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[Crazy Inconvenient] Appraiser Should Use Recent Comps

In Kenneth Harney’s column this week “In Times Like This, Only the Freshest Comps Will Do [1]” he discusses how lenders are requiring appraisers to use more recent comps in their appraisals.

Wow! Shocking!

Last night I was the speaker at an event [2] 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 [3].

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. [4]