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Don't shoot the messenger!

By Barry Owen

Real Estate Broker/Owner with Pareto Realty TN #251071

January 29, 2009 10:42 PM

We've flurries of crashed deals here in Middle Tennessee.

A fairly high percentage of these deals and refinances are not making it to the closing table are failing because of appraisal issues.

It's a pesky little thing . . . VERY irritating to get SO close to the closing table only have "some Jerk" come in and tell everyone the house is not worth the purchase price . . . or the lender will be requiring excessive repairs.

Heck! The Seller is already taking a bath (a loss) on the sale and has nothing left to give,

The Buyer feels good about the deal he got and had an inspection and is completely aware of the condition issues ... So, what gives?

Why are these appraisers swooping in and upsetting applecarts all over the place?

Are they just mean people?

Well, I know a few outstanding Appraisers and decided to invite the most experienced one I know in Middle Tennessee (Richard Exton - www.exton.biz) to hop into our hornet's nest (our training room) to help us understand what's happening and how we REALTORS can help our deals survive the appraisal phase of the transaction.

The day before the session, Richard and I decided that it would be cool to pick a listing and send it out to everyone and invite them to do their own Comparative Market Analysis - I would do one myself - and "Big Bad Appraiser" Richard would do one ... We would do a quick "class" about doing a CMA using the MLS - then asked Richard to describe his process . . . and ended with Q & A.

We had 15 associates show up in person and several tuned in to our internet live streaming feed @ www.stickam.com/barryowen

Here's the bad news . . . Richard's assessment of our subject property was that he would have a very difficult time justifying the Listing price @ $550,000 . . . His number was more along the lines of $425,000 . . . The room GASPED!

Here's the problem . . .

The banks want to be as sure as they can be that if they have to own this property one day in the future (Which these days has been happening quite frequently) that they will not have to take a loss . . . and the appraiser is their first line of defense . . . Their ONLY window to reality "on the ground" . . .

The lenders are requiring the appraisers to be VERY conservative and hold rigidly to the appraisal guidelines.

Gone are the days of "going outside the neighborhood to find comps" . . . or going further back in time.

The "Perfect Comp" is "The same floor plan with the same features, in the same neighborhood (Next door would be good), closing at the same price (or higher) . . . YESTERDAY!"

Here's the problem: Stating the obvious

High inventory levels have created many months of supply - 5-7 months of supply is relatively healthy, and we are seeing in some price points and areas YEARS worth of inventory . . .

and demand is down for a whole litany of reasons not the least of which is the "Global Economic Crisis" and job losses (insecurity) and public uncertainty of political leadership policy decisions.

All of this leads to FEWER real estate sales (DUH!) . . . DRAMATICALLY fewer sales over an extended period of time . . . and a large number of the sales that ARE happening in many areas are "Below Market value" sales (Foreclosures) . . . This leaves slim pickings when it comes to finding decent comps for decent properties.

It just is what it is . . .

and the Appraisers are doing what they are being paid to do . . . Determine their assessment of value on the day of the appraisal using the available data . . . and it's not their fault the data sucks :-)

Location parameters are rigid - in the same neighborhood or within a mile . . . Closed within 6 months . . .

What's interesting is that it seems less important now than before for the square footage and features of the comp (including age of the home) to match the subject. The Appraisers are using the comps that meet location and timing requirements and are "adjusting" the assessment for other factors.

My recent experience has been that most appraisers are willing to talk with REALTORS when they are having difficulty finding comparables . . . and will use any data the REALTOR offers as long as it meets the guidelines . . . but will NOT and can NOT compromise their obligation to their client - The Lender.

Hey! We're all in this together . . . Don't fight and scream when an appraiser spoils the brew . . . Seek to understand and learn their process better so that you can advise your clients better.

Best,

PS - I WILL be at Family Reunion this year - Hoping to connect with LOTS of folks

twitter @barryowen

Barry Owen

Principal Real Estate Broker

Keller Williams Realty

Nashville, TN - Green Hills

615-568-2123

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Fernando Herboso - Associate Broker MD, & VA

Maxus Realty Group of Samson Properties - Clarksburg, MD

301-246-0001 Serving Maryland, DC and Northern VA

Good advice thanks,

Jan 29, 2009 10:58 PM

Cindy Edwards

RE/MAX Checkmate - Johnson City, TN

CRS, GRI, PMN - Northeast Tennessee 423-677-6677

OMG...I feel like I'm reading a story of my life in Real Estate right now!

Jan 29, 2009 11:21 PM

Bill Cobb Appraiser

Accurate Valuations Group, LLC - Baton Rouge, LA

Greater Baton Rouge's Home Appraiser

Hi Barry,

Great Post and Great Insight! I'm glad you're asking these questions for the AR readers. I'd like to add two to three things I see that might have been left out out of the discussion - the lag time of solds and current listings - their impact on the value decision.

First, from the lenders perspective, which I'm not one, is that there is nothing on the horizon that says this national mortgage meltdown situation is going away or will be improving any time soon. The Bush Admin. and Obama Admin.s answer is and has been to throw money at the problem. Is throwing more and more money the solution to this crisis? If so, wouldn't Wall Street be fairing better and consumer confidence be rising? Only time will tell. The only thing that is certain right now is that the ARMs created in the 2005-2008 period will continue to reset and the 2nd, 3rd and 4th waves of mortgage resets will cause more and more foreclosures. Banks/Lenders will only be adding more and more "non-performing assets" to their books in the coming months and years. As I understand and have read, this is widely understood. This is the real reason banks and lenders have turned conservative and have added constraints on appraisers to become even more conservative!

How, You Ask? Listings. In the past, it was easy to complete 2-3 home appraisals a day. Not any longer. In the past 12 months, lenders have added requirements such as 4-5 sold comps (instead of just 3), 2-3 current listings (preferably "pending" listings), more neighborhood analysis and more reconciliation verbiage. This alone has added 1 to 1.5 hours to each appraisal. And on 4/1/2009, Fannie Mae has mandated the use of the new 1004 MC Addendum, Market Conditions Addendum, which adds 1-3 hours to every home appraisal where the loan is being sold to FNMA. This new addendum takes 8-9 questions and wants 8-9 answers for 3 periods of time within the past 12 months. That's 24 to 27 separate questions to answer.

Getting Back To Listings. Today, based on the instructions provided by major lenders, market value decisions are being made based on the "adjusted sales prices of the listings, adjusted to listing-to-sales price ratios". This is due to the lag time of sold comps. For example, say you have 3 sold comps that sold 3, 4 and 6 months ago to use in an appraisal and these comps support the purchase price of say, $300,000. The sold comps are this old because the market has slowed and there aren't any more recent solds. These solds are now 3-6 months old, indicating a lag time in the market. Lenders today want to know what's going on right now, which is why appraisers have been mandated to use 2-3 current listings adjusted to list-to-sales price ratio. Let's say that these 3 listings, adjusted to a list-to-sales price ratio of 94%, support a value of $290,000 instead of $300,000. Then, the appraiser's decision, based on the lender's newer requirements, is a value of $290,000, not $300,000. In today's market, adjusted current listings trump older sold comps, even if the sold comps are 3 months old. Again, a seasoned appraiser will be able to make value judgments based on the "current market", not a market that was 3 to 6 months old....and today, 3 to 6 months ago was a long time ago. Just letting you know how we're being told to view this market and the lender instructions we're being given to follow in making value decisions.

Here's a recent AR posts that I found interesing.

The Reality of Comparable Sales In A Declining Housing Market - Where 1 Agent Is Explaining How Another Failed To Properly Examine The Market

http://activerain.com/blogsview/901044/The-Reality-of-Comparable-Sales-in-a-Declining-Housing-Market

Please tell Danny Wiley, SRA in Nashville hello for me.

Bill Cobb, CREA

Jan 30, 2009 02:45 AM

Barry Owen

Pareto Realty - Nashville, TN

Bill . . . I certainly will pass along the hello to Danny . . . We just had a deal he appraised.

Thank you for your comments - I have passed them along to our associates . . . Great information there.

Best,

Jan 30, 2009 03:23 AM

Bill Cobb Appraiser

Accurate Valuations Group, LLC - Baton Rouge, LA

Greater Baton Rouge's Home Appraiser

Thank you, Barry! Have a great weekend!

P.S. Another reason appraisers are becoming more conservative is lawsuits and E&O Insurance issues. E & O Insurance is becoming more expensive. And, Fannie Mae is hard at work, through contractors, to make lenders buy back loans where fraud by the lender or fraud by the appraiser can be proven. I recently completed a field review for Fannie Mae, which I later learned was to help force a local lender to buy back a fraudulent deal. The appraiser used 3 private FSBO sales in the multi-family appraisal, MF Property located in a war zone (high crime area), which sold for $160,000 each. Apraiser falsified condition of subject BIG TIME! The seller of the MFP being appraised was the same person that had just sold these 3 for $160,000. The appraiser failed to consider the other 38 MFP MLS sales within 5 blocks of subject property because these sold from $69,000 up to $140,000 and wouldn't have supported the deal. What I later learned was that this same appraiser and lender not only worked together on this loan, but several. The lender, upon notification from FNMA of having to buy back the loan, will probably sue the appraiser for the $40,000 loss for each MFP loan. Fannie Mae is very serious about making fraudulent lenders and appraisers pay for their dirty deeds.

Jan 30, 2009 10:04 AM

Leslie Helm

Tennessee Recreational Properties - Jamestown, TN

Real Estate For Trail Riders

I have just had two deals tank due to the buyer INSISTING that the apprasial match the purchaseprice. To say that this is unlikely is being kind. It is impossible. In our area lots in a premium recreational area sold at 25,000 per acre. The bank is 12,500 an acres...because...the only lots sold in the last 6 months were an estate sale. Apples to Oranges...

Great post I'll pass it on.

Jul 25, 2009 10:45 AM

Tori Stamps

Stamps Realty - Franklin, TN

MA JD - Broker/Owner Franklin TN Homes for Sale

Great Post Barry! I've been very fortunate not to have run into this yet, but it's good info nonetheless!

Jan 31, 2010 11:39 AM

Robert Dirienzo

HABITEC Home and Building Inspections, LLC - Franklin, TN

Home Inspections - Nashville TN

Very interesting post and exercise Barry. I like the way you defended the "messenger" Maybe one day we could do a similar exercise regarding Home Inspections?!

Thank you,

Richard Acree

Comments in this blog posting are the copyrighted intellectual property of Richard Acree, President, HABITEC Home and Building Inspections, LLC, and contributing members of the Active Rain Real Estate network, and are intended to educate and otherwise assist home owners, sellers and buyers, building owners, sellers and buyers, realtors, real estate investors, property managers, and lenders in the process of owning, buying or selling homes or commercial buildings. HABITEC is a residential (home) and commercial building inspection company serving Middle Tennessee including Nashville, Brentwood, Franklin, Murfreesboro, Smyrna, Mt. Juliet, Hendersonville, Dickson, Belle Meade, Columbia, Spring Hill and more! In addition to building inspections HABITEC offers Environmental Services for mold assessments, radon testing and water quality analysis. Additional information about HABITEC can be found on our website at www.habitecinspections.com, or call 615-376-2753.

Richard Acree is the author of the HABITEC Home and Building Inspections Blog and founder of the ActiveRain Group Tennessee Home and Building Inspectors. All are welcome to join and see more blogs like this one.

Feb 25, 2010 12:32 PM

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Stream of consciousness commentary on the real estate industry from the perspective of a Principal Real Estate Broker and Founder of Pareto REalty, LLC in Middlle Tennessee - Also a Career Development Coach with vast Organizational Development/Transformation training and experience - in the industry since 1993

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