Well, real estate appraisers are probably great drivers but if they insist on driving the way they run their business, watch out. It is very hard to move forward safely and confidently when looking in the rear view mirror.
Over the last year, I have had more appraisal issues then the last 5 combined. Why? Buyers and appraisers look at the market differently. Buyers are seeing a very limited selection of available homes and noticing many of these homes get multiple contracts. Thus they are more willing to pay the list price or a bit more. That’s the market isn’t it? When 2 or 3 buyers submit offers in roughly the same range, shouldn’t that be a good indicator of where the market sees the value of that home? Isn’t that how supply and demand drive markets in any commodity?
Now, along comes an appraiser who because of recent changes in the industry is faced with having to do more for less money.** These are hardworking, honest people facing increasing regulation that is making their job much harder and forcing more conservative valuations on property.
Because they were considered one of the “bad guys” of the housing crisis, their industry has stricter and tighter guidelines than ever. Of course they need to use past sales to value a home but now it is very hard for them to also consider current market conditions. So, more frequently than before, appraisals come in low. When that happens, the buyer and seller renegotiate to a lower price. Thus the next home for sale in the neighborhood has to suppress their price due to the lack of healthy comparables. (Conversely, it is interesting that in a declining market, because of the rear view mirror effect, we seldom have appraisal issues. )
Now, when an appraisal comes in low, a buyer feels they “overpaid” for a home and they negotiate a lower price. They also harbor thoughts that they made a huge financial mistake. Did they? Probably not. Let’s look at the home pricing process. A listing agent and seller review recent sales AND current market conditions to determine a price they think will get the home sold. Several buyers take a look and a few decide to make an offer around the suggested price. These buyers are represented by buyer’s agents who also review recent sales and current market conditions to give their buyers guidance on a price. So after all is said and done there are 4 or more folks who have reviewed sales and market conditions to come together on a price. And these parties have opposite goals. One set wants to sell high and the other to buy low. In the end, they decide upon the best compromise. That is how a markets work.
Then an appraiser is assigned to the home by the lender. This person’s opinion carries more weight than the multitude of folks who previously looked at the value of the home. Certainly there needs to be a person representing the bank to establish value. Certainly, the bank wants to make sure there is no collusion between buyer and seller and that this is an arms length transaction. Collusion and scams were part of the housing crisis. But 99.9% of the time deals are fairly negotiated at what the principals believe is market.
So does the appraiser have a strict mathematical algorithm to determine value? Some rock solid calculation that gives a home value with a high level of accuracy? Nope. Appraisers are humans like everyone else in the transaction. They go through some level of calculation and then add in subjective opinion. This became crystal clear to me this year when I started work with a new investor client.
This client buys distressed properties, brings them back to life and then I put them up for resale. Because these homes have been owned less than 90 days, they are considered flips and certain loan programs require 2 appraisals on flips. One would think that having two professional appraisers look at the same property in the same week would yield the same results. Not so. Just last month I had a property in Fairfax VA appraise at $326,000 and $320,00. A month or so ago, I had one in Vienna VA at $350,000 and $335,000. Both appraisers used the exact same comparable sales to yield vastly different results.
I recently had a sale in Alexandria VA that required just one appraisal. It came in $10,000 below sales price at $380,000. That deal fell apart for reasons other than appraisal. It went back on the market and sold 1 week later for $405,000 and appraised at $405,000! Two apppraisers with a $25,000 difference in opinion of value in a month’s time!
The bottom line is that an appraisal in one person’s opinion of value. Whether it comes in low and forces a renegotiation or comes in high and makes a buyer feel like they “stole” a home, it is still just one person’s opinion.
The appraisers have a very, very tough job. So many folks are looking over their shoulder. Their work is being reviewed more closely than ever by loan underwriters and often other special field review appraisers. This is forcing them to be even more conservative in a market that is starting to loosen up. These are good people is a tough spot.
**The appraisers have been asked to do more for less due to increased regulation stemming from the housing crisis. It was felt by those looking at the housing meltdown that the relationship between appraisers and loan officers was part of the problem. Some lenders would tell appraisers to come in at a certain number to make the deal work and if they did not, they were told it could be their last appraisal from that bank. Did that happen? I guess it must have but like most unethical behavior it was really the rare exception and not the rule. I never heard of this from my lenders or my local colleagues. Anyway, because of a few bad guys, new appraisal guidelines were developed. The main one is that loan officers can not talk directly with appraisers. The appraiser needs to be selected randomly from a pool of appraisers or the lender must go through a 3rd party company that will randomly assign appraisers to a specific home. The 3rd party company needs to get paid yet the regulators didn’t want appraisal prices to soar so basically, it has come out of the appraiser’s pay. While they used to get $x for an appraisal, they still get $x but need to share some of that with the 3rd party company. Plus many loan programs are asking for more detailed information on the appraisal. These are really fine people being squeezed by regulation. One needs to ask if an appraiser used to make $x, now makes $x-$y and has to do more work to make $x-$y, does quality suffer as more appraisals need to be done faster so the appraiser can make a decent living?
Further reading: Excellent article in the Washington Post on low appraisals. There is one point in the article with which I disagree. I do not think it is worth battling the low appraisal. I have had very limited success there. But I do like many of their suggestions on how to help avoid a low appraisal in the first place.