Are Appraisers Holding Up The Housing Recovery?
This is a question that is being asked more and more in communities around the county and real estate professionals seem to be consistently stymied by appraisers that have been labeled as over-zealous or overly-cautious. But, do appraisers really deserve part of the blame in such an unfamiliar real estate environment?
I was talking to a good friend of mine who at one point appraised every home I purchased before we bought it so we would have a third-party opinion on its’ after-repair-value. It seemed like a small price for us to pay to have added security and should have been a huge benefit for any future investor that purchased the property. Today, we are simply friends and he has not done any professional work for us in years. Why? Because the rules changed for everyone in the real estate investment business and too many people were playing fast and loose with the rules. You cannot blame the government for making adjustments and for creating a system to remove perceived improprieties, but in the rush to fix a small problem, they may have created bigger ones.
According to a June story in the Star Tribune in Minneapolis, the National Association of Realtors reported in an April survey of agents that fully one-third of those surveyed had lost a deal, had a closing delayed or had to renegotiate a contract during the first quarter of 2012. One out of every three deals face HUGE headaches if not outright cancellation because of one person in the equation. The problems seem to be exacerbated when the deal involves a real estate investor looking to purchase, renovate and sell a property quickly. Many news headlines and web articles from around the country seem to point to a common complaint and headache when it comes to the current real estate market…appraisers are not keeping pace with improving markets!
The list could go on and on and you could insert any city into a Google search for appraisal problems, and there is a high likelihood that you will find an article written identifying appraisers as the problem.
So why are appraisers receiving such a large portion of the blame right now?
The most common noted problems with appraisers are that the HVCC regulation created an opportunity for many new home appraisers to enter the market. After receiving certification and licensing, they were off and running and immediately signed up for the program. Often these appraisers are willing to work at a fraction of the costs of larger, more established appraisal groups and can “win’ business by under-cutting costs. The effect is that experienced appraisers are left sitting on the sidelines and passed over by lesser experienced appraisers with lower overhead. That creates an huge experience gap and can lead to slower delivery times of a completed appraisal as well as errors such as using sales that are not truly comparable and failing to account for home improvements. As with any craft, it is difficult to be great right out of the gate!
Another common complaint has been appraisers traveling great distances to find work. The HVCC legislation created a set of standards that appraisers must follow and they banned the use of appraisers who did not have market knowledge. That doesn’t say they have to live in the area – in fact – where they live does not factor into the equation. Their market experience and time spent appraising in the area absolutely does come into effect and a large majority of the complaints collected over the HVCC implementation were over out-of-area appraisers returning low values.
What is and what is not a good comparable?
I am not sure if there is any real clear solution on this and I would love to hear feedback from actual appraisers on how they are taught on this subject. The question that is brought up, and is extremely relevant in today’s housing economy, is should foreclosure sales be considered when determining the value of an arms length retail transaction? It seems elementary that they should not when you consider the sentiment of the banks of the investors purchasing a cast majority of the foreclosed homes. These sales clearly do not reflect a true market value of those properties. But, what if there are no other sales. What if 9 out of 10 transactions in a neighborhood over a short period of time (3-6 months) were all foreclosures? How do determine a value for the 10th property? What if the only comparable sales were for two story homes and you are wanting a single story home to be valued? I know there are rules in place and procedures to be used, but isn’t this a subjective figure. Is it not the job of the appraiser to determine value based on their trained opinion? These questions don’t seem to have clear cut answers and as appraisers are shielded more and more from the reality on the ground (speaking with lenders and sellers) the opportunity for legitimate sales to be lost will continue to exist.
Whether the problems are caused by inexperience, lack of due-diligence or sheer laziness, low appraisals and the appraisers themselves are receiving the brunt of the frustration within the real estate market right now. There are few remedies available in the real estate industry outside of allowing your real estate agent to be armed to the teeth with data supporting your sales price. The adage of a home being worth what a buyer is willing to pa may be true, but the lender is only going to be willing to lend on what the appraiser comes back with. So unless you have a buyer willing to cover the difference, preparing to back up your numbers is top priority if you expect your value to hold.
In truth, appraisers are probably only a part of the problem and when researching for this article I came across several excellent blogs by appraisers themselves. A favorite of mine was by Michael Bolton titled “The Tale Of A Low Appraisal” who has left the lending appraisal business and appears to be doing quite well serving other niches of the appraisal industry. I especially liked his line at the end…
“Yes, I know there are some absolute idiots out there appraising houses, but when you find the perfect business where there are no idiots, please let me know, I want in.”
For now, there is no perfect solution outside of doing your absolute best work possible when selling an investment property and being spot on with your pricing. Forget realistic, because being realistic is the easiest path to mediocrity. But don’t ask for and expect a price that you clearly know cannot be supported by comparable sales in your area. Beyond that, realize the nature of the beast that we call real estate investing is in full flux right now and you may have to ride out bumps along the way as it gets worked out. I would also add to pray that the government does not offer any more “fixes”. We all know where that leads…
Photo: chrstphre ㋛ campbell