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Sell Your Home With A Realtor Or An Algorithm? (#GotBitcoin?)

Leading real estate brokerage launching iBuying program. Keller Williams, the sprawling national real estate franchisor, plans to launch an instant offer service later this year, another indication of the future path of residential real estate transactions. Sell Your Home With A Realtor Or An Algorithm? (#GotBitcoin?)

The embrace of a technology-driven approach to buying and selling by the brokerage most keenly associated with real estate agents points more to the increasingly blurred lines between the two approaches than to an affirmation of one over the other.

In May, Keller Williams will launch Keller Offers, a company spokesman confirmed to MarketWatch. The real estate industry has long expected such a step from the company, and founder Gary Keller teased it in a closely-watched public appearance last year, but this is the first time it has been officially reported.

Keller Offers will initially launch in the Dallas/Fort Worth market, and expand to six to eight “major” markets by the end of 2019, it said. The company plans to spend $100 million on instant offers in 2019, and noted, “We see iBuying as an important additional offering for our agents to offer to home sellers.”

That announcement comes just days after the leading pure-play iBuyer, Opendoor, announced a new initiative it calls the Opendoor Agent Partner Program. Taken together, the steps show the big players of an industry in flux experimenting with ways of being all things to all consumers.

“We’re looking to partner with highly-rated, trusted agents who we can pair with home buyers and sellers when it is the customer’s best option,” the company said. “To start, when someone requests an offer on their home from Opendoor but it’s outside of our buy criteria, our brokerage will refer them to one of our Agent Partners. Not only will this give homeowners peace of mind knowing they are in good hands, but it will provide a new way for agents to build their businesses with high-intent, high-converting buyers and sellers.”

That was precisely the path taken by Zillow when it initially launched its iBuying program, Homes. “If you’re thinking about Zillow doing ibuying and you’re not thinking about seller leads, you’re thinking about it the wrong way,” Mike DelPrete, one of the leading independent analysts of the iBuying space, told MarketWatch last November.

But Opendoor’s pivot comes just two months after Zillow announced plans to double down on iBuying for its own sake, not just as a lead generation machine.

DelPrete and many other observers think instant offers are likely to become the new first step for any homeowner considering selling.

“It’s like the new Zestimate,” DelPrete said. “That’s why Zillow had to go into this game. For the past decade Zillow has been waiting for an opportunity to really disrupt real estate. Their traditional model was media. That’s not disruptive.

They were just waiting, waiting, waiting. Then Opendoor and the other iBuyers came and it was like, here we go, this is the best thing we’ve seen. It’s risky and it’s going to take huge investment but given the situation, our core business is slowing down and if 20% of sellers are getting an instant offer, shoot, we have to do this. In typical Zillow fashion they’re all in.”

Zillow may be all in on iBuying, but they’re hardly out of the older business lines.

“With the consumer as our North Star, the investment in Zillow Offers complements our commitment to our Premier Agents,” CEO Rich Barton said on an earnings call last quarter. “We know most sellers would likely not choose to sell their house directly to us via Zillow Offers, yet it’s our mission to get everyone seamlessly into a place they love and can afford.

Our partner premier agents are not only necessary in fulfillment of this mission, they’re fundamental.”

For the upstart iBuyers, the goal is a lot more focused, for now. Agents may play a role, but “the vision is to make it simple and instant to buy and sell your home,” said Dod Frasier, Opendoor’s vice president of capital markets. “When you look at the process today, it’s filled with uncertainty and pain points, and all these different people who have to get coordinated.

We make it a few simple clicks. Our goal is to give you a fair value for your home.”

As a spokeswoman for Offerpad, a smaller competitor to Opendoor, put it, “One of the biggest misconceptions about companies like us is ‘they’ll lowball you.’ But if we can’t provide strong offers, we can’t stay in business.

Consumers are too educated. Why do people choose us? Certainty and convenience.”

One of the other big misconceptions about iBuyers, the companies say, is that they’re the 21st-century version of “We Buy Ugly Houses.” Offerpad’s spokeswoman is adamant that the company isn’t playing in that space, even though one of their biggest distinguishing factors is a co-founder who also helped start up Invitation Homes, the Blackstone venture that snatched up thousands of houses, many distressed, and transitioned them into a massive single-family rental portfolio.

For his part, Frasier sees iBuyers as a sort of housing market stabilizer. He thinks they follow in the footsteps of companies that once disrupted the used-car marketplace, like Carmax and Carvana. Those companies buy consumers’ used cars, sell different products and services, such as warranties, and “were more profitable through the crisis because they were able to be an institutional support and liquidity provider,” Frasier said.

“The reason I think our business model is long-term more scalable is that houses appreciate in value, whereas with autos, they depreciate.”

Opendoor and Offerpad both charge seller fees of about 7%, in contrast to the average of 5.0% charged by real estate agents, according to industry source REAL Trends.

Even if the lines of demarcation between the pure-play iBuyers and companies that once mostly catered to real estate agents are becoming increasingly hazy, one small startup has its own niche – although it, too, hearkens back to an old, unsexy real estate work-around.

Knock is the online disruptor version of a bridge loan for people who are ready to move up, but need to rely on the equity in an existing home for a down payment.

Knock co-founder and CEO Sean Black argues that, whatever the iBuyers say, they have to offer a “lowball” offer to make their model work. In contrast, Knock’s approach gives it a different incentive. Rather than being stuck with a home it buys from a customer, the company advances homeowners cash to purchase a new one, then sells the existing property on their behalf once the homeowners are settled in the new home. Knock charges a 6% seller fee.

“The traditional guys are all exactly the same,” Black said. “They all provide none of what we provide. It’s hard for me to believe that the experience we provide, because we own the entire solution, it’s hard for me to fathom that an individual agent who’s a 1099 contractor could compete with that. This generation is about on-demand convenience.”

One admittedly unscientific way of gauging how seriously any real estate industry player is taking iBuying may be the way he forecasts its reach in the future. “On the whole, Keller Williams believes the addressable market for iBuyers represents less than 10 percent of the overall housing market,” the company said in the release it shared with MarketWatch. Zillow’s ambitious goal, announced in its last earnings release, to buy 5,000 homes per month, would give it total market share of only about 1%.

When asked if instant offers would gain nearly all the market share in the future, Opendoor’s Frasier laughed and said “no. Real estate is a big market. But we are a great option for a subset of customers.”

“In ten years, it’s likely that most people will be buying and selling homes to and from companies, not individuals. Those companies will look a lot like ours and it will be less expensive than it is today,” Knock’s Black said.

Meanwhile, Mike DelPrete, the independent analyst, thinks we’ve already seen the future of the nationwide housing market, and it is Phoenix.

Opendoor has been operating there for years, and Offerpad is headquartered there. Phoenix, DelPrete thinks, is “the best market” for iBuyers. And right now they command just 6% of sales there.

“How many consumers are going to want to see an instant offer alongside a market offer?” DelPrete said. “Really, why wouldn’t you?”

See: Meet the tech-savvy upstarts who think they can finally give Realtors a run for their money

Meanwhile:

Meet The Tech-Savvy Upstarts Who Think They Can Finally Give Realtors A Run For Their Money

Behind the new entrants aiming to undercut the dominant Realtors.

A few years ago, Chad Torstenson decided to sell his house. His experience, he said, was “fairly typical.” A real-estate agent came to his home with a contract, a photo shoot was done, and a sign went up in the front yard.

“With the press of a button, the home was online and buyers began touring the home,” Torstenson said. “However, my listing agent was not giving the tours, the buyer’s agents were. After the home sold, I realized that my agent did very little to earn his share of (the commission),” he said.

Unlike most people who buy or sell a home, feel bruised by the steep transaction costs, and then walk away vowing never to move again, Torstenson decided to do something about it. Torstenson is an emergency room doctor – a profession where it’s fair to say inefficiencies and participants who don’t pull their weight aren’t tolerated.

He began to think about what he calls “the value of the Realtor to the consumer,” and the more he researched, the more convinced he became that professional real estate agents are redundant.

“For-sale-by-owner is not for everybody,” Torstenson told MarketWatch, “but if we were able to solve some of the friction points and educate the community that they can do it, empower them to do it, then we said, this needs to happen in the real estate market.”

“This” became a company called ShowPal, which launched in Torstenson’s home city of Des Moines just in time for the 2018 selling season, funded by friends and family. At a time when internet technology, the “sharing economy,” and penny-pinching households have remade nearly every consumer experience from trading stocks to buying plane tickets, ShowPal and a few other upstarts like it may be the answer to – finally – modernizing the buying and selling of real estate.

ShowPal’s model is a “graduated services” approach. For $999, homeowners get an appraisal and market analysis, a photo shoot, a yard sign, a listing on Zillow and Trulia, and the services of an attorney for closing documentation. For a few hundred more, sellers also get what might be the company’s secret sauce: a security service that allows interested buyers in for private showings or open houses. And the $1999 “ultimate” package gets the listing on the Multiple Listing Service, the industry-controlled database of housing inventory for sale.

Sell Your Home With A Realtor Or An Algorithm? (#GotBitcoin?)

It’s a model whose time has come, said Ben Harris, formerly the chief economist to Vice President Joe Biden and now a lecturer at the Kellogg School of Management, who’s written quite a bit about real estate market inefficiencies. In a 2011 research paper, for example, Harris demonstrated that for anyone selling a home that had been owned for four years or less, the transaction costs were the biggest expense associated with homeownership.

“There’s really no economic justification for not allowing the a la carte menu,” like the ShowPal model, Harris said in an interview. “I think there’s a real potential there just because technology has changed how we search for homes.”

But he and other observers are aware it’s not a lack of economic justification that often holds back the adoption of new business models, it’s entrenched interests. In the case of the housing market, that’s Realtors.

“It’s a market defined by failure, not working the way it should,” Harris said. “This is why they call Realtors a cartel. There is some evidence that they will consciously steer clients away from FSBO or even away from deals with brokers that offer lower commissions.”

The National Association of Realtors, the mighty Washington lobby boasting 1.2 million members across the country, declined to comment for this story. An industry group called the Accredited Seller Agency Council did not respond to requests for comment.

Daren Blomquist, who follows real estate business models as lead spokesman for Attom Data Solutions, takes a long view of ideas like Torstenson’s. “FSBO has been in and out of vogue at different cycles,” he said. “It looks like this is taking another run at seeing if FSBO can be more efficient and gain more traction than in the past.”

Torstenson argues that the ShowPal model is “resilient no matter what market you’re in:” in a buyer’s market, sellers need to watch every penny, whereas if homes are flying off the market, there’s no reason to pay a commission. But Blomquist thinks agents “really do show their value” for whichever side of the transaction is under pressure, meaning that while sellers might be able to go it alone now, that could soon change.

“I think it’s great that there’s a lot of brain power and innovation directed at the real estate market right now and think this could be a great solution for many sellers. But there are reasons that FSBO has not gained as much traction as some might have expected in the past,” he said.

Among them: “as a seller, you have to be driving the process. That’s difficult. Folks that are selling their homes have busy lives and jobs and sometimes more than anything you rely on a Realtor to just keep the process moving forward.”

That didn’t stop Katie Fischer and her husband Andrew from trying to go the FSBO route this summer. They weren’t quite ready to move – the couple is having a home custom-built in a school district that seems like a better fit for their two young pre-schoolers – but hated to let the red-hot Des Moines market pass them by.

The couple spent several weeks trying to get their home listed on Zillow, a process Fischer called “a bit of a mess.” ShowPal saw the Zillow ad and reached out to Fischer.

Fischer has high praise for the company’s support and communication, and she loved ShowPatrol, the company’s on-site showing service, noting that trying to do an open house yourself is “super awkward.”

The Fischer home was in contract within a month, and would have been sooner, except that the couple purposely priced the house higher than appraisals had suggested, both because they thought they might get lucky in a strong market, and because they were in no rush to move.

One of the most surprising outcomes of Fischer’s experience may be that the offer she accepted came from a buyer represented by a Realtor – meaning she and Andrew paid that broker’s 3% fee. “There was just a little bit of a comfort level” with knowing that the buyer had been vetted by a professional, Fischer told MarketWatch, even though ShowPal will also help with that part of the process. Even after paying that commission, Fischer estimates the family saved nearly $9,000 in the transaction, and hundreds more at closing.

Another newish player, REX, offers what it calls a “full service, low fee” approach. The amount any seller pays is always 2%, and if a buyer wants to work with his or her own agent, that professional must accept those terms. As an alternative to that uncomfortable conversation, the Los Angeles-based REX will provide one of its own on-staff, salaried brokers to any buyer. “We never ask anyone to go without representation,” REX spokesman Eric Rothman said. REX has been around since 2015 and is currently raising a Series C round of funding.

REX also differs from ShowPal in that it “Uber-izes,” in Rothman’s words, the showing process.

Showing requests go out to a pool of real estate agents who’ve agreed to work on a fee-for-service basis, and the first agent to respond gets to do the visit and collect the fee. REX also avoids the MLS altogether, relying not just on listing aggregators like Zillow  and Trulia , but on direct Google searches as well.

(News Corp, owner of MarketWatch, operates realtor.com under license from the National Association of Realtors.

For many industry participants, the Multiple Listing Services – there are over 800, all locally owned and operated – may be as ripe for disruption as the role of the agent. “We’re getting closer to a tipping point where the MLS is losing relevance,” Daren Blomquist said.

ShowPal’s Torstenson is more blunt. “While it has value to the Realtor, I’m not sure it has value to the consumer,” he said. And he believes consumers are driving the activity on the buyer’s side of the transaction by browsing sites like Zillow.

Victor Lund is founding partner of WAV Group Consulting and an industry veteran. The MLS has big advantages over consumer-focused media like Zillow, Lund contends. Zillow and sites like it aggregate listings from the MLS, so in hot markets would-be buyers get an advantage by watching the MLS for new listings. In fact, many local organizations are now pre-marketing properties that are “coming soon,” Lund said, meaning only Realtors and their clients get a sneak peek at tomorrow’s listings.

Right now, only Realtors have access to the MLS, and many, but not all, MLSs are owned by Realtor associations. What’s more, many states have what are called “minimum service requirements,” which sound consumer-friendly, but tend to preserve the monopoly of the incumbent system, in the eyes of observers like Harris. As he puts it, “It’s an example of states allowing cartels to exist. People should definitely have the right to purchase a la carte services if they want it.”

Lund acknowledges that the built-in advantages to that closed system only persist as long as the current state of play does. If disruptors like ShowPal and REX – and other innovations, like companies that buy homes from consumers – gain a foothold, the MLS monopoly may be shaken.

REX’s goal is for a 20% market share of homes $300,000 and up in the top 70 markets in the U.S., according to Rothman. With only five closings under his belt since starting up in May, Torstenson still aims high: he believes ShowPal can garner 15% of the business in any metro market within 24 months of launching there. The company is about to launch a Series A round of funding.

But Lund thinks that if real estate were ready for disruption, it would have been more disrupted by now. “The only answer I have is that consumers trust their Realtor and everybody has a friend, a brother, a sister who’s a Realtor,” Lund said. “They don’t want the headache. They want someone to take care of it for them. 70-80% of a Realtor’s business comes from a repeat or a referral customer.”

Related Story: Realtors will soon be free of 10-year-old Justice Department decree — so what happens to housing now?

Lund predicts a “single-digit percentage of consumers” will flock to the graduated-services model of companies like ShowPal and REX, “but the majority are going to continue to do it the way they do it because it works. There’s a lot that local real estate agents do that don’t show up in economic calculations.”

Torstenson has little patience for those arguments. “In many cases, gosh, it would just be cheaper to also hire a therapist,” he said when asked about the hand-holding many real-estate agents do for skittish clients.

He sees real estate as no different than other behemoth markets that are now being dragged into the 21st century, like car-sharing and short-term home rentals have been upended by Uber and AirBNB. And for now, there are still opportunities for real-estate agents to offer their services on a contract basis for ShowPal transactions.

“We don’t think the value proposition of a Realtor is zero. We think it’s approaching zero, but it’s not zero yet,” Torstenson added.

Updated: 11-12-2019

Zillow, Opendoor Pay Close To Market Value For Homes, Study Says

Analysis finds iBuyers operating on thin margins.

Companies using technology to make rapid cash offers to home sellers are typically paying their customers close to market value, a new study found.

The study’s conclusion is likely to be reassuring for sellers who are considering using so-called iBuyers instead of traditional real-estate agents. But it raises questions about the long-term sustainability of the iBuying business.

Companies like Opendoor and Zillow Group Inc. give consumers cash for their homes, saving them the hassle of tidying up before open houses and the risk of being unable to find a seller. In turn, consumers pay a fee of about 6% or more—higher than they typically would pay a traditional real-estate agent.

Many sellers have wondered if the iBuyers are making a lowball offer for their homes in exchange for faster execution.

The new study from Mike DelPrete, a scholar in residence on real-estate technology at the University of Colorado at Boulder, found Opendoor and Zillow typically purchase homes for just over 1%, or around $3,800, less than the value of the home as determined by First American Financial Corp. , a real estate title insurance company.

“This has always been a fundamental question. Are they ripping people off or not?” Mr. DelPrete said. “You can say pretty conclusively iBuyers are making fair offers on the homes they buy.”

Yet the analysis casts doubt about whether iBuying can thrive longer term with such thin margins, especially if home prices flatten or begin falling in more markets around the country.

“How are they ever going to make money?” Mr. DelPrete asked.

Zillow said it doesn’t make a profit on these homes by the time it factors in all the costs. President Jeremy Wacksman said Zillow isn’t trying to make money by giving consumers a low price on their homes, but through the 6%-9% fee it charges. A traditional real-estate agent typically charges 5%-6%.

“iBuying looks and sounds a lot like house flipping but it’s not,” Mr. Wacksman said. “If we’re doing our job down the road we’re perfectly predicting” what your home is worth.

An Opendoor spokeswoman said the company doesn’t comment on profitability.

Unlike a hotel room or a taxi ride, selling a home is such an infrequent transaction that it is hard for consumers to compare whether startups are giving them a better or worse deal than traditional firms.

Susan and Ken Patrick faced exactly this conundrum when they decided to sell their home of 20 years in suburban Denver. The couple, who are in their late 50s, wanted to move to Washington state to be near their sons.

The couple initially listed their home with a traditional agent for about $550,000. Within a few weeks they became frustrated with having to show their home, when a buyer’s agent left the doors and windows open on a hot summer day.

They sold to Zillow for $515,000, quite a bit less than what the agent claimed they could get. The home is now listed for $10,000 more than what Zillow paid.

“You know there’s something to be said for the convenience of all this. That amount of money is worth it to me,” Mr. Patrick said.

To determine whether sellers are paying dearly for this convenience, Mr. DelPrete analyzed more than 20,000 transactions done by Opendoor and Zillow in 2018 and 2019, the vast majority of the two firms’ transactions.

Mr. Del Prete used two separate methods to try to get at the price differential. First he looked at what the iBuyer purchased the home for compared with an automated assessment of its value determined by First American. He found a difference of about $3,800 on a $270,000 home, roughly the median price of a home in the U.S.

Mr. DelPrete also used public records data to calculate the difference between how much Zillow and Opendoor paid for a home and then resold it for. There he found a larger median difference of 3.3%, or $8,900, on a typical home. This method shows a greater disparity with the iBuyer purchase price, Mr. DelPrete said, because it reflects both normal appreciation during the several months for which they hold the home, and the premium they can command for selling a newly painted, freshly repaired home.

There were also outliers, who received either 20% more or less than what their home is worth. Mr. DelPrete said he thinks that is because algorithms aren’t good at taking into account factors such as street noise or water views.

Updated: 1-7-2021

Federal Regulators Want To Overhaul Home Appraisals — Here’s How That Could Hurt Both Buyers And Sellers

A federal financial regulator has sought input on how to modify the appraisal process for loans backed by Fannie Mae and Freddie Mac.

A federal watchdog agency is investigating ways to modernize the process used to determine how much a home is worth.

The Federal Housing Finance Agency, which oversees mortgage giants Fannie Mae FNMA, -8.64% and Freddie Mac, issued a “request for input” on the policies and practices surrounding home appraisals. The regulator is seeking input on a range of proposals, including relaxing key standards that Fannie and Freddie require lenders to abide by for the loans they back.

“Modernizing the appraisal process has the potential to create a more streamlined and accurate collateral valuation process,” FHFA Director Mark Calabria said in announcing the request for information. “But if modernization is not properly adopted, it could have negative unintended consequences.”

Indeed, while the proposed changes could lead to time- and cost-savings for consumers, experts told MarketWatch that taking the wrong steps could disadvantage consumers, particularly people of color.

Modernizing The Appraisal Process Could Have Unintended Consequences

Critics of proposals to overhaul the appraisal process point to a number of ways in which the changes the FHFA is considering could negatively impact households across the country.

In particular, experts pointed out a number of concerns tied to appraisal waivers, one of the proposals the FHFA is exploring.

“The problem with a waiver is you don’t know what you don’t know,” said Joan Trice, CEO of the Collateral Risk Network, an organizer of appraisers and risk managers. “You didn’t send an appraiser into that house. How do you know they didn’t gut it and run out of money? You have no idea.”

In this way, appraisers act as a line of defense for home buyers and owners, preventing them from assuming more debt than their home is worth.

And there are more ways in which waiving appraisals can cause issues for the housing market. Once an appraisal is completed, the data collected on that property is then fed into computer models that provide the comp values appraisers compare to produce their next appraisal. Should the number of waivers granted continue to increase, that could cause problems down the road.

“If those appraisals are replaced with waivers it would be logical to assume there will be less data to drive” the models in the future, said Tom O’Grady, CEO of Pro Teck Valuation Intelligence, a property data and valuation firm. And if a property goes uninspected, then changes to the state of the property could go unnoticed, that “could have a dramatic effect on the overall market value of the home,” O’Grady added.

In some cases, the negative consequences of the proposed changes could depend on how they are enacted. With waivers, Trice expressed concerns that more privileged homeowners could have easier access.

“It’s mostly white, wealthy people who get a waiver, and minority and the affordable housing sector don’t get waivers,” she said.

This could lead to disparate impact, she argued, and could drive costs higher for the latter group if appraisers need to make up for lost business.

Similarly, Trice cautioned that regulators would need to establish clear guidelines for people doing on-the-ground work as part of hybrid appraisals, another process regulators are investigating.

“Now Fannie and Freddie have decided that they don’t care if Uber drivers are entering your home and inspecting it,” Trice cautioned. “How do they know that person is not a convicted felon if there’s absolutely no due diligence on this group?”

Instead, Trice suggested limiting who could participate in a hybrid appraisal. In particular, she sees this as a strong opportunity for appraiser trainees. “Here’s a great opportunity for training to cut their teeth,” she said.

Appraisals Can Be A Road Bump In The Home-Buying Process

Appraisals have major stakes for home buyers and sellers alike. During a traditional appraisal, a licensed or certified appraiser visits a property that will be backed by a mortgage, collects data on the state of the home and then compares that data to other nearby properties. Lenders then use the appraised value to determine how much to lend to the prospective borrower.

If appraisals come in lower than expected, it can jeopardize a sale if the buyer in question cannot make up the difference between the mortgage offered and the proposed sale price.

But too high of an appraisal represents a risk, too: If home prices fall, it creates an even larger burden for the homeowner and mortgage lender alike, especially if the homeowner falls behind on their payments.

While appraisals are critical to the lending process, they can also slow things down. Some argue that the nation has a shortage of qualified appraisers. Between 2014 and 2018, the number of appraisers nationwide dropped by more than 10%, according to data from the Appraisal Institute, an international trade group for property appraisers.

When mortgage demand increases — as it did this past year — that can cause serious capacity constraints, with appraisals slowing down the process to close a loan. Finding an appraiser can also be more challenging depending on where someone lives.

Between 2014 and 2018, the number of appraisers nationwide dropped by more than 10%.

“It’s a question of supply and demand. Turn times go up and down with the number of refinances and purchase mortgages taking place at any given time,” O’Grady said.

“The ‘shortage’ appears to be seasonal, with more than enough appraisers to service the communities during other time periods,” O’Grady added. “Rural properties have always been a challenge due to the nature of the location, as well as possible complexity of the appraisal assignment.”

Some Argue That Improper Appraisals Contribute To The Racial Wealth Gap

Another criticism that has been levied against traditional appraisal practices is that homes owned by people of color often receive lower appraisals than homes owned by their white neighbors, even when factors such as property size and location are similar.

Last year, President-elect Joe Biden proposed creating more stringent standards for housing appraisals to ensure that professionals in the field “do not hold implicit bias” that influence their work.

At the time, the appraisal industry argued these standards were already in place. “National appraisal standards and ethics requirements already require appraisers to perform their work with impartiality, objectivity and independence, without bias,” said Jefferson Sherman, president of the Appraisal Institute.

However, a report from researchers at the left-leaning Brookings Institution found that homes in similar neighborhoods with similar amenities were assessed as being worth 23% less in majority-Black neighborhoods, compared to areas with few Black residents. Altogether, this amounts to over $156 billion in losses for black homeowners, researchers found.

How To Overhaul The Appraisal Process

The FHFA has suggested it is exploring a number of fixes, including ones proposed by Fannie and Freddie themselves. These include embracing automation technology that can produce faster appraisals using existing data and allowing so-called “hybrid appraisals.”

Also known as bifurcated appraisal, a hybrid appraisal is one in which a trained individual conducts the home visit and gathers the necessary data. That information is then relayed to an appraiser working from an office, who does the computations needed to ascertain the property’s value. Many lenders already accept hybrid appraisals for some loans, and Fannie and Freddie have been exploring the process since 2018.

Homes in Black neighborhoods were valued at 23% less than homes in white neighborhoods, one study found.

Beyond the attempts to modernize, the FHFA has also said it wants input on how much the appraisal contributes to racial discrepancies in home values.

The FHFA is also exploring the value of appraisal waivers. Amid the COVID-19 pandemic, federal regulators and housing authorities, along with Fannie Mae and Freddie Mac, have relaxed requirements for appraisals on certain loans.

While most new loans backed by Fannie and Freddie during the COVID emergency featured traditional appraisals “these flexibilities provide a way to protect the health and safety of industry participants, comply with local restrictions throughout the country, and continue to provide liquidity and stability to the market.” One of the considerations the FHFA is exploring is whether to allow more permanent waivers for appraisals.

Changes to the appraisal process could save Americans time and money

Many of the changes the FHFA is considering are already in practice — though it has yet to gain the official stamp of approval beyond a pilot program for loans backed by Fannie and Freddie, which currently represent over half the mortgage market.

For instance, Clear Capital, a California-based appraisal company, has completed more than 120,000 hybrid or “modern” appraisals over the past couple years, Kenon Chen, the company’s executive vice president of corporate strategy, said.

The company has trained more than 700 people around the country on how to do the on-the-ground aspects of the appraisal process, such as measuring for square footage and sketching a home’s layout, and then transmit that information to an office-based appraiser who does the necessary computations to come up with a report.

Many of the people doing the in-person work for Clear Capital are real-estate agents and brokers, Chen said.

“As the technology gets better we think that it would be easier to pull in other potential workforces as well,” Chen said. “COVID has given us the opportunity to see what it would like to even gather data from homeowners.”

Because of the time the hybrid process saves, Chen said that the hybrid approach has resulted in a 26% savings on average for mortgage borrowers. Appraisals can cost anywhere from $315 to more than $1,000 depending on the complexity of the project, according to HomeAdvisor.

Simplifying and speeding up the appraisal process can have other savings-related benefits for consumers. During the pandemic, appraisals were waived for refinance loans, in particular. Research has indicated that by waiving the requirement for appraisals, this allowed more refinances to be processed in 2020 by lenders.

For many homeowners, the increased use of appraisal waivers has provided a tangible financial benefit and helped them weather the economic stress of the COVID-19 pandemic.
— Urban Institute vice president of housing finance policy Laurie Goodman and senior research associate Michael Neal

Researchers at the Urban Institute looked at how often mortgage loans were prepaid in 2020 and compared it to past years — prepayments are a proxy for refinance activity. Their research found that falling interest rates alone didn’t explain the surge in refinance activity, suggesting that appraisal waivers played a role.

“For many homeowners, the increased use of appraisal waivers has provided a tangible financial benefit and helped them weather the economic stress of the COVID-19 pandemic,” the researchers wrote.


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