Appraisals are becoming the fly in the ointment with more regularity. To say appraisers are more conservative these days is an understatement. If you were paying attention in 2003, you will understand why lenders and the appraisers hired to provide property valuations on their behalf have traded in their tie dye and love beads for a button down oxford.
But from my vantage in the cheap seats, things haven?t really changed all that much. Both then and now, appraisal practices were purported to protect the principals in the transaction. Both then and now, the principals are the ones getting the short end of the stick.
Back in the glory days of home value appreciation, lenders couldn?t throw their money at the home buyer fast enough. I found this little explanation of the purpose of the home appraisal from RealEstateABC.com a chuckle and a half:
People get very emotional and excited about purchasing a house. When they’re in this highly emotional and excited state, they tend to just look at the cosmetic appeal of a house instead of the important factors. They forget that they’re not buying a CAR, they’re buying a HOUSE!! There’s a big difference between the two. One is a normal expense everyone has to incur occasionally. The other is the biggest financial decision most people will ever make. By becoming too emotionally attached to a deal, people often pay above market value for a home. This can cost them tens of thousands of dollars in an overpriced purchase. Since a house is such a major financial decision, it’s prudent for them not to take any chances. People should try to eliminate as much risk as possible.
So the point of the home appraisal is to save us from ourselves. That concern for the stupid, emotionally charged buyer must be what led to 103% financing and stated-income lending. Whatever. More to point, the obvious idea behind the appraisal is that the lender?s collateral is in the property, and he in theory wants to confirm that his investment is sound.
The punch line, of course, is that in 2003 plus and minus a couple of action-packed years, appraisers tended to use the ?whatever you want to pay? valuation approach. It was an appreciating market, after all. Ironically, when appraisals should have been our biggest concern, they concerned us the least. They always came in precisely on the money.
Today, the pendulum has swung in a big way. The lenders are not as generous; they?ve been burned by a deluge of bad loans. (One could argue that the consumer got a little burned as well, but hey ? it?s not about you.) We still need someone to protect us from ourselves, of course, because you know how we get when we want something bad.
The government determined last year that it?s not just our own irrationality which poses a threat. Maybe the appraisers were bad children as well. Maybe they tended to act with bias; perhaps they were coerced by their mortgage-making clients, the banks, into returning flawed opinions of value.
The Home Valuation Code of Conduct was born. The idea was that appraisers would now act independently and with integrity. In practice, too many of the really good appraisers have been kicked to the curb along with their livelihoods as Appraisal Management Companies (AMCs) take over the task of assigning the job orders. Think of the AMC as the temp agency, and as in the case of the temp agency, they need to take their cut. The cost to the consumer of the appraisal went up, and the fees to the appraisers went down. Oh, and a lot of these champions of independence are owned by the banks themselves.
Why You Care
?So what?? you say. Well, here?s why you care. Based on my experiences of the past month, the biggest hurdle in the home sale transaction is now the appraisal. Keep in mind that buyers are no longer ?qualifying? for loans with a wink and a handshake. They have to provide actual documentation of employment, earnings and reserves. They have to (gasp) actually have some skin in the game in the form of a real down payment.
Now, consider that in many segments of our local San Diego real estate market, prices are not declining but are actually increasing, whether it be because of the threat of a sunset on the first-time homebuyer tax credit, the fear of rising interest rates, the perception of a market bottom, or ? and this is a biggie today ? low, low inventory. Demand is up; inventory is down. This is what economists might call a supply and demand thing. It?s what drives free markets, but our market is anything but free.
First, you need to appraise.
My latest kick in the britches involved a beautiful little entry-level home. One day produced eight written offers and five others we turned away, each one at or above full-price. A few of the offers involved seller credits toward buyer costs. ?Beware the appraisal,? I warned. My very smart clients, recognizing that seller concessions artificially inflate the target appraisal value and understanding the very real risks, selected an offer in the middle, one that represented the best combination of highest price and least baggage.
So I met the appraiser, a true independent who parked in the driveway for the four and half minutes it took him to sprint through the home like he was late to a meeting with the Joint Chiefs of Staff.
The appraisal came in low.
As I reviewed the report, it was obviously flawed. The appraiser had noted that the seller was crediting 3% of the sale price toward the buyer?s costs; there was no concession. The appraiser showed a range of adjusted ?comparable? sales with a $20,000 spread between the high and low. (In the case of one, the MLS summary included no pictures, leaving the actual condition of the property to the imagination.) He picked the low one as ?value.? He did this even though he gave a hat tip to appreciating area market in his narrative.
The next logical step would be to appeal the findings. Logic, however, is not a component of today?s appraisal process. The appraiser would not return my calls, and the lender said ?we are standing behind the determination of value? (?we? as in ?me and the guy who acts independently and without bias?). He kicked me, the seller and the buyer to the curb.
You want emotional?
You would think that thirteen people can?t be wrong. Think again. They were obviously blinded by silly things like the gleaming wood floors, not to mention the need for a place to live. But this is where emotions really kick in.
The buyer suggested that the seller ?split the difference.? They are now thinking they are overpaying, and they have to come up with more cash to consummate the transaction. The seller, on the other hand, has mentally cashed the check and feels cheated. He wants to split the difference a little to the left, and doesn?t understand why the buyer isn?t just giddy that they are getting any ?discount.? Nobody wins.
We could cancel contract, relist the home, rinse and repeat. The problem is that the appraisal is a turkey shoot, and there is no guarantee we will fare better on our next outing.
Caveat Emptor (and sellers too)
During my first twelve years in real estate, I never had an appraisal miss on one of my transactions. In the past six months, we?ve been nailed three times. It may not seem like an epidemic, but talk to enough agents, and you may find it is.
On the face, this trend would suggest that buyers benefit. If the appraisal misses, they get to renegotiate price, right? The problem is that in a multiple-offer situation, the listing agent is now advising the seller to place more weight on things like down-payment and requests for concessions. As the buyer?s agent, you had better hope your client has not only the strongest offer but the biggest bank account. This is bummer maximus for the VA and FHA buyer.
If you are a seller, know that value is not necessarily what a buyer is willing to pay. Those were the old days. Value is what the appraiser says it is, and you had better hope that he is equally moved by your staging and stylish appointments.