Should You Price to Ward off Appraisal Problems?

Hello Everyone, the following comments relate to a great post by Jennifer Allan

I must say that these comments are not only on the mark, but extremely professional in nature.  I have been appraising real estate for 25 years, working as a Chief Appraiser during the last banking crisis and presenting a Market Analyst producing reports on the real estate market.  I would like to add some comments that have been stated to some degree by everyone:

1. We must accept the fact that there are bad appraisers, bad real estate agents and bad loan officers. With that in mind, we should not classify all in the industry as being incompetent or horrible at what they do.  Well over 90% of those in the industry are professionals.  Time weeds out the bad ones.

2. The Real Estate Agent's job is to get the highest price for the seller (or if representing a buyer, the best price for the buyer).  I have stated this for 25 years.  The agent is on the leading edge of sales activity, having access to new listing, pending sales and closed sales in advance of the appraiser.  If the agent is not seeking the best price for the seller, the agent is not doing the right job for the client. And let's not forget, your commission is also affected as it should be.

3. The appraiser should be a safety value.  In good times real estate agents where happy that the appraiser agreed with the sale price; and in bad times the opposite is the case.  Appraisers tend to trail the market because of regulatory constraints and the most important of all LACK OF DATA.  Lorene is the only commentary that I saw that referred to Same Data.  Appraisers have access to so much data today, but most of that data does not place the property being appraised in relative terms to the overall market or sales.  Computer assisted Mass Appraisal or AVM's remove the subjectivity of analysis, but are biased based on the algorithms employed.  Bad data leads to bad results.

Market value is what a willing buyer and a will seller agree to.  The appraiser's job is to research the entire market, study that market and produce an opinion regarding the market and sale price.  In over 90% of the cases this is done with little difficulty, but appraisers can be influenced.  If two individuals agree on a price, say $300,000 for a 2,000 square foot home; the appraiser must determine by examining the entire market if that price is reasonable and supportive.  It is the appraisers job to determine this, not the banks conservative underwriting.  If the appraiser can reasonably conclude the value is reasonable, I personally do not think the appraiser should come in with an appraisal that is different than the purchase price.

What is reasonable? I would say no more than 5% of the purchase price.  There simply are motivations we cannot measure.  Appraisers are not forecasters, they are reporters.  Much progress is being made for appraisers to gain access to statistical reports and appraisers need to spend resources to gain knowledge.  Appraisers need to be educated into the overall market, not just one property at a time.  Not every house is the best on the block, or best in the neighborhood. 

Sellers, and more importantly buyers are more educated today than 20 years ago.  And most importantly the purchase is a negotiation.

4. Loan Officers or better stated, Loan Requirements.  I am appalled that an appraisal only has three sales and three listings as a minimum requirement.  Why would an appraiser do more than the minimum?  Many commentators referenced unique properties as being an issue and the lack of sales.  We can go on and on about this issue.  Simple fact is the loan officer needs to understand the overall market for the property being appraised.  How can you rely on three sales from the past six months for a waterfront property, or house over 3,000 square feet.  Let's face it loan requirements and overall mortgage standards are based on the average or typical property; not the atypical. 

We all need to recognize that the new regulations are a quick band aide to a bigger problem.  Just like in the late 80"s, FIRREA IX was created to put in place regulations to prevent banking problems that we are seeing today.  Regulations are only good if monitored.  Think of it this way, most states prohibit people from driving and talking on a cell phone, it must be hands free.  So how many times a day do you pass someone talking on a cell phone and how many times have you done it?  If we do not enforce laws and regulations they are meaningless and will be abused.

In the past how many times did the appraiser hurt you and help you?  Markets change, but the blame game never does.  I have worked with many real estate agents who know their market and are very professional.  I have also been exposed to ones who are not.  I have reviewed thousands of appraisals, and ask where is Enforcement?  But what has disturbed me more than anything is the unwillingness or resistance to educate ones' self with better information.  We are not all salespeople or statisticians, but we need to understand that the future will make more information and data available for use.  Understanding how to use it can be the difference between getting the best price for your seller.

We all need to work together.