After the financial meltdown last year lawmakers and regulators were determined to discover who was responsible for the debacle. Yes, the very people who drafted the laws governing mortgages and yes were also responsible for oversight of them went out to determine who was responsible for the melt down. The first culprit, of course, was the lenders. I think we all know how that played out. The next group on the chopping block was the appraisers. If they wouldn’t have appraised the homes then the lenders would not have lent on them, so goes the finger pointing. From that came sordid tales of realtors and mortgage professionals pressuring and even bribing appraisers to up the value of a property.
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Home Valuation Code of Conduct – HVCC
After the scapegoats were identified the legislation followed. One prime piece of legislation aimed at appraisers was the Home Valuation Code of Conduct (PDF). The intent of the HVCC was to achieve more appraiser independence to reduce the amount of pressure placed on appraisers by lenders and Realtors. Well, if their had once been undue pressure on appraisers to inflate values it now pails in comparison to looming threat hanging over appraisers and it’s compelling them to keep prices down.
A Personal Experience
Just this week I was smacked once again by this new market reality. I had a beautiful property located in a prime location in Fairfax Virginia. We did a top notch rehabbed on the property all the way around and we thought it paid off when we got two very nice offers. Both of the people bidding were solid. They were both putting 20% down and they both offered more than $15,000 in earnest money deposits. The offers were very close but we accepted the bid that was slightly higher and moved forward.
We were pretty happy with ourselves until the appraisal came in $36,000 under our contract price. I contacted the appraiser and I was just amazed with what he told me. My property was remodeled to a superior standard and was head and shoulders above the competition; however, he did not even assess my property as high as his highest adjusted comparable home. His reason was that there was a home around the corner from mine that was the same model and also refurbished, so he essentially told me that that was the same home and so that is what my home is worth.
I begged this appraiser to look closer at my home and at the market. I brought up the data on 10 homes (his six comps included) that had recently sold. I noted that none of these homes were on the market for much more than two weeks. I begged him to consider the fact that I had multiple offers. I advised him that the home that he gave me the same value for was only on the market for 6 days. I had several people tell me that they had tried to put offers on that house but it was gone too quickly (the sellers just must have taken the first offer and ran.) Several of these would-be buyers were very upset about it. My buyers were willing to put up an additional $15,000 above the appraisal so I begged the appraiser to at least assess my home equal to his highest comparable sale which would have added another $10,000. He refused.
The appraiser, the appraiser’s supervisor, and the mortgage broker all told me that the appraisal must be based on the comps. Why yes they do have to be based on the comparable sales, but the appraiser does have the professional discretion to consider additional factors. The appraiser told me that they would not consider multiple offers because people are bidding any crazy number to win knowing that the home won’t appraise and, he said, time on market was not a factor either. People don’t put up $20,000 earnest money on that kind of gamble.
My other aggravation, though this one I fully expected, was that the appraiser gave no credit for my superior improvements. Rehabbers and homebuilders are used to this but I still think it should be addressed, it’s not a new phenomena. The comparable home had been remodeled as mine had been remodeled. Mine was clearly superior, however. I won’t go into the details but for example my bathroom had custom marble tile and a jetted shower. Theirs was a do it yourself job with 16 in ceramic tile and a standard shower. My appliances were top of the line Jenn Air and theirs were GE. I knew I was leaving money on the table by giving this value to my clients but in this case it seemed appropriate. I only hoped it would be just one more thing the appraiser could cite to justify a higher value. I plan to write a post dedicated just to this topic of over improvements after this home goes to closing.
What I’ve described here was a very summarized description of the events involving this property but I hope I’ve conveyed to you what I believe has happened in the industry. Regulators have essentially shackled appraisers. Appraisers have become not much more than data collectors to identify comparable sales. If all appraisers are obligated to keep their values at or below top comparable sale then how will property values ever go up? And, if that’s what they want then why don’t congress and the regulators just eliminate appraisers all together? We can have a computer program designed that will simply collect the sales data and then statistically analyze it and spit out a value. It could generate a median price average price, max price, minimum price, standard deviation, and all kinds of cool values for a cost to the buyer of about pennies per home.
I’m not only one crying over this subject. In my market, despite the frantic pace of home sales for nearly a year, realtors are walking on egg shells about appraisals. I have had many discussions with other Realtors who are extra leery about VA Appraisers. This makes any Realtor who gets an offer with VA funding take pause and lean towards another offer if it has conventional financing. There is actually a real estate boom going on here but prices are not moving up as they should. We’re all afraid of what the appraiser will do to us.
The National Association of Realtors recently conducted a survey addressing the possible impact of the HVCC and here are some of their findings:
- 76% of realtors state that appraisals are taking longer
- 37% of realtors reported loosing sales due to appraisals 20% said it’s happened more than once
- An increased use of out of area appraisers was reported by 70% of realtors
- Approximately 85% of NAR Appraiser members reported a perceived reduction in appraisal quality.
- Among Realtor respondents obtaining an appraisal for a client 55% reported a perceived decrease in appraisal quality.
- NAR Appraiser members reported a significant number of assignments in unfamiliar geographical areas.
The National Association of Home Builders
- 60% of builders are reporting that inadequate appraisals are causing serious problems in the market.
- 54% of builders said that the appraisal value was less than the cost to build.
A major concern has been expressed by builders about appraisers not properly valuing upgrades. The NAHB is advising builders to make potential buyers agree to pay separately for top of the line upgrades should the appraisal come in too low and not reflect the value of these items. This really hurts the economy and is unfair to high quality manufactures and adds pressure to reduce quality.
“Home builders are increasingly concerned that inappropriate appraisal practices are needlessly driving down home values. This, in turn, is slowing new homes sales, causing more workers to lose their jobs and putting a drag on the economic recovers.” NAHB Chairman Joe Robson
(Faulty Appraisal Process Harming Housing and the Economy, July 13, 2009)
My advice to investors, Realtors, home builders and sellers is to be extra conservative in any upgrades. In the past appraisers probably wouldn’t have given you full value for top of the line materials but now they are giving no value at all. I’m writing my congressman to let them know the repercussions of all of this regulation. I also signed a petition to delay the HVCC. In the meantime be very cautious out there when it comes to valuing your property. Not that you didn’t have enough to worry about already.
- Tools to Help Home Builders Deal with Low Appraisals