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Who Moved My Equity? Is your neighborhood being Undervalued?

By
Real Estate Appraiser

Isn't it funny how things change and at the same time...stay the same?  Historically, many real estate appraisers, especially those working for banks or mortgage brokers, have felt pressured to inflate the values of the properties they are evaluating.  Most appraisers have lamented over this situation.  Some have left the industry and many have attempted to work within the system.  Many appraisers felt that if they wanted to keep food on the table they had to learn to "be aggressive" when determining an opinion of value.  Sadly, as we know, many appraisals performed over the last few years were indeed inflated.  Appraisers, sometimes unknowingly, have aided and abetted shady mortgage brokers and real estate agents into pumping up real estate values to unbelievable levels.  This has left home prices in some regions of the US beyond the reach of most middle class families.  The situation has also contributed to the raging foreclosure problem we find ourselves facing. 

Enter the REO (acronym for Real Estate Owned, meaning a bank or foreclosure property) and short sale appraiser.  REO and short sale assignments often come from appraisal management companies.  They frequently call for more detail than the typical residential appraisal.  There may be a request for an REO addendum, Cost to Cure Analysis, repair estimates, As-Repaired values and so on.  The dwellings in question may have substantial deferred maintenance due to the distressed homeowner's lack of funds to property take care of the property.  All in all, a more complex assignment than some and frequently at a reduced fee!  

Imagine the surprise experienced by an appraiser the first time he or she appraises a short sale or REO property and he or she is told by the listing agent that the appraisal "needs to come in low".  Imagine the appraiser being told every single flaw, real or imagined, with the property in question.  (Something that is virtually NEVER done when the appraisal is for purchase financing or re-financing purposes!)  Understandably listing agents do not want to have to try to sell an over-priced turkey (homes priced above market value are often referred to this way).  At times though, the agent feels that the property he or she is representing should have the lowest list price in the area.  This is not always appropriate.  Fortunately, the agent is not the client in most cases and has no power to pressure the appraiser for value.  Sadly though, an inexperienced appraiser may unknowingly submit an appraisal where the opinion of value is lower than market value due to incompetence and upon the recommendation of the listing agent.  There are also situations where appraisers are coerced to "lowball" the appraisal with promises of more work from the agent if the appraisal comes in where "it needs to". 

It is unclear how widespread this problem is.  Generally, lenders trust appraisers and price the homes based upon these deflated appraisals.  This may result in the sale of homes at less than market value, thereby driving down property values artificially.  The market value of homes today is affected by many factors, particularly the stricter lending guidelines that are in place.  Appraisal deflation should concern anyone that owns a home.  Just as appraisal inflation has helped cause many problems in the housing market, appraisal deflation is contributing to a huge loss of equity in many parts of the US.
Rita Bradley
Laguna Hills, CA
Valuation Consultant in Orange County California 949-916-3263

Thanks Michael-funny I accidentally clicked on your name because you had commented on one of John Farris's blogs-so I saw your homepage and that you blog frequently and figured I'd go back later to read some of your blogs.

Thanks for your comment on my post.  Do you think the idea has merit or do you think this is just my perspective from where I'm sitting??

Nov 20, 2007 03:42 AM
John Fariss
Fariss Appraisal Services - Bakersfield, CA
Appraiser - Bakersfield, CA

There will always be someone who will pressure you to hit a number, whether that number be high or low depends on what type of package they are trying to put together. Now, don't get me wrong, there are plenty who will never ask to hit a number, just realize that there will always be someone who does, and it's always in their best interest, not yours.

My guess that when you experience this on an REO or short sale, you have an investor who wants to get in low, do some repairs and remodeling, and re-sell. The agent or lender who is pressuring you to come in low probably knows this, and is probably looking at future business with the investor. So, I don't think the problem is widespread in this arena, I haven't been pressured to do so.

Whether this is artificially deflating property values will depend on how many below-market REO and short sales there are in a given neighborhood and how many of those were pushed for low values.

Interesting food for thought.

Dec 02, 2007 11:40 PM
Rita Bradley
Laguna Hills, CA
Valuation Consultant in Orange County California 949-916-3263
Thank you so much for coming by John.  I think it is a potential problem.  Hard to quantify at this point though.  Everyone is still reeling from the sub-prime meltdown and inflated appraisals.  (Just remember you heard it here first though okay?)
Dec 03, 2007 04:43 PM
Bill Nazur
First Lending Solutions - Riverside, CA

Rita

Drive the price up to make the deal happen, and benefit from the artificially inflated interest payments, and then suppress the price by insisting that you adjust for market time to protect against loss.

Hard to quantify, but you certainly don't need to be a rocket scientist to figure that this is already happening. Frankly, no doubt in my mind......

It will be a few months before we start to see the effects.  

Dec 07, 2007 02:18 PM
Jack Hartzell
HomeAuctionAdvantage - San Diego, CA

As an appraiser and given choices of 30 to 180 days for typical marketing time, and knowing that your appraisal will require more explanation and review time if you mark the box over 90 days..., how do you make adjustments for listed inventory in the subject neighborhood of 500 to 600 days?

How do you as an appraiser adjust for competing listings consisting of 50 to 75 percent either bank owned, foreclosed, short sale - or vacant properties?

What adjustment do you use for the stigma of a short sale listing...from which 30 to 50 percent of agents will steer their clients away... from the headaches of a listing that may or may not sell even in a 90 to 180 day period of extreme frustration - and unknown results?  

 

Dec 30, 2007 05:16 PM
Rita Bradley
Laguna Hills, CA
Valuation Consultant in Orange County California 949-916-3263

To keep it simple Jack, appraisers may use a paired sales analysis to determine the monetary effect of a  property sitting on the market for an extended period.  

In the areas I have appraised recently I haven't seen a trend toward comparable homes staying on the market for 500-600 days.  It may happen some-particularly when properties are over-priced naturally, but I haven't seen it as a trend.  I rarely include short sale listings as comparables in my appraisal reports due to the reasons you cited.  I use reo listings for comparison as most of the properties we've appraised are in markets where there are a large number of REO sales and listings.  

There are no hard and fast rules as each neighborhood and market are different.  A little common sense goes a long way though.    

 Thanks for coming by Jack.  

Dec 31, 2007 04:17 PM
Rita Bradley
Laguna Hills, CA
Valuation Consultant in Orange County California 949-916-3263

Jack, 

Despite all of this, I still see some agents that, in my opinion, lowball their opinion of value on the BPO.  These are bank owned properties that I have observed, not short sales.  Short sales are a whole different ballgame.  It is important to keep the "stigma factor" in mind when pricing these properties for sale.   

Dec 31, 2007 04:21 PM
Jack Hartzell
HomeAuctionAdvantage - San Diego, CA

Rita

We list nothing but short sales in North San Diego County. Typically inventory will last 500 to 600 days based on absorption rates from none to 3 homes per month.

I have 20 years of a past appraisal experience... and I can not figure out how to make adjustments to come up with "most probable price" in this convoluted market. What we have been doing is starting our listings where we think the maximum market value should be... and then dropping the price anywhere from $250 to $1000 per day until we get a tight pattern of offers. We give all offerors an opportunity to know their standing (not actual prices) and let them define "Value" by giving their best offers and then submit the best offers to the lender.

We typically have 3 to 8 offers per short sale property. We are discovering what "knowledgeable and willing buyers and sellers are willing to pay / accept" and many times it is $100,000 below what the BPO, Appraisal, and the original list price are.

We are going to be starting to do regression analyses on the tougher neighborhoods and use that to help us discuss value with the foreclosing lenders.

We would welcome your suggestions.  

 

 

Jan 02, 2008 10:22 AM
Rita Bradley
Laguna Hills, CA
Valuation Consultant in Orange County California 949-916-3263
Wow-that's pretty bad- 500-6-I haven't done any appraisals in San Diego in awhile.  I don't really have any suggestions.  I'm flattered that you welcome my suggestions but yYou've been in the business a lot longer than I have...I defer to your experience....but please call me anytime if you want to bounce any ideas off me. 
Jan 02, 2008 03:40 PM
Alisa McKeel Willson
Appraisal Pros in Texas - Huntsville, TX
Certified Res. Appraiser
Thoughtful post, Rita.  I haven't been here in a while so I'm getting caught up.  I am starting to see more REO sales in my area and it is becoming a big part of my work.  I recently did a property in Oakland.  Of the 30 comps that sold in the prior 6 months only 5 were not REO or Short Sales. 
Jan 18, 2008 03:20 AM
Rita Bradley
Laguna Hills, CA
Valuation Consultant in Orange County California 949-916-3263
Hi Alisa-I haven't been around AR as much either.  You know how it goes.  Thanks for commenting.  
Jan 18, 2008 03:34 AM
Angela Clark
Tony Clark REALTORS - Owensboro, KY
CRS, Realtor, Broker

Rita, this is great info. No wonder you got the call from the AP reporter!!!!  

I heard (but cannot recall the TV talking-head source) that for every 1 foreclosed home, that neighboring properties experience a 1% deprecation in their home's market value.  

Mar 11, 2008 06:15 PM
Regina P. Brown
MBA Broker Consultants - Carlsbad, CA
M.B.A., Broker, Instructor

Rita, I agree that the REOs and Foreclosures are creating some weird and unique value situations in many neighborhoods.  Houses right next door to each other can be priced $50,000 to $100,000 apart just because foreclosures won't move unless priced much lower.

Join my NEW group for professionals who work from their home office at http://activerain.com/groups/virtualoffice

Regina P. Brown
Allison James Estates & Homes
www.ReginaBrown.AllisonJamesInc.com

Nov 29, 2008 04:55 PM