The Unspoken Appraisal Problem

As lenders, buyers, sellers, and real estate agents, the big unknown after a deal is put together is the appraisal. A proper pre-approval can smooth out the other components of the mortgage approval (income, assets, and credit- even title issues can be uncovered before the contracts are signed), so the only “unknown” is the appraisal.

The spoken challenges:

• An appraised value has always been loosely defined as “what a reasonable buyer would pay to a reasonable seller”, meaning that both sides were of sound mind and under no external pressure.  But in today’s environment of foreclosures and short sales, the whole concept of “reasonable” is muddled.  So, appraisers are challenged, through no fault of their own, in determining a home’s value because they can’t ignore the data and the distressed transactions, but should they be considered “reasonable”?
• Add to it the prevalence of seller’s concessions today (wherein the seller agrees to pay the buyer’s closing costs) and the appraiser is faced with a further dilemma>  If the seller is willing to pay $10,000 of the buyer’s closing costs, doesn’t that mean that they believe the “reasonable” value of their home is less than the actual price? Many will argue that the seller’s merely looking to make their home more financially attractive to solicit more interest in it, creating more competition, and thereby securing the highest price for themselves.

So, appraisers are in a difficult position, for sure. But, there is a problem with appraisals today that goes beyond a property’s worth. It’s the unspoken challenge.

With the advent of post real estate bubble regulations (predominantly HVCC in terms of appraisals), most lenders order their appraisals through a third-party company. This company gives the appearance of independence- a company immune to the pressures of a loan officer or a real estate agent who might push a value too high. But, in fact, many of these Appraisal Management Companies are owned or controlled by the lenders themselves.  And these AMCs don’t actually do the appraising. In many cases, they subcontract the work out to actual appraisers, but only pay them a fraction of the monies collected.

So, appraisers, besides being under tremendous scrutiny, today have a tougher job and they are asked to work for less money. Is it surprising that they would be conservative in their evaluations? The bubble was not the appraisers fault. There were multiple reasonable buyers willing to pay the prices in 2006, and the values reported were valid at the time. The appraisers didn’t create outrageous underwriting guidelines that allowed too many unqualified buyers to bid on those homes.

Let’s get rid of HVCC and let the appraisers do their job; otherwise, home appraisers will not be showing appreciation in any real estate market.