You knew the complaints about appraisers was coming, didn’t you? The low supply is generating bidding wars on certain properties, resulting in contract prices far in excess of recent comparable sales. When the appraisal doesn’t support the contract price, the buyer generally cannot make up the difference and the deal falls apart. Agents don’t get commissions. Rather than entertain the notion that the contract price was too high, agents blame the appraisers for killing the deal.
One of the most aggravating and ignorant arguments to come from this is that the market should determine the price. Whatever two parties agree to should be what the property is valued at. Well, that’s fair enough if the deal is all cash. Whenever my fund buys a property from the MLS, there is no appraisal because I am bidding all cash. However, when the deal requires lender money — money with taxpayer backing — then an independent third party is needed to ensure sale price is near recent comps to limit the risk to the lender, and ultimately the taxpayer.
On May 1, 2009, Fannie Mae adopted a new Home Valuation Code of Conduct making appraisers randomly selected and thereby completely independent. Now that appraisers cannot be hand selected by agents, appraisers are empowered to do their jobs without fear of a loss of income or being blackballed. The random selection of appraisers was the best reform to come out of the aftermath of the housing bubble. Appraisers are supposed to be independent arbiters of value. With the new system, they can be.
Appraisers function in a real estate market is very similar to the function of the judiciary in modern government. Supreme Court judges are appointed for life to ensure they are insulated from political pressures and thereby enabled to render judgements based on the facts and the law. Similarly, appraisers must be insulated from the pressures of buyers, sellers, realtors, mortgage brokers, and anyone else who stands to gain from the transaction so they can render judgement on the value of properties based on the facts of recent comparable sales.
This new independence isn’t sitting well with everyone who hopes to profit from these deals. They are whining and complaining in news articles all over the web lately. Expect this pressure to continue. This will test the strength of recent reforms. The outcome will have broad implications on whether or not we reflate another housing bubble with taxpayer-backed loans.
Low appraisals that don’t reflect rising markets are ruining deals
Real estate professionals say appraisals sometimes come in thousands of dollars below the price that home buyers and sellers have agreed upon.
June 24, 2012|By Kenneth R. Harney (biased columnist for Realty Times)
WASHINGTON — Are some appraisers failing to see the improvements in real estate values underway in local markets that have recently bottomed out and turned positive? When multiple bids push a house price thousands of dollars above what the seller is asking — not unusual in neighborhoods where demand is particularly robust — are appraisers still coming in with values below the agreed-upon price?
I certainly hope so. That’s their job. Appraisers are supposed to relate the value based on recently closed comparable sales. The problem with appraisals during the real estate bubble was that appraisers didn’t appraise, they simply agreed with whatever value was on the face of the contract. This allowed prices to go up too far too fast with lender funds. If buyers still want to overpay, that’s their business, but the overage needs to come out of their pockets, not the bank’s.
It’s much harder to inflate a housing bubble with equity, and appraisers must do their jobs well and limit prices to a reasonable range around recent comps to prevent lender funds from being at risk. During the bubble rally, clueless buyers would bid any amount they could imagine and some appraiser would agree to it, and some lender would fund it. If appraisers stop doing their jobs now, the bubble risk is passed on to taxpayers through GSE and FHA guarantees.
Appraiser reluctance to report local appreciation is becoming a significant complication in sales transactions, say a growing number of mortgage loan officers and realty agents.
Bullshit. Appraisers are reluctant to report a value significantly above recent comps. They are not reluctant to report a value supported by recent comps. This disingenuous lie about appraiser behavior undermines the good work appraisers are doing today now that they are truly independent.
In a new poll of its members, the National Assn. of Realtors found that 33% of their salespeople reported appraisal problems during the month of May. Moe Veissi, president of the association, said poor appraising “in markets that are no longer in decline is the single most important” valuation obstacle to seeing a real recovery.
Is anyone surprised a realtor is pressuring appraisers to reflate a bubble? Since they feel no responsibility for the results, this kind of lobbying is expected.
Even appraisal experts concede that this is a troubling issue. Frank Gregoire, former chairman of the Florida Real Estate Appraisal Board and an appraiser in St. Petersburg, says that many appraisers are reluctant to make the upward adjustments they know to be justified by recent positive appreciation trends because they fear criticism that they are potentially overvaluing the property — exposing lender clients to costly “buy-back” demands by Fannie Mae or Freddie Mac, or future litigation.
The GSE buy-back provisions keeps lenders from underwriting stupid loans. This is another valuable safeguard in the system. Look for it to come under attack as well.
Even if they have the data to support adjustments reflecting positive trends that affect value — pending home sales and new listings of similar houses at higher prices, for example — “they take the easy way out” and go with a lower valuation so as not to upset hyper-cautious reviewers at the appraisal management companies that now control the bulk of home real estate appraisal assignments, Gregoire said.
Higher pendings and new listings are not legitimate adjustments to value. Pendings are wildly manipulated by realtors, and WTF listing prices are MLS pollution, not a reflection of market value.
One appraiser in his area recently assembled strong supporting data to make an upward adjustment to a valuation based on recent sales activity on comparable houses. When he delivered the report to the appraisal management company that hired him, however, an official of the firm sent it back immediately with instructions to “revisit” the upward adjustment — in other words, get rid of it.
The Realty Times columnist writing this article wants to make this sound scandalous. To me it sounds like an effective check-and-balance in the system working as it should.
Joseph Petrowsky, owner of Right Trac Financial Group Inc., a Manchester, Conn., mortgage company, says too often valuations in upward-trending markets “aren’t catching up with the new values, let alone a property that was involved in a bidding war.”
And their not supposed to.
He cites a series of recent loan applications where the appraisal was thousands of dollars below the agreed-upon sales price, endangering or blowing the deals. In one case, the buyer offered $312,500 but the appraisal came in at just $280,000, despite readily available evidence that the local market has experienced appreciation in recent months.
More bullshit. First, recent closed comps are what matters. Second, the buyer always had the option of putting in the extra $32,500 to close the deal. Buyers can always work to inflate prices with their own money. It’s lender money appraisers are there to protect.
“Appraisers are scared to death” to report rising values, Petrowsky said. “I talk to them and they are beside themselves. They feel they have to [deliver] appraisals they know should be higher.”
Complete and utter bullshit. That comment insinuates appraisers are being held back by some sinister force. No appraiser is delivering an appraisal they know should be higher. They are delivering appraisals reflective of recent comparable sales because they have no pressure on them to deliver appraisals they know shouldn’t be higher.
Much worse, though, is the effect on sellers and buyers. When appraisals comes in much lower than the mutually agreed-upon price, buyers may need to revise their loan requests or renegotiate the purchase price with unhappy sellers.
Dennis Smith, a co-owner of Stratis Financial Corp. in Huntington Beach, says the problem is magnified when the appraiser assigned by the management company travels from 30 or 40 miles away and has no insights into neighborhood appreciation trends that may be relatively recent. He cited an example in which a client saw a bidding war — four offers that pushed the price from the listed $350,000 to $375,000 — but the out-of-town appraiser would not take this into consideration in arriving at the final valuation.
No matter where the appraiser is from, they should not take into account the stupidity of buyers caught up in a frenzy. That’s what inflated the housing bubble. Appraisers are supposed to look at recent comparable sales, which is undoubtedly what this appraiser did.
Sara W. Stephens, president of the Appraisal Institute, the largest association in the industry, says it is every appraiser’s professional duty to arrive at valuations that “reflect the market,” including recent changes — whether positive or negative — if they can be verified with authoritative and accurate data.
How can buyers and sellers guard against the see-no-appreciation problem?
The better question is how can appraisers guard against the see-no-limits-on-value problem of realtors.
Tops on the list: Make sure the realty agents on both sides of your transaction have assembled accurate data on comparable sales or pending sales that demonstrate how the market has changed in the last six months or less. Then make sure the appraiser sees the data.
Your purchase or sale doesn’t have to be jeopardized simply because the appraiser doesn’t have — or chooses not to collect — all the relevant recent facts.
Is he really insinuating that appraiser are intentionally ignoring relevant data? Give me a break.
Not arguing for my own interest
During 2010, my flipping fund was clipped by over $40,000 on low appraisals. I certainly would have been happier if these appraisals came in higher. Some of them I felt were ridiculously low and not reflective of recent comparable sales. Just last week, a property I was selling fell out of escrow due to a low appraisal. But even in my frustration, I recognize the important function appraisers perform, and I salute them for their independence and the work they are doing to prevent another housing bubble on the backs of the US taxpayer.
What will this REO appraise at?
Today’s featured property is an REO that went pending with multiple offers. It’s typical of what happens with a well-priced property in today’s market of extremely limited supply. If you look at recent comps from Redfin below, there is quite a range. I suspect prices between $500,000 and $600,000 could easily be justified. But what if a financed buyer offered $650,000? Would that make this property worth $650,000? I don’t think so.
The former owner managed to Ponzi borrow $133,000 out of the property. She was a typical, small-time, Orange County Ponzi.
Westminster Overview
Median home price is $368,000. Based on a rental parity value of $478,000, this market is under valued.
Monthly payment affordability has been worsening over the last 1 month(s). Momentum suggests unchanging affordability.
Resale prices on a $/SF basis increased from $258/SF to $259/SF.
Resale prices have been falling for 12 month(s). Price momentum suggests falling prices over the next three months.
Median rental rates declined $107 last month from $2,090 to $1,982.
Rents have been falling for 2 month(s). Price momentum suggests unchanging rents over the next three months.
Market rating = 4
Proprietary OC Housing News home purchase analysis 
6002 East MAHOGANY Ave Westminster, CA 92683
$338,500 …….. Asking Price
$355,000 ………. Purchase Price
9/11/2002 ………. Purchase Date
($16,500) ………. Gross Gain (Loss)
($28,400) ………… Commissions and Costs at 8%
============================================
($44,900) ………. Net Gain (Loss)
============================================
-4.6% ………. Gross Percent Change
-12.6% ………. Net Percent Change
-0.5% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$338,500 …….. Asking Price
$11,848 ………… 3.5% Down FHA Financing
3.67% …………. Mortgage Interest Rate
30 ……………… Number of Years
$326,653 …….. Mortgage
$85,790 ………. Income Requirement
$1,498 ………… Monthly Mortgage Payment
$293 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$85 ………… Homeowners Insurance at 0.3%
$340 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,216 ………. Monthly Cash Outlays
($226) ………. Tax Savings
($499) ………. Equity Hidden in Payment
$14 ………….. Lost Income to Down Payment
$105 ………….. Maintenance and Replacement Reserves
============================================
$1,610 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$4,885 ………… Furnishing and Move In at 1% + $1,500
$4,885 ………… Closing Costs at 1% + $1,500
$3,267 ………… Interest Points
$11,848 ………… Down Payment
============================================
$24,884 ………. Total Cash Costs
$24,600 ………. Emergency Cash Reserves
============================================
$49,484 ………. Total Savings Needed
——————————————————————————————————————————————-
We're sorry, but we couldn't find MLS # S701629 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
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$519,000 13669 KINGSBRIDGE St |
0.63 miles 3 bd / 2.25 ba 1,880 Sq. Ft. |
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$475,000 6171 CHIPPEWA Dr |
0.66 miles 3 bd / 1.75 ba 1,800 Sq. Ft. |
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$475,000 6272 CHEROKEE Dr |
0.82 miles 4 bd / 2.75 ba 1,816 Sq. Ft. |
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$589,900 5212 HARVARD Ave |
0.9 miles 4 bd / 2 ba 1,932 Sq. Ft. |
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$575,000 6291 CITADEL |
1.24 miles 3 bd / 1.75 ba 2,000 Sq. Ft. |
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$429,000 13451 SHOOTING STAR Cir |
1.29 miles 3 bd / 2.25 ba 2,016 Sq. Ft. |
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$749,000 15332 FLINTRIDGE Ln |
1.44 miles 4 bd / 3 ba 2,350 Sq. Ft. |
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$459,000 7544 IVY Ave |
1.67 miles 4 bd / 3 ba 1,880 Sq. Ft. |
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$599,000 15622 SUNBURST Ln |
1.74 miles 4 bd / 1.75 ba 1,930 Sq. Ft. |
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$500,000 7611 LEHIGH Pl |
1.81 miles 4 bd / 3.5 ba 2,306 Sq. Ft. |
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48 Responses to “Appraisers resist pressure to reflate the housing bubble”
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Since it takes good paperwork skills and 1 year in a classroom to become an appraiser, it makes sense that appraisers are the ones who determine valuations.
Not sure what happened to the post above…. but lets try again..
Since it takes good paperwork skills and 1 year in a classroom to become an appraiser, it makes sense that appraisers are the ones who determine valuations
LOL, still not correct
Nevermind
Appraisal is not rocket science. Any training on appraisal makes them more qualified than agents and buyers. The key point with appraisers is their need to be independent. Without independence, they will succumb to the pressure to reflate the housing bubble.
Larry, for whatever reason, what I typed in the box, then clicked reply, does not appear above exactly as it was typed. Twice. Half of my thoughtful remarks are missing. Can you just delete the posts?
Once they get nested, I can’t delete them easily. Your explanation serves to clarify you didn’t mean what you said.
Why do they tell the appraiser what the sell price is before they do their appraisal? Wouldn’t it make sense for them to come up with an independent price? I imagine it’s no coincidence that my appraisal came out exactly the same as the sales price – just doesn’t seem right.
OCC: 11.1% of mortgages are not current
The rate of delinquent mortgages fell to a three-year low in first-quarter 2012, according to a report from the Office of the Comptroller of the Currency (OCC).
The OCC Mortgage Metrics Report for the First Quarter of 2012 showed that percentages of mortgages between 30-59 days delinquent and mortgages between 60-89 days delinquent both fell to their lowest levels since the OCC began publishing mortgage performance reports in Q1 2008.
The percentage of mortgages that were current and performing increased to 88.9 percent, the highest level seen in three years. The percentage of mortgages 30-59 days delinquent decreased by 17.3 percent from Q4 2011 and 3.8 from Q1 2011. The percentage of mortgages that were seriously delinquent was 4.5 percent, down 10.4 percent from the previous quarter and 6.2 percent year-over-year.
The percentage of mortgages in the process of foreclosure at the end of the first quarter increased by 1.8 percent from the previous quarter and 2.3 percent year-over-year. However, the number of newly-initiated foreclosures decreased from the previous quarter by 1.8 percent and from the same period in 2011 by 8.1 percent. The report also showed that the while the number of foreclosures in process increased slightly (0.6 percent) from the previous quarter, it decreased 3 percent from the same time in 2011.
The report attributed the improved performance to several factors, including strengthening economic conditions during the quarter, seasonal effects, servicing transfers, and the ongoing effects of home retention programs and home forfeiture actions.
Servicers implemented 352,989 new home retention actions-modifications, trial-period plans, and payment plans-during the quarter, nearly twice the number of completed foreclosures but still a 23.3 percent decrease from the previous quarter and a 36.7 percent decrease year-over-year. While servicers have been emphasizing alternative solutions to foreclosure, retention actions have fallen with delinquency rates as servicers run out of options to help homeowners who have not already received assistance.
Of the more than 2.5 million loans modified by servicers from 2008-2011, 50.7 percent were either current or had been paid off by the end of 2012’s first quarter. Another 7.1 percent of modified loans were 30-59 days delinquent, while 15.1 percent were seriously delinquent. Nearly 11 percent were in the foreclosure process, and 6.3 percent had completed the process of foreclosure. Modifications made more recently that focused on reduced payments and increased affordability outperformed earlier loans.
HAMP-modified loans also outperformed others-68.2 percent of HAMP modifications implement since Q3 2009 remained current compared to 53.4 percent of other modifications made during the same period. The better performance reflects HAMP’s emphasis on reduced payments, income verification, and affordability, traits that nearly all performing loans had in common.
Mortgages serviced for Fannie Mae and Freddie Mac made up 59 percent of mortgages in reporting servicers’ portfolios. The performance of these mortgages remained relatively consistent over the last year, with the percentage of current and performing mortgages at the end of the quarter at 93.7 (a slight increase from 93.2 percent at the same time last year). The portfolio of GSE mortgages tends to perform better because it contains prime loans.
NAr puts Baghdad Bob to shame
NAr’s cHEIF eCONOMIST Yun is predicting a 10% INCREASE in home values within 12 months. Even with a normal economy that would be hard to achieve. And it’s all just basic analysis and it doesn’t even factor major threats like jobs, economy, budget cuts, mortgage rates increases, appraisals, and shadow inventory. This is just bluster to try and re-inflate the housing market.
Realtor guru: 10% home-price jump possible
June 26th, 2012, 8:06 am · · posted by Jeff Collins
National Association of Realtors Chief Economist Lawrence Yun said he “would not be surprised” if U.S. home prices jumped 10% by June of next year.
If true, that would be significant after three or four years of falling home prices.
“The market is healing,” Yun said recently at the National Association of Real Estate Editors conference in Denver.
Several factors triggered Yun’s enthusiasm: Strong demand among buyers, higher sales, lower number of homes for sale, and a level of foreclosures that – while high – has steadily decreased over the past two years.
Distressed sales – foreclosed and underwater homes – account for a fourth of the market this year, compared to a third last year, he said. By next year, they’re expected to account for 15%.
“This time next year, there could be a 10% price appreciation. I would not be surprised to see that,” Yun said.
What makes this call so good is despite the fact that Yun is pulling this prediction out of his ass, when it doesn’t happen, he can blame the appraisers and add to the pressure they are putting on them.
Yet perhaps Yun is right. There could be statistical deviations leading to a “higher home value” based on a peculiar definition of what that value is: if median value of all closed single family homes yes. Remember, lower price homes REO and not yet foreclosed especially are seeing accelerating purchases by huge groups of investors jointly taking over bad bank total portfolios (apparently without any recording being done through mers-like entity assignment) then indeed, could be. Also the high end home is selling more units due to comparison numbers, also doing odd things to the median. If Yun means Case Shiller numbers…if…then still that’s possible IF what I suspect will still happen. That is, that the banks have from the start, reduced interest rates by one half percent jumps timed out, to keep their refinance income coming in…it’s a huge part of their earnings. They aren’t done. They can’t afford to lose that; it;s why they didn’t greatly cut long term rates the first day of the recession, the cash flow of refinance mattered more than losses on the homes (mostly imposed on investors/govt). So if interest rates now fall to yet another half point or more lower, plus inflation now is reported to help spook the common person to seize inflation shelter as housing is all they know…yep, could be. Interest rates on the thirty year loan could nominally be reduced another point to two points so long as Europe remains in risk disarray. (Nominally in the sense of being offered to those with absolutely the best credit, it keeps the suckers coming). All those homes being bundled and sold in bulk to investment groups that pledge to rent 80% of them, is going to have this impact on the homes closing prices still available for sale (investors don’t want the higher priced stuff, and that’s what will be left). Thus Yun can, technically, be correct if these present continuing plans come to pass (as I speculate, speculate wildly). Heck, if the banks can rig LIBOR, they can rig anything (also they rigged student loan rates, etc). And by “anything” I include the upcoming Presidential election.
I think federal and state taxes are increasing next year. Plus, it seems like the economy is headed fast into a deeper recession and it affect jobs and income. These issues will put downward pressure on home values. But your right, if they rigged LIBOR, then anything is possible.
I’ve just learn to expect the unexpected.
Jump in prices..or jumped the shark?
They discuss the change in the mix of housing. Are move up buyers returning?
O.C. home prices forecast to jump 7.1%
The average median price of an existing house is projected to rise 2% in Orange County this year, followed by a 7.1% leap in 2013, Chapman University’s Anderson Center for Economic Research forecast Wednesday.
But before you call your agent with “Buy!” orders, be forewarned: That forecast reflects a change in the mix of homes that will sell over the next 18 months rather than a big increase in overall home values, the forecast warned.
How come?
Chapman foresees a delcine in the number of foreclosed home and homes selling “short” of their overall debt. That will result in higher price averages, but not necessarily a big bump in home values.
Nonetheless, the local housing market is getting stronger, bolstered by rising demand, homes becoming more affordable than ever and an ebb in the number of homes on the market, Chapman economists said.
“The combination of job recovery and high housing affordability is gradually improving housing demand,” the forecast said.
It stated elsewhere: “Over the long-run, pent-up demand for housing in Orange County will lead to broad-based increases in home prices.”
This market is HOT right now, most houses are getting full or above list price offers within a few days.
the above 800k market certainly isnt. most of the one i am following have had a price cut.
That piece of the market will be moribund for years. There is very little demand above $800K because so few buyers can raise that kind of money.
I appreciate you putting a link in this post back to my article on BiggerPockets.com (The Residential Appraisal Problem) and agree that appraisers must have independence. However, to say that my argument about the market dictating real estate values is aggravating and ignorant is a little, well, aggravating and ignorant.
I believe the entire appraisal process is flawed. The residential appraisal is based on historical data, or comps. If a neighborhood is littered with short sale and REO properties, all selling for around 100K, and appraisers only use historical data to determine value, then how will prices ever go up?
Appraisers should be allowed, and actually encouraged, to use “terms of sale”, i.e. normal sale vs. short sale vs. REO when determining value. After all, most people know a normal sale is more valuable than a short sale or REO. They should also be told how many offers the owner of the property has received. This would help them and everyone else involved in the transaction.
The bottom line is there is not enough uniformity in the appraisal industry. Three different appraisers could come up with three different values for the same property. Check out this post for a real world example:
http://freerealestateeducation.com/2009/10/29/performing-an-autopsy-on-a-dead-real-estate-deal/
“most people know a normal sale is more valuable than a short sale or REO”
I’m not convinced that an equity sale is any different than an REO or Short Sale. Why should I, as a buyer, pay an equity seller more than the exact same property next door that is an REO or SS? What makes the equity property inherently “more valuable?”
The argument is, that a short sale or foreclosure includes one party that isn’t a willing participant. It’s not an arm’s length transaction between two willing parties.
Fair point.
But how does that not get extended to other situations where the seller “must sell” like in the case of divorce/death/job transfer/etc? Why simply limit it to broader SS/REO/Equity? How many sales really occur where a buyer convinces a seller to sell? Aren’t most sales “mandated” in some form or another (meaning one side isn’t really a “willing participant”?
Also, doesn’t current bank behavior in withholding inventory show that they aren’t “forced” to sell?
Agreed. Not only do we not know how “willing” any sellers are, but many short sales/foreclosures have “owners” living rent-free who are “willing” to sell at any price, so long as the negotiation/sale takes many months.
“They should also be told how many offers the owner of the property has received. This would help them and everyone else involved in the transaction.”
Then I would only submit low ball offers on houses in the area I’m interested in purchasing. That would eventually lower the appraised values if it’s based on the number AND amount offered.
The close sale in the market the price and it’s based on many factors…closing costs, conditions or sale, buyer finances, improvements agreed during sale, seller financing, and many other factors. At an auction it’s not the number of bidders it’s the final bid price.
A good appraisal factors in the condition, neighorhood into the value of a house. Appraisal for an extra price can also have cash flow analysis, replace cost with age and condition of the house factor into the price. Hopefully the days when the bank called the appraiser to raise the price/value so that it was a done deal are over. The old days the appraiser in many areas were there to rubber stamp the deal. If they didn’t, the appraiser would lose future work from the bank and RE agents. With the old conditions the price automatically went up with each round of appraisals, since the comp’s were pushed up by comparing them to the prior inflated appraisals.
If the appraisers can truely be independent, I see sanity returning to RE market and the middle class.
It all begins at the top of the food chain (banks).
The entire valuations mechanism is well beyond “flawed”. Reality is, it’s completely broken because the price model is based on a fraudulant standard.
My neighbor’s 4u building in La Verne went through foreclosure and was sold at $550,000 when the value was $750,000 but that price is not reported and not used in appraisals. I think it should be known and used. I know the value because I have had mine on the market a few times during my marriage to Marina, and I’ve toyed with selling even now to get to a better location like Dana Point. So when the previous owners came to me and offered theirs at $750K I said forget it, thats no deal, and they went to foreclosure and you see what happened. Does that make me evil? Hell no, that makes them greedy and stupid. The new owners jacked up the rents even higher than mine, and said its because everything is new. I do appreciate that. But something is wrong with the obfuscating banks or the archaic system of foreclosure auctions because a lot of stuff went on I had no clue of. Plus, if it means values are widely known by both sellers and buyers and prices reflect that, why, that might change how people view the appraisal business.
On another note, Hinkles and McCoy are laying off 2 employees from every department and they say its because of union line workers messing up but there is no recourse with union workers so everybody else gets the axe. That is NOT GOOD. I am beyond caring about union workers and their lazy-ass ways. My tenants end up getting evicted, rents suffer, INCOME TAXES GOES DOWN, cities go bankrupt, and they are complaing about APPRAISALS? Lets put blame where it should go, at the union’s feet for starters.
Marty,
First, the basic premise of your article is flawed. If whatever a buyer and seller agree on is considered “the market,” then what are appraisers for? Why would we need them? Every transaction would get funded by lenders (and backed by taxpayers) on whatever price buyers and sellers agree on. Obviously, this would be an open invitation for fraud, so some third-party evaluation is necessary to prevent fraud. But is there any other purpose for the appraisal? I argue that saving stupid buyers from themselves is a valid reason for an appraisal. If the agreed upon price is far in excess of market value, buyers need to know that, and they can make an evaluation as to whether or not they want to put in more of their own money. Either way, lender money should never be put at risk because some clueless buyer agreed to overpay for a property.
“and appraisers only use historical data to determine value, then how will prices ever go up?”
Appraisals are an estimation of value, and appraisers generally allow for some degree of upside error in their estimations. If a price is near recent comps, most appraisers will agree with the slightly higher price (+-5%). This allows prices to drift higher by as much as 5% every 120 days for the new comps to cycle through the system. The key thing is that appraisers must wait for the new comps to be closed sales.
As for the statement “After all, most people know a normal sale is more valuable than a short sale or REO,” It was touched on above, but what you put out as an accepted fact is complete nonsense. I wrote about this in two recent posts.
Distressed sales cannot be excluded when analyzing the market
http://ochousingnews.com/news/distressed-sales-cannot-be-excluded-when-analyzing-the-market
Short sales damage house prices just like REO
http://ochousingnews.com/news/short-sales-damage-house-prices-just-like-reo
Larry, merely because Marty authored an article, doesn’t make him an authority; just as a person who knows how to move the pieces on a chessboard isn’t necessary a masterful chess player.
I suggest you refrain from engaging Marty and his ilk in discourse. You’ve already pilloried him enough. He’s probably seething with anger because you had the temerity to take him to task for his nonsensical arguments. Sadly when I was reading your response, I was reminded of this quotation:
Never argue with a fool, onlookers may not be able to tell the difference. ~Author unknown, attributed to Mark Twain
http://www.quotegarden.com/speaking.html
In other words, by responding to Marty’s thinly disguised absurd rant, at least in my eyes, made you look bad. If someone argues according to the rules of arithmetic that 2 + 2 =5 then why bother correcting him more than once?
I hope you won’t let this blog degenerate into a series of wasteful, foolish debates.
I try to respond to every comment, particularly when they are addressed to me. His commentary was not so ridiculous as to be absurd on its face, so I felt it necessary to respond. Also, I didn’t respond with any disparagements and instead addressed the points he raised. It’s a judgment call when dealing with potential trolls. Perhaps I should have let it go.
Dear Not Given and Irvine Renter,
I’m not seething with anger, nor do I ever recall been referred to as a fool or a troll. If you want to call me names how about using your own in this forum?
I don’t claim know everything but I’ve bought and sold enough houses to say that the appraisal process is universally flawed. I flipped a house once that, in a period of 60 days, appraised for 125K, 118K and 93K. I also know that retail buyers are willing to pay much more for a normal sale than a short sale or REO. Why? Because normal sellers usually respond quickly, provide disclosures and are willing to fix stuff that’s broken. Here in Phoenix normal sales sell for 15-25% more than short sales and REOs and I can provide the statistical data to support this fact.
I’m not saying that the agreed upon price between the buyer and seller should be the only factor in determining value, only that it should be considered, along with historical data and terms of sale. Most of the real pros I know take these factors into consideration. However, just like there are lousy Realtors, mortgage brokers, loan underwriters and title reps, there are also lots of bad appraisers that only look at historical data.
A new process with more uniformity would solve many of these problems. We’re all in this together. Healthy discussions about the issues in our industry can be very productive. I prefer to be part of solution, not the problem. That’s why I write about real world examples of the flawed process. It’s not my intent to offend anyone.
“Because normal sellers usually respond quickly, provide disclosures and are willing to fix stuff that’s broken”
Wait a minute, you mean to tell me that a property that is in better condition than another will sell for more? That doesn’t sound like an REO/SS/Equity difference, that sounds like an actual difference with the property……
I can show you countless examples (here in the OC in an area that I am actively looking) where a Short-Sale and/or REO sells for the same as or actually more than an identical property on the same street. I am just not seeing any difference realtive to actual comps that you describe as showing up in broad statistical data.
Marty,
If you look at my bio, you will see that I also have bought and sold many homes. I am also a professional property flipper. My market is Las Vegas, but I have encountered the same problems you have. I’m sure you would like to believe I don’t have much experience buying and selling homes and haven’t seen what you have seen, but that simply isn’t the case.
You are arguing for what is in your best interest and blaming the appraisal system for what’s happening in the market. Your arguments are biased toward an outcome you want to see, and you are ignoring the valuable functions served by the appraisal system.
Your flips and mine do sell for more than distressed properties because we fix them up. That is a material improvement to the property. Distressed properties are also often run-down properties, so making the blanket statement that distressed properties sell for less than non-distressed properties is comparing apples to oranges. And yes, it has pissed me off to improve a property and have an appraiser fail to recognize the value I added, but that’s the business risk I took on when I entered this market. So did you. Though I may disagree with the appraisals I have received on specific properties, that is not a sign of a flaw in the appraisal system, that is just a difference of opinion between me and an appraiser. Appraisals are part art and part science. The subjective nature of them is what’s frustrating you (and me).
Honcho, I guess that’s why they say real estate is a local business. Here’s the chart for greater-Phoenix:
http://flippingphoenixhouses.com/wp-content/uploads/2012/06/Terms-of-Sale-Chart-6-28-12.png
Larry,
I’m not just arguing for myself, but on behalf of every home buyer and seller that has ever had a deal go south because of a low appraisal. I know several friends, family and real estate colleagues that have had deals blown up. These weren’t investors who understood the risks like us, they were regular people.
I agree appraisals are valuable but don’t agree that the current system is valuable. Too many people have been burned.
For what it’s worth, I never doubted your credentials. I read your bio. Very impressive. I appreciate the blog and lively conversation. Is there any way I can be notified via email of new comments? I just happened to check back here this morning to see if anyone posted a reply to my original response. Imagine my surprise when I saw so many passionate replies. I’m glad I came back for a visit.
Marty,
I appreciate your thoughtful and civil discourse. I apologize if I was too harsh with my opinion on your original blog post. It makes the writing more interesting when it’s a bit over the top.
I don’t think there is a good answer to the problem of low appraisals. Doing away with them or ignoring them is an invitation to fraud. I’ve had several buyers go to different lenders after a bad appraisal and get a better one. That’s the only solution that makes sense that I can see. Perhaps lenders could allow a second appraisal at the borrower’s expense so the borrower wouldn’t have to qualify all over again, but it would still take time and money.
BTW, it isn’t just appraisals. I had a deal fall apart because the lender chose not to fund even with a favorable appraisal. The internal people at the bank overruled the appraiser and said they know better. Wait until that one happens to you to see how mad you can get at the system.
Larry, saw this yesterday. Frank Gregoire, past chair of NAR’s Real Property Valuation Committee testified before the House Financial Services Committee this week.
In his testimony, Gregoire said that a number of issues are impacting the credible valuation of real property, including appraiser competency and local market knowledge, challenges in accurately estimating market value in stabilizing markets, and the lack of oversight and regulation of Appraisal Management Companies (AMCs).
Here’s the link to the article:
http://www.realtor.org/news-releases/2012/06/strong-independent-appraisal-industry-vital-to-market-and-loan-origination-process-say-realtors
Marty,
Unfortunately, nothing the NAr says has any credibility whatsoever. Their opinions are completely self-serving, and as evidenced by nearly everything they said about the market over the last six years, they are generally completely wrong.
Marty
Broad statistical charts based on averages don’t tell me anything about how like properties (as between SS/REO/Equity sales) should be treated for comp purposes. These AVG charts show somewhat of the same thing here in the OC, but I can show you specific examples of like properties (same model/same neighborhood) where one is an REO or SS and the other is an equity sale and there is no difference in where they ultimately closed.
In one particular neighborhood my wife and I are interested in, the high sale in the last 3 months belongs to an REO! There have been a handful of equity sales since then and they all come in below that one (they are all basically the same model or slight variation thereof). Why is the REO the high sale? Because the REO was in the best shape of any of the properties in that neighborhood.
The mere fact that one property is an REO or SS and another is an equity sale tells me nothing about “value” when I am trying to figure out what to offer on a particular property.
REIT predicts second-wave:
“You could say the positive of this negative equity is that it helps drive home prices up, as underwater homeowners delay as long as possible putting their home on the market which creates a supply constriction. But it’s only temporary and not a real sign,” said Williams. “These situations are unsustainable and certainly short lived.
“Strategic defaults, foreclosures and property value declines have to happen for the market to reset and clear itself of the toxicity from the greatest mortgage mess of this century.”
http://www.housingwire.com/content/reit-predicts-second-wave-san-diego-foreclosures
If banks don’t kick out squatters, it could be a long second wave.
It’s interesting how people think short sales, REO sales, etc., should not be used as “comps” when appraising a property. I agree if they are a small part of the market – but when half of the sales are distressed they influence the market. Someone posting above (I am too polite to name the individual) objected to the use of REO’s, short sales, etc. in appraisals because the market won’t go up if these properties are used as comps. Well, it’s not an appraiser’s JOB to make the market go UP (thank you)…it’s the appraiser’s job to base an estimate of value on WHAT IS HAPPENING IN THE MARKET…
When markets go up due to natural market forces (increased income and household formation resulting in increased demand for housing) that is a positive thing, but when markets go up due to phony financing and flawed appraisals that is a bad thing because these increased values are built on hype and hot air. There is nothing solid supporting them.
I have been in the appraisal profession for many years. We always get blamed when times are tough – YOUR VALUES ARE TOO LOW…but I never get gift baskets from builders, lenders, and others when the markets are good. We get all the blame for the rain but no credit for the sunshine. If appraisers are so powerful it should be a two-way street – in the good times we should be treated LIKE ROYALTY.
Will, I know people who are actively looking to buy right now. I always direct them to this blog so they are not blindly following their Realtor, how many actually do I don’t know.. Thank you for what you do because basically you are the last mechanism in place to protect them from over paying. They will thank you one day, maybe not personally…
It seems that many appraisers simply do not have the experience, especially for this type of volatile market – but it is not just their fault. With the increased number of short sales and foreclosures, coupled with shadow inventory and cash sales, it is becoming increasingly difficult to accurately value and appraise homes in this marketplace – when coupled with the fact that lenders are increasingly wary on pulling the trigger, it is no wonder the market is in such disarray.
Appraisals for this type of marketplace – where short sales and foreclosures comprise a significant portion of available homes – are just more complex. And, while appraisers are getting a bad rap, 150 hours of education (75 hours until recently) seems inadequate appraisal training for anything other than a very simple/basic appraisal.
GRES-
I agree with you that many if not most appraisers have inadequate training…in other countries the appraisal profession is held in much higher regard and appraisers have a lot more training. Here’s the problem – no one wants to pay more for appraisals. If appraisers were required to have more training the cost of appraisals would have to increase so that appraisers could pay for their training. However, having been in this business a very long time I find that when a borrower/client is unhappy (or furious) they rarely have better data to prove their case. When I get an angry call from a buyer, broker, lender, etc., I very calmly say, “I used the best data I could find. If you have data that supports a higher value I would love to take a look at it. If it turns out I’m wrong I’ll be happy to revise my appraisal.” Most of the time the person has zero – zilch – in the way of data to support his/her case. In maybe 5% of the cases a very professional broker/buyer/lender will send me some good data that I did not have and I will revise my report, but most of the time the anger is without any basis in fact. I just ruined their deal and they are mad as h*ll!
you say “It seems that many appraisers simply do not have the experience, especially for this type of volatile market”
This market is anything but volatile. It’s moribund, dead-in-the-water. Seller and buyers are on strike. Thank you big-nanny government for meddling.
I respectfully disagree. Inventory is moving, there is just a lack of it. If you have the money to purchase with cash, you are in a great position. Properties are moving quickly for those who can afford it. The fact of the matter is, the market is anything but moribund – it’s flourishing. The volatility is in reference to the lack on consistency in inventory, appraisal values, and loan approvals.
The market is not flourishing. You are either delusional or lying. The market appears to be rebounding due to the smoke and mirrors of cheap money, money printing, and government subsidy. None of this is sustainable and all of this is inflationary.
I agree 100% with matt136. I live in an ocean front top-tier neighborhood. I now see people and certain media putting out a new tune, that housing is moving and there is a lack of it and that the top 1% are buying up properties to rent them …I have one thing to say to that crap just STOP. PLEASE JUST STOP.
In my neighborhood 800K and over nothing is “moving” in fact even 250K and under is NOT moving anywhere but into foreclosure. I am so sick and tired of the various manipulative techniques now being blown around I have one tactic I just shut off everything. I have adopted one principle I listen to my own mind and my own research. I just cannot believe people THINK people are buying into the smoke again.
No need for caps and yelling. The simple fact of the matter is, if you review the inventory levels now vs. 6-months ago, much of it has been snatched up. I never differentiated between short sales, foreclosures, and traditional sales. I never said the inventory is traditional sales – I agree with you that it is not. There are few, if any traditional sales at this point. I believe there is definitely substantial shadow inventory, and that the media and government is definitely misdirecting the public, and spinning this into a false sense of market recovery by limiting inventory and not releasing accurate facts to the public for both housing and employment – that is a fact.
My only point was, even if the majority of the inventory is short sales and foreclosures, the simple fact is that they are moving for those who can afford it- numbers do not lie. Whether it is purchased as a short sale, foreclosure, or REITs’ and groups purchasing the homes for sale – they are selling.