Assassination of Real Estate Deals through Low-Ball Appraisals

Barbara Corcoran Outlining Issues with Real Estate Appraisals on the Today Show 9/12/2012

Low Real Estate Appraisals have become a commonplace thorn in the side of buyers and sellers alike, and finally drawing the attention of the main stream media via the Today Show thanks to our gal Barbara Corcoran. Although, we may not always see eye-to-eye with Barb, she hit the ball out of the park with this one. 

Here is a snapshot of the many factors contributing to the lack of talent in the Appraisal industry. We all know the housing bubble was caused by inflated housing prices, backed by crooked Real Estate Appraisers in cahoots with lenders to determine values over a scotch on the rocks and a handshake.  Cut to the bubble bursting, when state and federal legislators had their hand in a “solution” in an effort to “protect” the consumer. This has backfired greatly and has resulted in giant Appraisal houses employing less-experienced robots passed off as Appraisers in lieu of a local expert.

Most cities including Portland have seen a massive uptick in the Real Estate market, due to an increase in buyers, short supply of inventory, and record-low interest rates. The problem? Appraisals are based on past home sales in the last six months to a year including short sales and foreclosures, which common sense would tell you, does not accurately reflect the values of today’s market. When the Appraisal comes in low, the buyer is then turned off, and the lender is not willing to complete the loan at the agreed upon price. Deal Breaker!

The lack of talent in the Appraisal industry is single handedly contributing to major chaos to over one-third of Real Estate transactions, and is crippling the housing recovery. Be sure to protect yourself by providing the Appraiser data on your local Real Estate market, verifying that the square footage and housing stats are correct in Appraisal, ask to have short sales and bank owned properties eliminated from the comparable properties, and if worse comes to worst, pay for a new Appraisal. It helps to have a Real Estate Agent that has your back as well, and will go to bat for you when they know the Appraisal comes in too low.

Steve Roesch
Principal Broker
PDX Home Group
Keller Williams Realty Professionals
Steve@PDXHomeGroup.com
503.318.6351 direct/text
www.pdxhomegroup.com

Having Appraisal Issues?

Why do we bother to pick a price to sell a home anymore, when the appraiser has the final say in value?

This doesn't seem all that illogical, though. You should only be selling your home for what it's worth, right? But who gets to decide the value anymore? The tax assessor? The listing agent? The seller? The licensed appraiser? In my book, none of these should ultimately decide the value. It is always the buyer that decides the value. Hasn't it been a long time economic fact that supply and demand, determine value? And as long as the consumer sets down the dollar amount for that commodity, haven't they just set the value? Let's only talk about non necessity items here, and true competitive capitalism. Because when the buyer doesn't have any choice on whether he/she needs an item, or have any choices for such items, then they truly don't have much to say when determining value. But in any normal marketplace, buyers have their freedom to choose. And when they find the right color, size, flavor, shape… for the right price… they buy it. And if they can negotiate, they will. And if it's not priced within reason, they also have the freedom to walk away.

But I am speaking specifically about houses now. In a lot of larger ticket priced items, like real estate, there is financing involved. Adding a partner to the transaction. This partner is actually the larger share holder, and thus requiring this 3^rd party appraiser. Not the one, who has shopped in the competitive marketplace. Not the one, who has to live in the house, or drive to work from this house. Not the one who picked it to be near a certain school, or live closer to their family. A non biased, and non personal, cursory overview of the recently sold homes for the area. And if there are no recently sold homes for that area, then it becomes the appraiser's subjective opinion.

But, then again, this is the bank, that is the one shelling out usually more than three quarters of all the money for this home. Surely, they must have hired someone really great to protect their investment in this asset? Actually, that is not the case anymore. Helped by some new government guidelines, banks now feel that the ambiguity of the appraiser is a better way to choose the one determining value. Not based on local experience or tenure, or any other quality. Just pick someone, that doesn't know someone in the transaction and is licensed. And to be fair, and non biased, make it more like picking a name out of a hat. The appraisal industry used to run like normal capitalism. Banks would choose an appraisal company usually based on the following : competitive pricing, availability, speed in turnaround, and size of support staff. Now, it is random selection. The larger experienced appraisers, seem to get no more business than the newer or less entrepreneurial appraisers. Those that made a good living, now are changing industries to continue making a good living. Those that struggled before, are finding themselves getting randomly selected more often, because being in a rotation is better than fierce competition.
Too many deals are falling apart based on this new system. When a buyer makes an offer, usually, they have seen 20 to 50 houses before making a decision. They, themselves are a pretty good judge of value by now. It's pretty obvious to spot the one overpriced house. So, why does the appraisal trend today, find a large percentage of homes are overpriced?

I think it is the new system. The appraiser has no allegience but to the rotation. In the past, they were part of the deal. Using relationships and knowledge to put together common sense to create value. But today, it is like the DMV. Get in line, wheres my ticket, get back in line. I understand where the corruption was, and agree with regulation (that is an entirely different blogpost). But is this trend coming from the new system healthy to the market? No way. It's adding more downward pressure on the housing prices, and it is also killing deals. And that is causing homes to stay on the market longer, looking for another buyer with a different appraiser, in the rotation, perhaps with a different opinion.

If this is the new era of real estate, then perhaps we should cut to the appraisal first.