In Kenneth Harney’s column this week “In Times Like This, Only the Freshest Comps Will Do” he discusses how lenders are requiring appraisers to use more recent comps in their appraisals.
Wow! Shocking!
* Can you believe that appraisers should be using comps that are more recent to reflect the current market?
* How will we “make the number” for the lender so the deal will work?
* What an incredible inconvenience to everyone involved in the transaction!
Last night I was the speaker at an event and a loan officer came up to me beforehand and said (I am paraphrasing):
>”It’s a pain these days to get deals done, not like the old days. We have no access to the appraisers anymore. It’s crazy!”
How do you respond to this?..other than: Are you out of your &*%$#% mind? That’s the kind of thinking that got us in this mess. Good grief.
A “comp” or comparable is a piece of evidence that reflects market value of the subject property by comparing it to and making adjustments for differences. The older the “comp” relative to current value and the more adjustments that need to be made, the more diminished its relevance is to estimating market value.
>Major lenders and investors such as Fannie Mae and Freddie Mac are “beating down on the appraisal” by demanding 90-day comps or fresher
Lenders shouldn’t need to require more current comps to be used if the appraiser is on the ball, especially in a declining market area.
Here’s a classic example in Ken’s article:
> “Some sellers are taking a beating,” he said, citing a recent transaction where the appraisal came in thousands of dollars below the signed contract price. Had the seller not agreed to eat the difference — take a lower price than the buyer had agreed to in the contract — “the whole deal could have fallen through”
Duh! That’s simply the process of finding the market. The seller was willing to take a lower number. Don’t lay it on the appraiser, who has to prove the market value to the lender empirically.
Here’s a problem though. In weaker real estate markets, there are fewer sales to select more recent comps from. Contracts are the guiding light even thought closed sales are required.
An appraiser colleague of mine told me this many years ago:
>Everyone’s smarter than you. The buyer, the seller, the buyer’s real estate agent, the seller’s real estate agent, the mortgage broker, the lender, the buyer’s real estate attorney and the seller’s real estate attorney. They are all looking at you as the final step in the deal.
>They already know the “number”.
Another problem, is the education of sellers on the value of their home.
>The housing market may have gone bust, but many homeowners are still living in a bubble.
>Despite dismal housing headlines and reports showing falling prices nationwide, owners in some once-hot areas still believe their home is gaining value or at least holding its own.
In other words, everyone else’s property values are weakening except their own.
>It took John Cicero [no relation to my business partner in our firm Miller Cicero] and his wife an appraisal, some convincing by their real estate agent and some hard-to-swallow facts to get them to lower the $525,000 listing price on their five-bedroom home in Valrico, Fla. They closed two weeks ago for about $380,000.
>”We didn’t really understand the severity of the market,” Cicero said. “We lost close to $100,000 in equity so we were walking away from real money.”
Ok, so this isn’t rocket science.
The value of a home isn’t in a vacuum (even though vacuums literally suck). The value of home is in relationship to others that would compete for the same buyer using the principle of substitution.
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“Everyone’s smarter than you. The buyer, the seller, the buyer’s real estate agent, the seller’s real estate agent, the mortgage broker, the lender, the buyer’s real estate attorney and the seller’s real estate attorney. They are all looking at you as the final step in the deal.
They already know the “number”.”
From my experience with appraising in a context that involves the sale and purchase of real estate, the list of players your friend provided are not so much smarter than the appraiser as they are adept at shooting the messenger and willing to do so at the least demonstration of appraiser independence.
With the assistance of the appraisal industry, the other players have reduced their need to destroy appraisers by placing requirements on turn times and fee that ensure the appraisers they hire are at the same time maleable and interchangeable.
Joe Palumbo recently becried the lack of professional demeanor he encountered from an appraiser. In the context of real estate sales and mortgage transactions (including relocation) defiance and defensivness is what substitutes for independence when appraisers are selected on the basis of how fast and cheap they can be.
My advice to appraisers who are concerned about honety, competence and how the profession can contribute to market disasters is to not compete on the basis of lower fees and ever faster turn times. A friend of mine recently told me of an expectation of a nine hour turn time and of course the $175.00 or lower URAR fee is ubiquitous.
Appraisers cannot run a reputable appraisal business, make a living or enhance their professional standing playing with the faster-cheaper crowd.
Let the rest other than appraisers compete to remain in denial. Appraisers deal with logic, facts and reasonable assumptions, period.
The value of any asset at any point in time is the price a third party is willing to pay. In a rising market, the valuation for appraisal purposes should not only be the current comparable prices, but also should build (discount for) in any market exuberance, which will likely wane. The converse is true for times of panic and decline…at those times, the value as is relevant to a lender, may be above the benchmark of recent transactions, as the market conditions which supported those transactions are likely not to be permanent, as well.
There is no indication that appraisals indicate anything other than the appraisers’ need to self-justify yet another tax on transactions. Similar in many ways to the waste and friction built into our system by brokers, regulators, lawyers and accountants.
All true – however, for the good appraisers that don’t play the fast and cheap game, I think we can all use less righteous indignation when dealing with clients like that. Say something professional and then walk away or we get an industry rep as being self-dealing. It doesn’t change how they think. Use other methods to convey the message.
@ Realistically cynical. That’s pretty silly, really, and reflects the general misunderstanding of what appraisers do. Our charge is to reflect market value at a point in time. What you are suggesting is really an underwriting decision by a lender.
How on earth do you extract what is market exuberance? If the industry was protected from pressure, you bet appraisers would have been killing deals as the market reached a frenzied peak. We got off the merry go round at that point because we wanted to be able to sleep at night.
If the appraisal function is not protected by pressure, then let’s be honest. It really is a form-filling expense in the transaction and I would agree with you. If it is protected and the mortgage players ACTUALLY have an inducement to know what the market value is, then it’s essential to the process.
Try thinking forward instead of backwards.
The advice that professionals act professionally in all circumstances is well taken, but appraisers who wish to be professionals must then learn to avoid the situations where they are expected to do their very best real fast and for the least fee. We now know that combination coupled with shoving everything into the Fannie guides is a harbringer of unscrupulous activity at many levels.
In the mean time, those who endeavor to find the cheapest and fastest appraisers can learn to expect less than professional service from them.
And for realistically cynical, I’m not at all sure your comments make sense, but you seem to recognize there may be the possibility that what what the third party is willing to pay might be a product of what you call “market exuberance”, naivete, stupidity or fraud. All good and sugfficient reasons why the information and anlysis Jonathan provides is valuable.
If what appraisers are doing is perceived as mothing more than a tax, my bet is they are operating on the fast and cheap.
I think lenders can be short sighted. I would rather have a little older comp and adjust for the market, than to use a more distant comp that is newer. In my market, Baltimore, only a couple of blocks away can mean dramatically different values. These are no more useful in assessing value than an older comp on the same street but banks will accept them.