Owner of Inspection WerXs and Appraisal WerX, Lanny Freng joins the show to talk about the property appraisal industry.
Lanny talks about the Home Valuation Code of Conduct (HVCC) and the Appraisal Management Company (AMC) and how it changed the industry and the appraiser’s relationship with mortgage companies since 2008. While appraisers continue to carry through, Lanny explains that appraisers need to transact with AMCs and can no longer directly connect with banks. He also talks about the guidelines being used in the property comparable and appraisal reports format.
They also discuss the technology and modern tools that appraisers use and an appraisal database. Lanny highlights that property appraisals are based on historical data and that the lender is their client and that they are the intended user of the appraisal. He explains how they make time adjustments with their appraisals in accordance with the market. He also talks about Reconsideration of Value (ROV).
Reuben asks how home inspections affect the property appraisal and vice versa. Lanny shares about the changes in the appraisal industry. He talks about the differences between Fannie Mae’s products such as Hybrid appraisal and Desktop appraisal. Lanny mentions that there are price ceilings, especially with townhouses. He explains how costs do not equate to value.
Contact Lanny Freng by calling 612-386-2660 or visiting appraisalwerx.com.
TRANSCRIPTION
The following is a transcription from an audio recording. Although the transcription is largely accurate, in some cases it may be slightly incomplete or contain minor inaccuracies due to inaudible passages or transcription errors.
Bill Oelrich: Welcome, everyone. You’re listening to Structure Talk, a Structure Tech presentation. My name is Bill Oelrich, alongside Tessa Murry and Reuben Saltzman, as always your three-legged stool coming to you from the Northland, talking all things houses, home inspections, and anything else that’s rattling around in our head. On today’s episode, we are excited to be having a conversation with Lanny Freng. Lanny, you can fix any pronunciations if I butchered that, but Lanny owns a company called Inspection WerX. So Lanny is a home inspector, but he also owns a company called Appraisal WerX. So he does home appraisals on the side. And again, Lanny, you can correct any of this, but we wanted to bring Lanny in and ask him some questions about appraisals, what that business looks like, the home inspections where there’s maybe some overlap, and we have a thousand appraisal questions for you Lanny. So I hope you’re ready, but why don’t we start off by giving you the floor. You can properly introduce yourself, tell everybody how to get ahold of you, and then we’ll launch into that long list of questions.
Lanny Freng: Yeah, no problem. Thanks for having me in here today. My name’s Lanny Freng. I own Appraisal WerX. I’ve been in the business, the appraisal business for just 20 years now. So I’ve been through a lot of ups and downs with that, market changes and stuff. Got into the business, I used to be a loan officer, imagine that and that was really boring. I think we had to go into work from 10:00 AM to 7:00 PM. You gotta be there when people are at home and stuff. So you’re calling people at that time. So winter time, you didn’t see a whole lot of sunlight. So I just got sick of it, started talking to the appraisers when I was in that position and thought that might be a little better fit. So I ended up going off on my own on the weekends and going to school while I was working for the mortgage company. They didn’t know it, obviously, but got licensed, got hooked up with a guy, he was a mentor. It’s always been tough to get a mentor and I luckily had someone that knew somebody that took me underneath their wing and got into it that way. So ended up getting certified in 2005, a couple different license levels. You’ve got your trainee and then you’ve got what really nobody uses these days. The big one is the certified and then there’s one of that called general certified, which you’d step into commercial properties and whatnot. That’s kind of how I got into it.
BO: Awesome. And when did you begin doing home inspections?
LF: Inspections were 2004.
Tessa Murry: So were you learning the home inspection process and getting certified the same time you were doing the appraisal certification stuff?
LF: Yeah, yeah. So I was doing full-time appraisals in 2002 when I first started up. It took a couple months to ramped up, but it was busy back then. So yeah, I started doing home inspections on the side, I was looking for something that was a little bit less hills and valley, not to say that there isn’t in inspections, but there’s always people buying and selling houses. So it’s a little bit less versus having to rely on that refinancing aspect too, in the appraisal world.
TM: Yeah.
BO: What was life like for you during the crash, when the bubble burst, what was it, 2008?
LF: Yeah, 2008-ish. It was tough, 2008, when everything fell apart. Congress back then, basically started this HVCC home valuation code of conduct. That basically took all of my clients that I have worked with for the last six years and cut us off cold. We couldn’t talk to the lenders anymore or anybody in production. So that’s when we had the birth of the Appraisal Management Company, the AMC come into it, where basically we’re going to a third party getting on a panel and they are the go-between, between the mortgage company and the appraiser. So nobody keep us separated. ‘Cause there was a lot of in cahoots, we could say. You know, back in the day where appraisers were in the back pocket of loan officers to get business and stuff. So it was tough to kind of keep yourself on an island ’cause they always were waving the carrot in front of your face.
BO: It was a crazy time for everybody involved in real estate. And I know for structure tech, Reuben, you could speak to this because this is long before I was a part of this team. You guys didn’t really see a slow down? You know, houses were still selling, they were just selling differently but for appraisers there was a massive adjustment.
LF: So it was a big change in my world. Basically, we’ve got our clients stripped from us due to the HVCC coming in and the AMC model coming in.
Reuben Saltzman: Wait, what’s the HVCC model?
LF: The HVCC is the home valuation code of conduct. It was enacted by Congress, basically isolating appraisers from production staff or loan production staff from the mortgage companies. So basically anybody that was getting paid for off of that loan, couldn’t talk to us. That was their bail safe, I guess.
RS: Okay, alright. Got it. And what was the AMC, I think you said?
LF: Yep. AMC is an appraisal management company. It’s a third party company. Mortgage companies would have to order the appraisal through the appraisal management company who then gets in contact with us to perform the appraisal. Everything’s a go-between, between that third party.
RS: So it’s really a way of just kind of isolating you from any other interested parties in the home to make sure you can’t see each other or talk to each other.
LF: Yeah. As an appraiser, we’re supposed to be impartial, we’re not supposed to be influenced by loan officers or realtors or anything like that. Obviously adding that third person in there slowed everything down, again, because nobody can talk to us directly, so we have to run everything through those companies.
RS: I’m sure there’s a ton of stories out there just like this. But I remember I was doing a refi back 2005, 2006, something like that for a big remodel we were gonna do, and I remember the appraiser coming out and he’s like, “So how much are you trying to get on this refi?” And I was like, “Well, I’m hoping it comes in at, I don’t remember what it was like $225,000 or $250,000 or whatever. Wouldn’t, you know, it comes in like exactly what I told him I was hoping to come in at. And it’s like, “That wasn’t a coincidence. No way.”
LF: No. There was a lot of people running rough shot back in the day. Fortunately, a lot of that have been cleaned up because of the HVCC, but it’s got a lot of drawbacks with it too.
BO: Biggest drawback is you were essentially deemed a commodity, right? You became just a cog in the wheel, and how do you conduct business when you are just a cog and you can’t go out and build relationships with people and prove, “My work is superior than this person.”
LF: Yeah, that’s a big thing. It’s still a big thing today, the appraisal management company, it’s a business, it’s there to make money, they don’t necessarily care about quality so much, they want an appraisal to be turned around fast and they want it done cheap, because the appraisal management company is keeping a cut of that fee. So, say you refinance, you get charged $600 for an appraisal, that AMC may take 200 of that and give the rest to the appraiser, and in my eyes, is not a good way to do business, ’cause appraisers are getting fee splits that are lower than normal, not every appraisal management company is bad, but there are a lot of them out there.
BO: And are there management companies for every metropolitan region?
LF: There’s regional appraisal management companies, there’s national ones, there’s nothing to stop the lender from starting their own internal appraisal management department, where they have one person that just assigns appraisals all day and they’re not involved with the loans or anything like that, that is legal for them to do it. They just didn’t wanna do it at the time, ’cause they were just finding out about all this too at the same time, and they had to keep their business model rolling.
BO: So business changed for the good, yet to be determined, it’s just different now, and you have a new way of doing things. How, in this new world, do the banks, they just go right to these appraisal management companies and they say, “We’ve gotta refi, I need you to go out,” and then the appraisal management company calls you, and How is that work doled out?
LF: Yeah, so how it is, basically appraisers get on their “panel,” you get signed up through them, get all your information over to them and whatnot, they get thrown on a panel and some rotate it, the good ones rotate it, the ones that are trying to get the highest fee split will shop it, so I just got an appraisal order the other day, or not an order, a bid request, with 69 or 60 some other appraisers on it, and whoever gets to us first in a response with the lowest fee is probably the one who’s gonna get it.
TM: Is this commercial or residential?
LF: No, residential, residential.
TM: This is how it works for residential?
LF: Not all of it, but a good portion of it. Yeah.
BO: That’s crazy.
RS: It’s like a race to the bottom.
LF: It is a race to the bottom.
BO: The fatal race to the bottom.
RS: Could you guys imagine if this happened in the home inspection business?
TM: No.
RS: Is this gonna happen in the home inspection business, Lanny?
LF: I hope not. [chuckle]
TM: I had no idea, I had no idea it worked like that, or there was so much competition amongst appraisers.
LF: Yeah, and I’ve kind of took in the stance for a long time now that I’m not gonna do the cheap stuff, it’s just not worth it. We’re doing the same amount of work on our end no matter what, we have to conform to all these different regulations, we use PAP, all these laws and whatnot, do I wanna do it for $300? No. But there are companies out there that will do it all day long and they’ll run through these things.
TM: And do you guys all have the same kind of report that you fill out? Are you following the same template?
LF: Yeah, basically Fannie Mae puts out the bulk of reports, they’ve gotten certain templated reports that they require lenders to use, so everything’s standardized. If I do something for a private person, it’s gonna be on a general purpose form, which, they can’t use for any financing, ’cause it’s gotta be done on the Fannies, so basically, every bank uses that. ‘Cause even if they say it’s gonna be a portfolio alone or kept in-house, there is a chance that it could be sold, so they want the option to be able to sell it to Fannie if they have to bundle it with something to get rid of it.
TM: Okay, so you guys are all providing the same product basically.
LF: Basically, yeah.
TM: End product. Okay.
LF: Mm-hmm. Yeah.
RS: Do you have any kind of liability?
LF: Oh yeah, yeah. Every report I sign, I certify it. I don’t know, there’s 20 something certifications at the end of that, so there’s a ton of liability on it.
BO: What would the liability be?
LF: Yeah, so say you’re a shady appraiser, you use some comps that you probably shouldn’t have used, maybe you jumped over a freeway, you went from Richfield over to Edina, or something like that, and used comps like that, you certified that you used the most representative comps in that appraisal, and then you get audited and they find out, “No, you didn’t.” The state’s gonna come after you or the appraisal board will come after you, fine you, and probably could end up in a license revocation, you just never know until you get to that point.
BO: Okay.
TM: Appraisers get caught in that situation frequently?
LF: I don’t know if it gets real frequent. No, no, 99% of the appraisers are probably trying to do their best job out there, there’s always a few though. I’ve seen appraisal reports where I look at it, and “why would you go to that neighborhood for a comp? It’s nothing like your subject’s neighborhood. Could be selling for 80 grand less in the subject’s neighborhood, and you jumped over to this neighborhood, crossed a freeway and went grabbed a new construction comp, and your subject’s 30-years-old,” ’cause some of the stuff does not make sense.
RS: Sure.
TM: I would think real estate agents would catch that too, though, if they’re working with a client and they get an appraisal back and they’re familiar with the comps and the area too.
LF: Yeah, they should be. If they’re experienced they should be.
TM: Yeah.
LF: There’s every real estate agent experience. There’s a lot of them that just do onesies and twosies here and there, and they have no idea what’s going on with appraisals.
TM: That’s true. That’s true.
BO: Okay, that leads me to a process question, I don’t think it’s uncommon for us to see an agent from maybe a southeast part of our metro do a deal in the northwest part of metro. And like real estate is a local thing, I think the people who know the neighborhoods the best can really help people understand whether they’re getting the best, but that’s here nor there, that’s just Bill’s opinion. Or what are the guidelines you’re using for comps? And is every appraisal report exactly the same, or do you have different types of appraisals that people can order? I’ll let you tackle those two before we dump more questions.
LF: Yeah. So, the comp selection process… Appraisals are kind of based on the idea of substitution. What point are you gonna walk away from one property and go to another property? It’s probably gonna be a similar property, so we probably shouldn’t be using those new construction comps on a 40-year-old house. Those two buyers are two completely different buyers, so ideally, you wanna be location-wise in the same area. It might not have to be the exact same neighborhood, but somewhat similar appeal, somewhat similar access to area amenities, shopping, schools, that kind of stuff. So that all goes into the process of selecting your comps, a big driver square footage.
RS: Lanny, Can you pause there? You’ve said comps many times. Just for the layman, anybody new to real estate, can you explain what a comp is?
LF: A comp is a comparable, basically, what compares to the subject? Not every sale is a comparable though. That’s basically what it breaks down to.
RS: So a comp, it’s gotta be similar. You can’t go to different neighborhoods, can’t be a different year, can’t be a severely different size.
LF: I don’t wanna say it can’t be, because we always run into ad hoc properties where you’re forced to do it. You’re out in a rural area, you might have to use two stories if you don’t have any ranches, you just never know.
RS: Gotcha, gotcha.
LF: That’s our general rule of thumb.
RS: And other rules of thumb, I heard you say a few times that you’re not supposed to cross a freeway.
[overlapping conversation]
LF: We call it Major Neighborhood Boundaries, we try to not cross those, which might be a freeway. You might have inferior housing on one side, superior housing on the other and demand-wise, and you don’t wanna jump back and forth if you don’t have to.
RS: Okay, alright, got it. And I used to live in, it was technically North Minneapolis, it was over in Bryn Mawr, and I remember there was one road and it was so funny. It was like, you cross to the other side of the road and you are in a completely different neighborhood. [chuckle] It’s like you’ve got houses that are very well-maintained and cleaned up, and then you go across the street and there’s garbage all over the street, and there’s lawns that aren’t mowed. It is crazy how much a neighborhood can change just across the roads.
LF: That would be one of those instances that could get you in trouble if you use one of those comps from the other side of the road, if you didn’t disclose it or make adjustments for it. Yeah.
BO: Lanny, what kind of technology are you using in the appraisals now that would help standardize everything?
LF: Yeah, so as far as personal technology, I use laser measures where I’m out in the field, we don’t use tape measures anymore. Our appraisal software that we use, it’s got a little sister that goes on my phone that syncs up with it, so I can do all my sketching in the field right on my phone, all my photos drop directly into the reports, I don’t save them on my phone at all, they go into the software. And as far as adjustments and stuff like that, there are computer programs that help you with that kind of stuff. You don’t make adjustments on an appraisal without some sort of support. You gotta be able to support it. That’s one of the certification, not certification, but one of the requirements. So there’s not a ton of technology involved in that, but it’s getting better with people that are putting effort into building programs and such for appraisers to use, ’cause it’s a lot. It would be very difficult to run the 12 different or whatever there are different ways of coming up with adjustments on each file, you’d be there doing math all day long, but these guys are smart, they put together programs and we use them, and it basically pulls all that on and off the MLS database and we can extract adjustments that way.
BO: I’m a big fan of learning about the Blockchain, and it feels like appraisals and real estate are a place in the world where Blockchain would be very interesting. Is there a master database of every appraisal that’s taken place, and so we can always just kind of begin to use established data?
LF: So they have, Fannie Mae has now gone to the UAD, Uniform Appraisal Dataset. It basically, when we send an appraisal, and it’s send in a dot XML file, it goes to Fannie Mae. They download that, they take all that information out of our reports and put it into a database. So they’re slowly building that database as the appraisals are turned in, and yeah, so they are gathering the data for sure, and that kind of brings us to another topic of trying to go automated without using the actual appraisal and using all that data to come up with your house’s value. So they’re trying to push that now.
RS: And what does that look like? Is that something that’s just in conversation, or are they actually rolling out, modeling and trying to use those…
LF: There have been AVMs, which is Automated Valuation Model out for a long time now, those have been around, they’ve been used, I’m sure you guys may have had them done on your house. Those are for borrowers that have really good credit, low loan-to-value, that kind of thing, but they’re trying to bring this to the next level where they can use it more and more, basically. I don’t know the timeline on it, but I do know they’re gathering data for sure.
RS: Okay, so we have appraisals, which are evaluation compiled by a professional who’s looking at comps, and we have the real estate sales market, which is, you put a price tag on it and let’s go, let’s see who comes up with the strongest offer. Those two have to overlap at some point in time, are you seeing that you’re being asked to make a lot of adjustment to the market like we’re in because it’s so aggressive, or do appraisals just follow the aggressiveness of the market?
LF: Well, with that, appraisals are based on historic data. The lender who ultimately is my client, the real estate agent’s not my client, the borrower is not my client, the lender is the intended user. They wanna know what stuff is sold for. When we get into this thing that we got into in 2021 where values just started rocketing up all of a sudden, it was very hard for us to be able to appraise them for that much because we had no history of values increasing. For us to do a time adjustment, we have to have market trends to be able to support that. So we were in a pickle there for a little while. It’s gotten a lot better now, I will say that for sure, just because we’ve got that, you can look on a graph and see what the median values are doing in that market, so a lot easier to make time adjustments and absolutely, you should be making time adjustments if they’re warranted up or down, just depending on the market.
TM: What’s a time adjustment?
LF: Time adjustment. So if you had a comp, well, let’s say it sold for $100,000. We’re in a 10% appreciation in the market and it sold six months ago, 5% adjustment on that sale price, so it should be a $105,000, if my math is right.
TM: Gotcha. I’m not gonna challenge your mental math here.
[chuckle]
LF: It’s off the top of my head, but I’m pretty sure that’s correct. [laughter] Oh yeah, when the market’s going up, you should be going up with time adjustment because, obviously, those sales might be eight months old.
TM: What are you seeing now, Lanny, with this crazy market? Are there a lot of appraisals that are coming back that are below what the accepted offer was? And then what happens in that situation?
LF: Yeah, so at first it started out with a lot of them; it’s gotten better now, but they still happen for sure. I run into ’em, I don’t know, I don’t really track them that much, but maybe 5% of the appraisals I do come back below the purchase agreement price. In that instance, lenders always have the option to do a reconsideration of value, it’s called an ROV. The lender initiates it, not the borrower, not the real estate agent. They contact me as they contact your lender. You gotta go through them. It’s a process they go through. They are gonna submit a form, maybe some additional comparables that come with it or some other supporting evidence that the house is worth more and they submit that to us and we read it and we go through it. And if we agree with them, we’ll change our value. It doesn’t happen a lot because I’ve spent four hours on this thing and it’s a 35-page report you’re looking at, but it can happen here and there if they’ve got a better sale that maybe wasn’t recorded on MLS or who knows, wasn’t geo quoted right in the MLS system and didn’t show up on our searches. That obviously is a possibility. If they’ve got good information, I’m for sure, we’re gonna look at it. I’d look at it, if it’s bad information, I just have to refute it at that point.
BO: Lanny, I imagine your world is fairly static in terms of change comes to the appraisal world, I would think, fairly slow. Please correct me if I’m wrong, or are there any changes or anything recently going on in your world that real state purchasers or sellers would wanna know?
LF: Yeah, so with that, Fannie Mae is trying to roll out new products now. One’s called the desktop, one is called the hybrid. The hybrid’s been around for a little while. Desktop is the new one. I think it’s an oddball product. Right now, it’s got a pretty isolated use, I can see them trying to open it up a little bit here in the future, lower loan-to-values, five or six different restrictions on it, but basically what that involves is they want me as the appraiser to sit in my office and do a desktop appraisal, which means I’m not leaving my desktop. I’m doing everything on the computer. They’re gonna send a third party out into the field to get photos of the house, get a floor plan of the house and submit that back to me where I develop an opinion of value. The problem with that product is, is I have to certify that all of that information is reliable. I don’t know who’s doing the physical inspection on the house or the floor plan, they want us to take that on as a liability, I can see that going downhill very quickly for an appraiser if they get pulled in front of someone and said, “How did you verify that?” We don’t have a way to verify that via third party.
RS: And who’s doing this? Who is the third party?
LF: The third party could be anybody, they don’t have to be licensed, they don’t have to be an appraiser. I’m sure a lot of real estate agents will probably do it, they don’t pay very well, I’m guessing $50 a house or something like that. They have to do an interior floor plan, which is time-consuming. You’re measuring interior walls, windows, where everything lays out. As an appraiser, we just do the exterior ’cause we’re after the square footage, unless there’s some functional utility issues with the house, we got to do the interior with that as well. But yeah, it could be anybody and they will go for the cheap person, I can guarantee you, ’cause they get more of the cut then with the AMC.
RS: And then I’m assuming that you wouldn’t get paid as much to do this desktop appraisal, so it sounds like it’s just kind of a cost-saving thing for the… What did you call it?
LF: Appraisal Management Company, the AMC.
RS: A cost-saving thing for the AMC, so now they’re paying you half the fee or whatever it is, you can sit at home, they’re paying somebody else $50 and now they’re pocketing the rest of that money?
LF: Yeah, basically that’s how it is. And I don’t know if these fees will go down to the borrower, I suspect they wouldn’t, but you never know. I’m not in that part of the world, I don’t really know all those fees that they charge. But one other thing with that too, their big push is, it’s not so much freeing up our time more. They think it’s gonna be faster. I don’t know how they think it’s gonna be faster. I gotta verify everything now. In some aspects, I might have to teach older generation husband or wife to download this app, put it in your phone and walk around your house, video tape the entire interior and then upload it to this company so that we can get a floor plan. It just sounds like a nightmare to me as an appraiser, so I won’t even do them, I turn them down. “Nope. No, thank you.”
BO: What’s the hybrid model that you were talking about?
LF: The hybrid model, it’s just a little bit different in far as requirements of it. The desktop requires in floor plan, the hybrid requires an actual appraisal sketch. We can take our information from the home owner as long as the appraiser can verify that through a third party that’s disinterested on the desktop. I don’t know how you do that, but the hybrid’s got someone with a little bit more training as far as I know. That’s my understanding of it. I don’t do either of them, I’m just not gonna take the risk.
BO: I know there’s a lot of really nice neighborhoods that will have this oddball house that’s just been run down. It’s either somebody who’s lived there forever and they made no improvements, it’s still got the 1940s bathroom in it. And they get an appraisal next to every other house in the neighborhood has been upgraded. Is that old house propped up by all the much nicer houses in that neighborhood, or is that house actually calculated down because it is kind of tired?
LF: Yeah, it will be somewhat propped up a little bit just from location-wise if you’re in a high demand area, I don’t know. A house in Edina, one of the higher dollar areas in there, it’s probably gonna be worth a heck of a lot more than a house 10 miles away that’s the same condition, just from the locational demand of it. But obviously, it’s not gonna be worth what those other houses are ’cause they’re probably apples and oranges as far as condition and quality go, so it will be reflected in the appraisal, that condition and quality going to that, and we’ll try and figure out what that is by using other comparable sales that are dated, grandma’s house that hasn’t been touched since 1972, that kind of thing. And we try and reflect that in the value, there’s other ways to do it, like depreciated cost method for adjustments and whatnot, just getting a little bit technical. In a nutshell, it’ll probably be helped out a little bit from its location, just from the land value alone.
BO: Okay, in a follow-up question, some of the housing stock that was built in the ’90s, I feel is a little bit suspect. We were sort of moving from one generation of building to another. Does that ever factor into appraisal value? Now, I’m gonna ask you to put your inspector hat on. This house has cheap windows and no building paper on it, because they didn’t use any at that time. Is that house likely to have more problems and should it be valued in a different way than a house that’s got all of the proper…
LF: No, if you’re doing your job correctly, you should be using comparables. We gotta go back to that. What’s that house similar to? It should be other homes in that neighborhood, that’s where the value would be reflected at. We wouldn’t do that cheaper-built national builder, and then go jump and grab a custom comp that’s two miles away and say it’s worth what that one is just because we know the difference in those two different build qualities. So as long as you’re staying with similar houses in the neighborhood, you’re probably gonna be right on for value.
BO: Yeah. It makes total sense. And now, Tessa, I’m officially handing the baton to you, because I know you have several questions that you’re ready to fire off.
TM: So I guess one question I have for you, Lanny, is, what percentage of these appraisals are coming back higher than what the agreed upon purchase agreement price is? ‘Cause it sounded like when you said it, that didn’t happen too often, which is surprising.
LF: No, it happens, 5% maybe, I don’t know for sure. I don’t track ’em where the appraisal is coming in below the contract price. That’s just a rough shot of the hip. I run into a couple of ’em a month probably.
TM: And what are the options for the buyer then in that situation if they try to have you do this reconsideration of values and you say, No, we’re gonna stick with what we appraised it at. What options are there for the buyer?
LF: So a couple different options there. They can re-negotiate with the seller, try and agree to a price that’s in line with the appraisal, maybe. Maybe they bring a little bit of extra money to the closing table to bridge that gap. Some people bring a lot of money to the closing table to bridge that gap these days. And I don’t know if they’re getting from Giftech, gifts from parents or whatever. But I just did one the other day. I think they had a clause into the contract that said they would make up the difference from list price to contract price if the appraisal didn’t come back at list price at least. And it was like a $40,000 difference. Yeah, I don’t know why people wanna do that and pay that much more for a house that, literally, if rates go up, could come back down that quickly. I don’t get it. But people do it.
TM: Do you think that’s a… I mean, would you take that kind of risk?
LF: Not if I was a professional with 20 years experience telling me the house isn’t worth that much.
RS: You’re sure you don’t wanna think about it? [chuckle]
LF: Some of it’s emotional for buyers. This is the one a lot of these buyers have been looking forever. They just get beat out offer after offer after offer. So now they just run in high, we gotta get this house, I’m sick of looking. I’ve been looking for eight months kinda thing. That might be a little bit of a motivating factor for them. But you gotta realize, as a buyer, unless you’re paying cash, you’re using someone else’s money, and they have certain rules to play by.
RS: Let me ask you, do you ever get involved in the VA loans, or is that somebody totally different?
LF: So the VA, I do not do. I do FHA and USDA, two different government entities. But VA has a panel that you have to get on, something that I just never had the need to do or had the want to do. They’re a little bit different process. If they disagree with the value, they’ve got a whole tide water they enact, and it’s a different process. I don’t know too much about that. But there are certain requirements for those appraisals, property requirements and that kinda stuff.
RS: Well, for the FHA then, so you do the FHA appraisal, so often we get people calling us up and say, Hey, can you do an FHA inspection? Please, shed some light on this mythical FHA inspection.
LF: Yeah. The FHA inspection is more in-depth than a conventional appraisal. They have certain minimum property requirements that they require. You can’t have peeling paint on houses built before ’78, no broken windows, they’ve got a lot of different things. No exposed electrical wiring. So they can be a little bit of a challenge for buyers, if you’re running into a little bit of older house that’s got some deferred maintenance and stuff. So we’re looking for that as a HUD, a HUD appraisal as I go through a house. We definitely don’t go anywhere near the level of a home inspection as far as that goes inspection-wise.
RS: Why does everybody seem to think it’s an inspection?
LF: I don’t know. I don’t know. They sign a piece of paper stating, This is not a home inspection when they go to apply for a loan.
TM: And what happens when you find peeling paint on a house that’s older than 1978? Because I don’t think I’ve ever seen a house older than that that doesn’t have peeling paint.
LF: Yeah. They’re few and far between. Basically, what we do is make the appraisal subject to repair. So I check a box on the appraisal, send it off to the lender, they have to send someone out there or have someone out there go repair that paint. Once that’s done, they send me back out there for final inspection, and I get photos of the repaired work, and it goes back to the lender, and then they sign off of it and say, You’re good to go, you’re good to close.
TM: So the lender pays for the repairs?
LF: Nope.
TM: Who pays…
LF: Seller, buyer, whoever does it.
BO: Negotiated.
LF: Yup. Negotiated.
TM: Okay. Okay.
BO: Well, it’s a good thing that lender had that paint repaired, because there won’t be any more peeling paint.
LF: I wanna say one thing about peeling paint to all the agents out there. If you’re gonna repair peeling paint, don’t leave all the paint chips all over the ground, ’cause we’ll call that out, just as we would peeling paint on the house. Get a shop-vac up there and suck ’em up ’cause that is still lead paint sitting on the ground that the HUD does not like.
RS: I bet not. Yeah. So, Lanny, how has been an appraisal affected your home inspection business and vice versa? How has being a home inspector affected appraisals, or has it?
LF: It hasn’t, really. They’re two different animals. You gotta take one hat off and put the other on. I don’t do an appraisal to the level of a home inspection. I’m not in the house for three hours. I’m there for maybe 30 minutes. Bigger houses, a little bit longer. And we’re not looking at the same stuff. Obviously, if I see a failing foundation wall or something like that, I’m gonna call it out, but it’s usually pretty obvious. We’re not running opening up furnaces or anything like that or pulling electrical panels off. So it’s more of a cursory inspection, just to make sure, Hey, we don’t have any huge safety issues here. So that’s kinda the difference of ’em. The appraisal’s for a value, the inspection’s for condition.
RS: Have you ever been called to do both on the same house?
LF: I have before. I don’t do that.
RS: Okay.
LF: I’ve done it a little bit when I first started out, but I soon found out that once I do the inspection, which comes first in the contingency, then the appraisal gets ordered, I know way too much. And they don’t like that.
BO: I was thinking, as you’re walking past that FPE panel as the appraiser going, Well, they’re gonna have to repair that, probably.
LF: No. We don’t go that. I don’t even open those up. It’d be tough to prove that as an appraiser, ’cause there’s really not been a recall on that, if I remember right I’d argue back at you.
RS: That’s right.
TM: Well, and ethically, what would you do if you did an inspection and you found aluminum branch circuit wiring in the house, and then you get called to do the appraisal on that?
LF: That’s why we don’t do ’em. [chuckle]
TM: Yeah.
LF: Yeah, it’s just you can kind of muddle in the water too much there, if you’re doing both of them.
BO: How can there not be a recall on the FPE panels? It just doesn’t make any sense. They’re not safe.
LF: I don’t know.
RS: The Consumer Product Safety Commission, believe it or not, they can’t force any companies to make a recall. They send out notifications about voluntary recalls, but they can’t force companies to recall anything. And because FPE is gone, there is no way to make an official recall on it. That’s the short and bitter answer to your question, Bill.
BO: I like the bitter part of it. I mean, you’ve just seen too many of these over the years to not be bitter?
RS: No. I’m just saying it’s not short and sweet. It sucks. But that’s just how it is.
TM: Well, so Lanny, I was gonna ask you, this process is like 30 minutes, you said, and you’re inside and you’re doing measurements. But what are the main things that you’re looking at? If I wanted my home to appraise for the most amount that I could, what should I focus on as a homeowner?
LF: Well, it’s based on an as-is value when we’re there, typically, unless you’re doing a remodel or something like that. But as I’m going around the house, we’re measuring square footage, we’re taking photos of all the rooms, I’m getting all my quality of finish. What materials are used, where they’re used at. Bedroom counts, bathroom counts. Short of cleaning the house, there’s really not much you can do because you can tell me all day long you’re gonna put a new roof on next week but if it’s not on, I don’t care. So it’s what’s at the house that day? We’ve had a homeowner’s point out new light switches and stuff like that, well that doesn’t do nothing for an appraisal. It’s just cover plates don’t really excite me too much on the light switches. [laughter] But if you’re doing improvements on the house, there’s certain things you can concentrate on that will probably get you more dollar than doing nothing.
BO: I was gonna say you go, convince other people with the exact same house that you have, put it up for sale at a premium price, get it closed, and so there’s four or five really nice new shiny comps for you to go out and use, Lanny, and then you put your house up for sale.
LF: Yeah, there you go. There you go. It’s always a tough one, if you’re the first one in the neighborhood to sell high ’cause it’s tough to prove it.
TM: Yeah, you’ve gotta kind of push that ceiling up.
LF: Yeah. There’s somewhat of a ceiling in a market, especially townhomes and stuff like that, those are really tough. You get someone that throws a bunch of money into kitchens and bathrooms in a townhome, and every other houses, townhomes, that’s an identical unit floor plan-wise is selling for 180 grand and now you’re listing yours for 220. You may have a buyer that wants to pay it, you don’t have a lender that’s gonna wanna lend on that because if that goes into foreclosure, they’re gonna lose a lot of that. The extra stuff in there doesn’t sell. The cost does not equate to value, usually.
BO: Say that again, that’s important. Cost does not equate to value?
LF: Absolutely. If you’re gonna buy a house or you own a house and you wanna drop $120,000 in landscaping on it, I can tell you you’re probably not gonna get barely any of that out of that value just because there’s no support for that in the market. Or a pool. Pools are similar situations in Minnesota. We have a very short swimming season, a lot of maintenance involved with owning a pool. A lot of buyers don’t even want a pool. So it’s not like Arizona where every other house has a pool, if not more than that, that’s more of a value in use item where you’re getting value out of it. You put a lot of money into it, you use it a lot. But the market in general, in Minnesota, doesn’t care too much about a pool or landscaping or those kind of personal touches you put on a house.
RS: Sure.
BO: You’re saying that curb appeal doesn’t add to value.
LF: Well, it can. It can, just depending, you just can’t go overboard with it. That $45,000 retaining wall you put in, that boulder, buyers aren’t gonna pay 45 grand more for a house that’s got a boulder retaining wall. It just doesn’t make sense to the market in general, to pay that much more for a house with a retaining wall that’s boulder.
BO: I notice retaining walls. I notice a lot of them, and I know, I notice a lot of them that are in bad shape, they’re leaning the wrong way, and I always feel bad for homeowners who have this fix that should happen. It’s gonna be a big chunk of money, and it’s gonna take a lot of labor to fix some of these things.
LF: Yeah, yeah. All that kind of stuff goes into appraisal, it’s more lumped into the condition aspect of the house. So if a house has some bigger issues, we’re gonna try and find comps with bigger issues to kind of show what that reflection is in the market. So it’s not like a home inspector where we’re picking apart every part of the house, it kinda goes in the overall condition.
BO: For me, I guess, which do you prefer? If you had to spend all day doing something, would you rather be in appraisals or would you rather be in home?
LF: Home inspections. The reward after a home inspection from your customers is 1000% better. [laughter] I can do the best job in the world as an appraiser, and 90% of the people hate me. [laughter] I can do the best job in the world as a home inspector, and everybody loves you. Except for the agents maybe on the selling side. But in the end, they call you back to do their inspection.
0:36:44.1 RS: Yeah. And I don’t think we covered it. Where are you based out of, Lanny?
LF: I’m out of Webster, south of Lakeville. I kinda cover the south metro area, south of the river. Say Burnsville, to Faribault, Belle Plaine to Cannon Falls.
RS: Okay.
BO: And housing stock is relatively new.
LF: Yeah, pretty much. We’ve got some older areas like Faribault and Farmington, downtown Lakeville that have old downtown areas, but most of it, it’s probably 1970 and up.
BO: I always hated those 15 to 20-year-old houses that were never touched. When you walk in there and everything, the furnace, the water, everything is original, and you just feel it. Including the wood windows that were made out of something that was wood that was glued together and it’s no longer.
LF: Yeah, yeah. They’re always interesting.
BO: They were just long days.
LF: Yeah, I enjoy doing the old houses down at Faribault and stuff that are built in 1860 and stuff. It’s just neat seeing all the different houses, styles, characteristics and all that stuff, keeps you sharp too.
TM: You never know what you’ll find.
BO: Is there a penalty for a house that’s 1860? I mean, is it so old that it has less value than something…
LF: No, a lot of those houses if they’re kept in good condition, are worth a premium in those downtown areas just for the historic factor of it. Like Northfield, they’ve got a central area right south of Carleton College that if you’ve got a really nice good condition Victorian era house, they sell for a lot of money. Gotta be in good condition though.
BO: Okay, Lanny, we should probably put a wrap on this episode. But where can everybody get a hold of you?
LF: So you can get on my website, appraisalwerx.com. A phone call is probably the best just to get directly to the source here. I could throw my number out there, it’s 612-386-2660 for appraisals. Private appraisals, if you’re listing a house and you wanna see what the realistic selling price may be versus what your agent thinks it might be, it’s always a good idea for a second opinion on that. Private work, divorce work, whatever, I can just kinda do it all.
TM: And Appraisal Works is spelled W-O-R-K-S?
LF: W-E-R-X.
TM: There we go. Okay.
RS: Perfect.
TM: We’ll post a link to that.
LF: Yeah.
BO: I have another question, just because you brought it up. How often are you doing just private appraisals? What percentage of your business is that?
LF: It’s not a lot. I just never really concentrated on it too much. But I’ll probably do three a month, maybe something like that. The problem with some of the attorney work and stuff like that is you can get wrapped into court, which can really screw up your days for your regular work. So I kinda shy away from that. I’ll do them here and there if I feel like it and they’re close to home, and it doesn’t look too crazy client-wise, civility and stuff like that. Yeah, I don’t concentrate on too much for divorce work and that kind of stuff, but I’ll take it here and there.
BO: Alright, we’re gonna leave it with that. Thank you, Lanny, we appreciate you spending some time with us and sort of explaining your world, I find that world fascinating. So thank you everybody for listening. You’ve been listening to Structure Talk, the Structure Tech presentation. My name is Bill Oelrich, alongside Tessa Murry and Reuben Saltzman. As always, thanks for listening and we’ll catch you next time.