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Response to A.P. article in Daily Breeze 01/04/2010

January 26, 2010 on 3:33 pm | In Uncategorized | No Comments

After reading the AP article 01/04/10 “Foreclosures Weigh on Home Appraisals”, I have a few comments.

As a real estate appraiser for the past twenty five years, I never fail to marvel at the warped logic used to blame the appraiser for all the industries problems.

We were apparently the cause of the bubble because we valued properties too high, and now are hampering the recovery by appraising them too low. We had the same problem during the last crash in 1990, which resulted in licensing of appraisers. The theory at that time was that too many inexperienced and underqualified appraisers lead to that crash. Licensing was intended to raise and standardize the education levels of appraisers and provide for enforcement of rules. The fact that we are here again suggests that we were not, in fact, wholly responsible for the last collapse.

The answer this time was to saddled the appraiser with the Home Valuation Code of Conduct, which was intended to sever the relationship between the loan originator and the appraiser in an effort to eliminate pressure on the appraiser to “hit the number” needed to make the deal work. Placing an intermediary in the appraisal ordering process has been a benefit only to the intermediary who collects a portion of the appraisers fee for performing this service. Since these entities feel entitled to as much as half the regular fee for this service, novice appraisers are more likely to accept this type of assignment and the result is often a less accurate valuation from someone not necessarily familiar with the specific market in which they are appraising.

This article seems to find fault with the practice of using foreclosure sales as indicators of value.

What an appraiser does, in most cases, is not hard to understand. We look to recent sales and current listings of similar homes to establish an estimate of value. The primary concept at play here is the law of substitution which states that no one would willingly pay more for something than they have to. The buyer doesn’t care if the seller is a homeowner or a bank, they are only concerned with getting the most bang for their buck.

The reported statistic that foreclosure sales bring less than full market value may be correct, but the reasons are less about the loan history of the property than they are about how the foreclosed home is marketed. The latest trend I see in the industry is to list homes far below their market value and wait for the potential buyers to bid up the value. Most buyers in the current market are bargain hunters. That, combined with tighter credit rules, tends to exert downward pressure on sales prices. Also, foreclosed homes are often in need of repairs at the time of sale. Home owners in economic crisis may defer repairs and maintenance in an effort to remain in the home, and borrowers who feel they have been victimized may intentional damage a property when they vacate.

The appraisal process has techniques for dealing with disparities in condition, so this is less of an issue.

The example used of Las Vegas neighborhoods “just a few miles apart” having very different values is meaningless. Ask anyone in the industry what the most important component of value is and they will tell you – LOCATION.

Rolling Hills and Lomita are only a few miles apart, but anyone from the area knows they are miles apart price wise.

In my opinion, the biggest culprits in the real estate crash are those players whose compensation is commission based. The Realtor and the Lender have a vested interest in higher values to increase their compensation, while the appraiser receives a flat fee based on the difficulty of the assignment. Our fiduciary responsibility is to accurately report the market trends and arrive at a value estimate that is supported by market data. If the strength in the market is for bargain properties, we are not responsible, we can only analyze and report.

The media needs to step up their game when it comes to reporting on real estate. One of my pet peeves is the Median Home Price Index. No where have I seen reported what exactly constitutes a “median priced home”, yet they’re only too happy to tell me the price has gone up or gone down. What this statistic doesn’t say is that last years median priced home was 1,000 square feet, two bedrooms and 1 bath and this year’s might be 1,500 square feet with three bedrooms and two baths. Just knowing the median price is of little value.

Just my 2 cents worth.