Are some realty agents hyping the pricing information on closed sales they report to their local multiple listing services? And if so, should you care?
A first-of-its-kind study by appraisal and real estate experts suggests that maybe you should. Researchers compared closing documents – which are supposed to indicate the final price in sales transactions – with the prices that agents actually reported to their local MLS and found that in nearly one of every 11 cases (8.75 percent) there were discrepancies. Overstatements of final price exceeded understatements by a ratio of nearly three to one. In one case, the price reported to the MLS was 21.4 percent above the actual closing price.
The study, published in the latest issue of the Appraisal Journal, is unusual because settlement statements (traditionally the “HUD-1” form, now the “Closing Document”) are not public. The researchers, three professors at Florida Gulf Coast University, obtained the HUD-1 statements from two banks that had extended mortgages on the properties. They then matched them up with the prices reported by realty agents to the local MLS. A total of 115 listing agents or brokers made the reports on the 400 sales in the statistical sample.
One of the co-authors, Kenneth M. Lusht, a past president of the American Real Estate and Urban Economics Association, told me that some of the errors could simply be clerical mistakes – “typing errors” – but others could be the result of agents “purposely inflating” the prices they reported to the MLS.
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Though the average overstatement was not huge, 6.7 percent, the authors expressed concern that because the home appraisal system depends on accurate price reporting to MLSs, errors can distort appraisers’ valuations. Appraisers use MLS pricing data to identify “comparable” houses to help estimate the values of homes on the market for sale.
Accurate appraisals are important to homebuyers because lenders use them to help decide whether to approve their applications. Inaccurate appraisals also pose potential risks for lenders – if values are overstated, they may have less true “collateral” backing the mortgages they make, as they found to their horror during the housing bust of the last decade.
Multiple listing services exist to share property data among member realty brokers, appraisers and other real estate professionals. According to the Council of Multiple Listing Services there are more than 800 MLSs in the U.S., typically with rules emphasizing “data integrity.” Individual agents are supposed to report pricing and other property information to the MLS so that it can be viewed and used by other members.
Realty brokers, agents, appraisers and MLS officials I spoke with last week had starkly different interpretations of the study results. Several brokers and agents said they observe inaccuracies in pricing reports to their MLS frequently or occasionally. Several appraisers agreed. Others said they encounter little or none.
Joshua Hunt, founder and CEO of Trelora, a Denver realty brokerage, said “many agents aim to show a higher closed sale price to show that their list-versus-sold percentage is higher (and) they will use this in their listing pitch to show how great they are.” They do this, Hunt said, by omitting seller concessions – adjustments to the final price that reflect either repairs or closing costs the seller has agreed to fund – from the price they report to the MLS. The MLS doesn’t pick up these intentional misreportings, he said, because “there really is no audit system in place” to spot them.
Alexis Eldorrado, managing broker at Eldorrado Chicago Real Estate, says this “is not common in Chicago,” mainly because the local MLS has “an anonymous violation reporting system” that allows agents who observe misreporting of final prices to flag them for disciplinary action by the MLS if not quickly corrected.
Kathy Condon, president of the Council of MLSs and CEO of Massachusetts’ largest MLS, agreed. In an interview, she said “most MLSs do self-policing” rigorously to guard against inaccurate data. At her MLS, five staffers monitor reports and search for errors.
Bottom line: The jury is out on this one. Maybe the pricing errors found in the study sample were not typical. But maybe errors are more common than MLSs care to admit. As one Virginia appraiser told me, “we find inaccuracies quite often and have to verify information (on prices, square footage, etc.) before we use it.” He said he has seen pricing inaccuracies “more than two dozen times in the past year” alone.