problem. And the second thing that they can do is that make sure that the appraiser has all of the comparables that could possibly be used. And so they would be able to at least get to as close to the price as they can.
Mark Ratterman: And so, but remember one thing. The appraiser’s clients are the lenders. And since the job of the appraiser is to protect the client’s interest, then essentially the client may not want them to stretch, may not want them to be exaggerating it. They won’t. They do not want that. So that’s usually the problem. So that’s why sometimes the appraisals just don’t make the price, because they can’t. There’s just no data to support that.
Kimberly Small: So, and you’ve mentioned, it’s the lender that is choosing the appraisal, does an agent have any input in that?
Mark Ratterman: No. They’re not supposed to have any input on that. And that’s something that the Dodd Frank bill required. And it actually goes back even further than that. That the lenders are supposed to choose their own appraisers. They are not even allowed to bring in appraisers and say, “Here, use this one.” And they’re not supposed to be part of the selection process. And so, lenders can order second appraisers if they’re not happy with the first one, but they don’t want to usually do that, because it costs a lot of money to do that.
Mark Ratterman: But no, the brokers can’t … they’re not allowed to say, “Don’t use X, Y, Z appraiser because I don’t like him.” And so, I’m sure it happens, but they’re not supposed to.
Kimberly Small: Okay. Are there certain property types that are more likely to have an appraisal problem?
Mark Ratterman: In most cases, when they have an appraisal problem, it’s because the data is too good, not too bad. And what I mean by that is when the comparables are really bad, we have to make all kinds of adjustments to compensate for the differences. It’s when you’ve got a four bedroom, two story house in a suburb and you’ve got nine comparables of pretty much the same house, there’s no latitude.
Adam Small: You really can’t argue.
Mark Ratterman: There’s no adjustment, so they’re selling for X dollars, and that’s all there is to it. But if you’ve got a log house on 27 acres in a rural area with a swimming pool in the backyard and a barn-
Adam Small: It’s much more subjective.
Mark Ratterman: It becomes more subjective, and therefore, it becomes less of an appraisal problem, because there’s so much more subjectivity to it. And so, that’s the problem. So the more likely where you have appraisal problems is when the data’s just too good.
Kimberly Small: Okay. So what are some upgrades that generally don’t show added value when it comes to appraisals? I know I’ve heard pools and finished basements sometimes don’t come back as added value on an actual appraisal?
Mark Ratterman: That’s an excellent question. And I will say to you that up until a year ago, maybe a year and a half ago, Fannie Mae and Freddie Mac had a criteria that essentially said that if you make excessively large adjustments that those adjustments must be explained and supported. And lenders read that to mean that they wanted the appraisers not to make the large adjustments. Well, the difficulty with that is, like here in Indiana, is if you’ve got a 2,000 square foot basement that’s 2,000 square foot finished, and it costs, let’s say, $25 to build it and $25 to finish the interior, that’s $100,000 asset. $100,000. So if it’s a $500,000 house, you’re making $100,000 adjustment if the comparable doesn’t have a basement, well lenders would hate that, and they would say, “Don’t do that.” So appraisers would, many cases, under estimate the value of the basements because of the Fannie Mae, Freddie Mac criteria.
Mark Ratterman: A year and a half ago, Fannie Mae and Freddie Mac published a letter saying, “We realize you’re doing this, and stop it, and we’re no longer require you to explain large adjustments like that.” So the years of not adjusting much for basements, hopefully, are over, because quite honestly, if you have a 2,000 square foot ranch house with a 2,000 square foot basement, the realtors all say it’s the same value. You should be considering it the same value. Well, we have some very strict rules that say that if any part of a floored area is below grade, we have to consider it basement. But that doesn’t mean we have to consider it to be low cost space. So what I always tell people, I say is if you say to me that the above grade’s worth $75 dollars finished, why wouldn’t the lower level be $45, $50, $60 dollars a square foot.
Adam Small: Right.
Mark Ratterman: And so, hopefully that’s the issue. As far as pools and things like that, those depend a lot on two things. One, climate. I don’t think a pool is worth as much in Minnesota as it is in Florida. Just because you don’t get to use it as much. And also the markets that it sits in. And the reason I say that is because if you have a $200,000 house and a first time home buyer is the most likely buyer, do they have extra cash and extra borrowing power available to them to buy recreational devices … things like a pool. The answer is probably not. They’re getting 90% loans and they’re getting trouble with their down payments. But if you’ve got a $2.5 million dollar house, how much excess cash do those people have to pay for pools, and the answer is quite a bit. Pools and tennis courts and extra recreational things, that they will pay for. So I always tell appraisers you have to know what your market is and your most likely buyer, and then you can decide whether that pool in the backyard is worth $30,000, $40,000, whatever it costs, or whether it’s worth nothing.
Mark Ratterman: Because in some cases, there’s just nobody to buy it because of the market setting that they’re in.
Adam Small: You know, we talked a little bit about the value coming back and broker involvement and all that. What if the broker’s not happy with the appraisal that comes back? Can they argue that? Can they dispute it, push back, try to get it raised?
Mark Ratterman: The Dodd Frank bill, this is federal law now, specifically talks about not badgering an appraiser, not trying to coerce an appraiser, but then it follows up by saying, this is not saying that an appraiser shouldn’t … there shouldn’t be some kind of an appeal process. And that’s why almost all lenders will say the same thing is the broker’s not allowed to call the appraiser and badger them, or even submit comps to them after the fact, after the appraisal’s done. But they will accept any comparables that the agent feels, or the home owner feels are better comparables. Then they just run them through the lender. Because then the lender becomes kind of the buffer.
Adam Small: So they give it to the lender and then the lender passes back to the appraiser and then appraiser says, yeah or no or whatever.
Mark Ratterman: Exactly. Correct, and that’s why I … a lot of times what happens is they send in comparables that the broker thinks is going to help their case, and a lot of times it doesn’t, it hurts their case. Because once you put them on the grid, and you look at it and you say, yeah, it sold for more, but it’s also got a 2,000 square foot finished basement that we don’t have in the subject.
Adam Small: Right. Or a massively upgraded something or other, right?
Mark Ratterman: Yeah. So sometimes it doesn’t help, sometimes it does. And I always look at that point, if the broker says, “Oh gosh, look, they didn’t see the comparable down the street that just got published,” because sometimes, quite honestly, the comparables sales also are late getting into the books.
Adam Small: Right.
Mark Ratterman: No books anymore. Into the MLS system.
Adam Small: There you go. No more [inaudible] books, it’s all computerized these days, right?
Mark Ratterman: Yeah.
Adam Small: So if in the end for one reason or another, the broker or the home owner is upset or, I say home, but that could be any property owner, right?
Mark Ratterman: Yeah.
Adam Small: If they’re upset and they want to file a complaint, is there a process to do that and what are some of the legitimate complaints versus the frivolous complaints that you mentioned earlier?
Mark Ratterman: The process varies from state to state as far as how the complaints are filed. In some cases, the complaints are public immediately, and anybody can know about them. In my state here in Indiana, the complaints are confidential until they become published. And so once they’ve gone through the screening process, the appraisal complaints can then be processed and are public. But ours are confidential until then. But that may not be true in every state. A matter of fact, a lot of states vary.
Adam Small: Okay. So the process is going to vary from state to state, and generally speaking, where would you go to find out what that process is? You said the Attorney General generally-
Mark Ratterman: Yeah, in our state it’s the Attorney General, it might be like in Kentucky, I think that you file the complaint with the Real Estate Appraisers Board. And in Illinois, I think it is the Office of Financial Services or something like Financial Banking Services or something to that effect.
Adam Small: Right.
Mark Ratterman: Ohio, it’s Department of Commerce or something like that. It varies from state to state, but they all have a process. They’re required to have a process.
Adam Small: Okay. Well that’s good. So what are some of the … let’s start off with the frivolous claims that you’ve heard and then some of those that are legitimate without giving any specific names of course?
Mark Ratterman: Right, of course. And not that I could remember them anyway, but the most common complaint is that the value’s not high enough, and the appraiser’s incompetent because he didn’t get to the price that I sold it for, or I had five offers and how could it not appraise out, and those kinds of things.
Adam Small: So those are kind of frivolous then?
Mark Ratterman: Well, if the appraiser used the best comparables that are possible and they didn’t do anything irregular as far as adjustments, then yeah, they have to be considered frivolous complaints because our process is not such that we can just say anything we want. We’ve got to provide support for inclusion, and so if the appraiser’s done all they can, then yeah, it has to be … we don’t want to process a complaint against an appraiser because they did the best they could, and it just didn’t get to the price and that made somebody mad so they filed a complaint.
Adam Small: Right. Okay. So you’ve been working with agents for a long time now. You know, a lot of times, I hear it myself, just working with agents, they grumble about appraisals and inspections and stuff like that. So how can they prepare themselves and their clients for the process of the appraisal? Where can they find out about the rules and how they can make sure they’re educated and even let their customer know, their seller, know this is what’s going to happen, this is how this works.
Mark Ratterman: Well, as far as the agents learning, they probably should do what they can to take some CE classes that includes focus on appraisals.
Adam Small: Focus on appraisals.
Mark Ratterman: Yeah, and how these work, and they can even take the appraisal classes, but they’re fairly expensive, so they probably … I don’t think they’d want to. But as far as educating their owners in that regard, I think that the best thing they can do is just tell them that the bank, or the lender or the mortgage company, has hired somebody to come in and make sure that the value is in line with other market sales in the area, and that’s an appraisal. By law, an appraiser is a disinterested third party. For example, they can’t be involved in the sale, and-
Adam Small: They can’t have any interest in it at all.
Mark Ratterman: They can not care what-
Adam Small: Nothing financial, or anything like that.
Mark Ratterman: Every appraiser that does residential work that’s using our standard form signs something that says, “I swear, I’m a disinterested, unbiased person and so I can’t have any interest in the deal.”
Adam Small: So you can’t do one for your friend down the road or anything like that?
Mark Ratterman: Well, that’s a very gray line. And the reason I say that is because if you’re in Smallburg, Indiana, you know everybody in town, and so if you don’t do one thing-
Adam Small: It gets a little more difficult there.
Mark Ratterman: Yeah, it’s more difficult to not do appraisals for friends because everybody’s your friend.
Adam Small: Right.
Mark Ratterman: Because you know everybody. But if you’re in a big city, urban area, yeah, you’d want to avoid things that-
Adam Small: Give the appearance of it, right?
Mark Ratterman: Appearance of a conflict, or that you feel that you have a conflict. And so, because, again, the clients are relying on a disinterested third party to do these.
Adam Small: Right. And the client is actually the lender to reinforce that it’s not the seller of the home, right?
Mark Ratterman: Right.
Adam Small: So the client’s the one relying on that. So is there anything that an agent can do when they’re writing an offer, anything that they should avoid, anything that will help them along the way when they’re writing their offers?
Mark Ratterman: Yeah, that’s an excellent question, and I’m glad you brought it up. Avoid things on offers that don’t change the real estate but do increase the price. Now what I mean by that is, real estate is legally … a legal term that defines what you’re selling. And that means permanently affixed to the earth. So you’ve got a building, and you put a light fixture in it, and it becomes real estate. But if you sell a house and you include a pontoon boat, the seller’s saying, “You ought to be paying $5,000 dollars or $10,000, $20,000 whatever a pontoon boat costs, and saying, “Okay. So if you want my pontoon boat, the price isn’t going to be $500,000, it’s going to be $510,000. Well, guess what? The price just went up, but the real estate didn’t change because the pontoon is not real estate.
Adam Small: Right. And that’s going to effect the appraisal, right.
Mark Ratterman: Yeah. And so the other more common thing is to get the seller to pay closing costs for the buyer because when you say to the seller, the buyer wants you to pay $10,000 dollars in closing costs on their behalf, the seller then says, “Well, fine, instead of $500,000, the price is $510,000. So you’ve just raised the price, but you didn’t change the real estate.
Adam Small: Okay. Interesting.
Mark Ratterman: And so you’re asking for appraisal problems, because there’s personal property in the deal, or a financing concessions in the deal. And so, because the appraiser’s probably only appraising the real estate. And the reason I say probably is because there are some property types where personal property is included. Say in hotels, you can’t sell a hotel without furniture.
Adam Small: Right.
Mark Ratterman: So what happens is, there is personal property in hotel appraisals all the time, and lenders can loan on, they just don’t want to loan on much.
Adam Small: Right, right. I understand. So before we wrap up, Kim, do you have any other questions?
Kimberly Small: I don’t think so. This has been very educational.
Adam Small: Yeah. Very good. How about you, Mark? Do you have anything else you’d like to add before we wrap up?
Mark Ratterman: No, I really appreciate this opportunity to talk about this, these things, because of communications between appraisers and brokers is sometimes not very friendly, but we try to make as much as we can, and most of us have to work in the community for a long time.
Adam Small: Right. So it’s generally a good idea to have good relationships, right?
Mark Ratterman: It is, and I always say, just don’t … if you’re not happy with an appraiser, just wait a day before you do anything.
Adam Small: Then you might be.
Mark Ratterman: Well, you may be, or you may say, “Well, I guess it isn’t so bad.” And so, don’t fire off letters and file complaints the day that you’re mad because it’s likely-
Adam Small: Well, I think that’s a golden rule in general. Don’t do anything when you’re mad, right?
Mark Ratterman: I have a three minute delay on my emails when they go out just to prevent me from sending out something I wish I hadn’t.
Adam Small: That’s a man speaking from experience there. Well thank you so much for joining us, Mark. It was very informational and educational, we do appreciate it. This has been the Real Estate Marketing Minute. Thanks so much for listening. If you like what you’re hearing, don’t forget to like and or subscribe. Have a great day.