The collapse of the economy began with a reality wind blowing against the sub-prime mortgage house of cards. We are all living with the results of over aggressive lending practices and over active government intervention. With all these friends who needs any enemies?
As the market realigns, property valuations have plummeted. Some of you may even be “upside down” on your mortgages. Do you buy? Do you sell? Do you ride out the tsunami? This series will go through all the major questions that we normally encounter in determining the value of a property. What are the drivers? What are the inhibitors? What you need to know to get the best value.
What is Property valuation/real estate appraisal?
The purpose of property valuation is to provide a current market based value for a property in comparison to others in its immediate vicinity. So an appraisal is time, location and geography specific. It is a comparative value – not an absolute. Second, real estate appraisals are broken into two broad categories – residential and commercial. For the purposes of these papers we will be discussing strictly residential appraisals. Residential real estate appraisers are licensed by their respective states and have different levels of license levels based on the value of loan for the property. They have to take classes and pass certification tests to gain and maintain their license status. They are also usually bounded by county because of the way Multiple Listing Services (MLS) keep and sell their records. So a good appraiser really knows their geography and what to look for.
Why does it cost so much?
Real estate appraisers are traditionally independent contractors/business people – no appraisals = no money. So while you are paying a relatively standard one time fee (e.g., $400) they have to make sure they get as many appraisals in as they can to make any profit at all. How’s that? After all they’ve got your $400. An appraiser has to cover all out of pocket expenses the same as any business person (education, health insurance, MLS fees, liability fees, business insurance, state fees – the list goes on). In addition a good appraiser may spend anywhere from 3 to 6 hours in preparation (looking for comparables, etc.), have a 45 minute or more drive time to location, 2 hours driving comparables and taking pictures and then another 1 -3 hours writing the report and then if the bank wants more info or kicks anything back they have to invest the time to answer questions, etc.
Also, is they get your request from another appraiser or from one of these new rip off government created middlemen called AMCs – they may have to split the fee. These are all just the costs of doing business. So when someone stops by for 30 to 60 minutes with a tape measure know that it’s the tip of the iceberg and you’re getting a good deal.
Do I own the appraisal?
The person/company who owns the appraisal is the person who commissioned it. So if you are looking for a house loan, your loan company “owns” the appraisal, not you because they are the commissioning agent. Even if you pay the appraiser, it makes no difference – you did not set up the transaction. Why is this important? The appraiser can’t legally give you a copy of “your” appraisal – it’s not yours. If you request an appraisal for loan purposes you may find that it’s not accepted by the bank because they didn’t request it or they don’t know the appraiser. Catch 22 – yes but not made by the appraiser so don’t shoot the messenger. There are all different kinds of appraisals (home, land, cost based, estate, chronological, etc.) and they are not interchangeable. Make sure if you are going to personally request an appraisal you know what it can be used for.
Why do I need a new Appraisal?
The market is so volatile that you may require a new appraisal every 6 -8 weeks for some lenders. In the last eight months housing values have dropped up to 40% in some areas. This means a $1 million house could be going for $600k now. This has made lenders very uneasy and they require more documentation and proof of values than before. Of course they were also the companies that caused the problem – Catch 22 for us. Refinancing has become more challenging as appraised values have gone done so rapidly that people who can manage the monthly payments are penalized because the “value” puts them underwater. For sellers it’s even more emotionally challenging as they believe their homes have a higher value in the market than they do and they get upset, the real estate agents get upset because the deal doesn’t close and the bank says the appraised value I what it is. The appraiser gets attacked for the state of the market instead the banks who created the issue.
How to determine value?
Value is determined the recent sales of similar homes within a given geographic radius. This means sales, not pending sales; people can ask what they want but banks want to know what other similar homes sold for – don’t let your real estate agent mislead you. While the process is meant to be precise, “similar” is a very ambiguous term. Are we talking square footage, age, upgrades, tile vs. marble, pool vs yard, the variables can seem limitless. This is why online value services are worthless and if you pay for them you are wasting your money. Only a live onsite inspection can see and assess value properly. Lenders understand this. Geographic area is also becoming looser. Neighborhoods can change in character so rapidly that the normal radius for a comparable is 3 miles. However because sales have been so slow, comparables are fewer and fewer. Because the lenders require 3 -5 or more valuations per property, sometimes more; appraisers are searching outside the 3 mile radius for comparables. Bottom line – if you’re looking to sell in the next 12 – 18 months don’t do any major upgrades because you probably won’t get your money back. Do what you need to please yourself and that’s it.
Who’s on First in this process?
People who refinance a lot or were thinking about a refinance in the last 6 months often ask this. Remember in the whole real estate process – the bank has the power – no one else. The recent complaints by others and finger pointing at appraised property values is really a distraction as banks with their loan programs and compensation systems drive everything. Because the banks lent money so freely and caused the crash – they have swung 1800 away and are now hoarding cash. To justify this approach they are squeezing loan agents and appraisers for more and more documentation of value. This is especially ironic for refis – people who are already good customers but just want to take advantage of some good rates. Bear in mind that banks don’t have customers they care about for repeat business – you are a commodity. This squeeze play in the name of “making sure it doesn’t happen again” drives up appraiser and loan agent costs which cannot be flowed through to the borrower. If you’re a banker – no big deal – you’re going to get a federal bailout bonus or in the government where it’s basically “who cares it’s not my money” – these things are not important because you don’t really care about impact. BUT if you’re working for a living on $400 increments with no guarantees of where your next job is coming from – it means a lot. The other guy in the process, who used to be a silent partner is the government. They have enacted new legislation to “clean up” the valuation process when it was never broken to begin with. This has backfired into more regulation raising lending costs in the process – some of which has been passed on to the borrower. It has also stifled loan creation – so while still have money they can’t borrow because of government pressures. The psychology is beyond the normal mind to fathom. Everybody that is supposed to help likes to put more rocks in our backpacks as we go up the hill and tells us it’s for our own good.
It also produces lower quality valuations and appraisals. Example, Fannie Mae requires that all appraisals they get be from “certified” appraisers. Because the government requires banks follow suit. Now the difference between a regular appraiser and a certified appraiser is a couple of classes and taking a test. So let’s say you been an appraiser for 20 years, done thousands of honest appraisals, have an MBA and have an excellent reputation – guess what – thanks to the government your out of business until you get spend hundred to thousands more and take a test. But it’s the same job you did before. So now you get a valuation done by someone with little practical experience who happened to take a test but gets the work. That’s the answer to some of the basic questions you want to know in this market. If you’re in the middle of this process and frustrated take it out at the ballot box but don’t kick your appraiser – they’re just the messenger.