Real Estate Investing

One would think that the blood, sweat and tears of today’s appraisals are by the buyers, sellers, and their agents, but the appraisers are also sweating it out and pouring their lifeblood into getting it right these days.  Danny Wiley, an appraiser from the Middle Tennessee area, spoke at our office earlier this week and assured us that appraisers want a home to appraise JUST AS MUCH as everyone else wants it to happen.

His credentials:  From 2001 through 2006 Mr. Wiley served on the Appraisal Standards Board, which produces and promulgates the Uniform Standards of Professional Appraisal Practice. Since 2003 he has served on the International Appraisal Standards Board.

Mr. Wiley said the problems we are experiencing today were caused primarily by “The Good Days” of 2004, 2005, and 2006 with out-of-control home values on the rise, and the business model appraisers have. As an example of what happened in those glory days of home sales, he cited on home that was listed at $825,000. The sales price landed at $1.8 million (or double the list price) and it then appraised at $1.8 million.  This type of rampant disregard for proper conduct in the world of appraisals triggered the new Home Valuation Code of Conduct (HVCC): you can’t show any preference in selecting an appraiser.

The business model could be the impetus that triggered the wild, wild west of appraisals.  Typically, there are 1.2 employees in an appraiser’s office - meaning the average appraiser works alone with just a handful of clients.  If an appraiser loses a client because they were not cooperative, they stand to lose 30 to 40 percent of their business - a blow that could literally put someone completely out of business.

As a result, the HVCC dictates that appraisers are randomly chosen - a requirement often managed through a “middle man” company.  While this seems like a good solution, problems arise when these middle management companies just go with the least expensive appraiser … often an appraiser who doesn’t know the area.  When they are from another area, they do not have access to the local MLS and have on idea what’s happening in a specific neighborhood and to specific homes in specific neighborhoods.

The good news is that REALTORS are still allowed to talk with appraisers and if they honestly think an appraisal is off, they can offer other comparables.  Appraisers will try to work with agents - within reason.

Part Two Coming Soon: What do appraisers look for?

Photo by Larry Page via Flickr Creative Commons.  Hard to get an appraisal in this town!

When the housing bubble burst a couple of years ago, appraisers had a lot of fingers pointed in their direction.  Of course, they weren’t fully responsible - Realtors price based on the last six months and as listings sold for more and more, prices also went up.  That’s just how the market is.  Lenders too gave out loans like candy flung at a parade.  Sellers of course were out to make as much as they could on the sale of their home - who wouldn’t?  Buyers - with easy-to-obtain loans - were also jumping in on what the lenders said they could afford.

Still, the finger-poining in the direction of appraisers seems to be haunting them.  In Las Vegas, agents are saying that it’s the appraisers who are now dragging down the housing market because they are so wary of what happened two years ago.  According to the Las Vegas Sun,

First-time homebuyers and investors are leading the sales charge with home prices at their lowest in a decade, but Realtors contend that several appraisers are setting values much lower than they should be — and those appraisals are killing sales.

Some call it an overreaction to the housing boom, when some appraisers were accused of inflating values in some deals, prompting banks to lend more money than the properties were worth. Appraisers contend they are setting prices based on those of comps, or comparable properties, on the market.

The Wall Street Journal is reporting the same findings - that appraisers are now being too conservative in their work and becoming obstacles to home ownership.  Another potential hazard in appraisals is the May 1st adoption of the Home Valuation Code of Conduct in which loan officers, mortgage brokers or real-estate agents are prohibited from having any say in the selection of appraisers for Fannie Mae or Freddie Mac (government backed) loans.  This could mean that an appraiser could potentially show up who has no idea what the local market is like - perhaps someone from out-of-state.

While the new code is likely to prevent some abuses, it also removes flexibility. For instance, loan officers or mortgage brokers used to be allowed to discuss specific home values with appraisers, who sometimes would advise against ordering an appraisal if it seemed unlikely to be high enough to warrant a loan. That would save borrowers money.

It’s a big no-no for Realtors to talk directly to the appraiser - we refer them to the lender.  But if the lender is now unable to speak to the appraiser, the mess continues.

Photo by The Ritters Photostream via Flickr Creative Commons.