The collapse of the economy began with a wind of reality blowing against the house of cards of subprime mortgages. We all live with the results of overly aggressive lending practices and overactive government intervention. With all these friends, who needs enemies?
As the market realigns, property valuations have plummeted. Some of you may even be “upside down” on your mortgages. You have bought? Do you sell? Did you survive the tsunami? This series will look at all of the top questions we typically encounter when determining a property’s value. What are the drivers? What are inhibitors? What you need to know to get the best value.
What is Property Appraisal/Real Estate Appraisal?
The purpose of property valuation is to provide a current market value for a property in comparison to others in its immediate vicinity. So, an assessment is specific to time, location, and geography. It is a comparative value, not absolute. Second, real estate appraisals fall into two broad categories: residential and commercial. For the purposes of this document, we will analyze strictly residential appraisals. Residential real estate appraisers are licensed by their respective states and have different levels of license depending on the loan value of the property. They must take classes and pass certification tests to obtain and maintain their licensing status. They are also usually delimited by county due to the way Multiple Listing Services (MLS) maintain and sell their records. So a good appraiser really knows his geography and what to look for.
Why does it cost so much?
Real estate appraisers are traditionally independent contractors/businessmen: no appraisals = no money. So while you pay a relatively standard one-time fee (say, $400), they need to make sure they get as many appraisals as they can to make any profit. How is that? After all, they have your $400. An appraiser has to cover all out of pocket expenses just like any business person (education, health insurance, MLS fees, liability fees, business insurance, state fees, the list goes on). Also, a good appraiser might spend 3-6 hours getting ready (looking for comparables, etc.), have a 45 minute or more drive time to the site, 2 hours driving comparables and taking pictures, and then another 1-3 hours writing. . the report and then if the bank wants more information or rejects something, they have to invest the time to answer questions, etc.
Also, if they get your application from another adjuster or from one of these new government-created intermediaries called AMCs, they may have to split the fee. All of these are just the costs of doing business. So when someone stops for 30 to 60 minutes with a tape measure, know that it’s the tip of the iceberg and you’re getting a good deal.
Do I own the appraisal?
The person/company holding the appraisal is the person who commissioned it. So if you are shopping for a home loan, your loan company “owns” the appraisal, not you because you are the broker. Even if you pay the adjuster, it makes no difference: you did not set up the transaction. Why is this important? The appraiser cannot legally give you a copy of “his” appraisal, it is not yours. If you request an appraisal for loan purposes, the bank may not accept it because you didn’t request it or because you don’t know the appraiser. Catch 22 – Yeah, but the appraiser didn’t, so don’t shoot the courier. There are different types of appraisals (home, land, cost-based, estate, chronological, etc.) and they are not interchangeable. If you are requesting an appraisal in person, make sure you know what it can be used for.
Why do I need a new Appraisal?
The market is so volatile that you may need a new appraisal every 6-8 weeks for some lenders. In the last eight months, home values have fallen by as much as 40% in some areas. This means that a $1 million house could cost $600k now. This has made lenders very concerned and they require more documentation and proof of value than before. Of course, it was also the companies that caused the problem: Catch 22 for us. Refinancing has become more challenging as appraisal values have done so quickly that people who can manage the monthly payments are penalized because the “value” puts them under water. For sellers it’s even more emotionally challenging as they believe their homes have a higher market value than they do and get upset, real estate agents get upset because the deal doesn’t close and the bank says the appraised value is what it is. is. The appraiser is attacked by the state of the market rather than the banks that created the issue.
How to determine the value?
Value is determined by recent sales of similar homes within a given geographic radius. This means sales, not pending sales; People can ask what they want, but banks want to know what other similar houses sold for; don’t let your real estate agent fool you. While the process claims to be accurate, “similar” is a very vague term. Are we talking square footage, age, updates, tile vs. marble, pool or garden, the variables may seem limitless. This is why online value services are worthless and if you pay for them you are wasting your money. Only a live on-site inspection can properly see and assess value. Lenders understand this. The geographic area is also becoming more flexible. Neighborhoods can change character so quickly that the normal radius for a comparable neighborhood is 3 miles. However, because sales have been so slow, comparables are fewer and fewer. Because lenders require 3 -5 or more appraisals per property, sometimes more; appraisers look for comparables outside the 3 mile radius. Bottom line: If you’re looking to sell in the next 12-18 months, don’t do any major upgrades because you probably won’t get your money back. Do what you need to please yourself and that’s it.
Who is in first place in this process?
People who refinance a lot or were thinking of refinancing in the last 6 months often ask this. Remember in the entire real estate process – the bank has the power – no one else. The recent complaints from others and finger pointing at appraised property values is really a distraction as the banks with their loan programs and compensation systems drive everything. Because the banks lent money so freely and caused the crash, they have deviated from 1800 and are now hoarding cash. To justify this approach, they are squeezing loan officers and appraisers for more and more documentation of value. This is especially ironic for refis: people who are already good customers but just want to take advantage of some good rates. Keep in mind that banks don’t have customers they are interested in for repeat business – you are a commodity. This lobbying game in the name of “making sure it doesn’t happen again” adds costs to the appraiser and loan officer that cannot be passed on to the borrower. If you’re a banker, it’s not a big deal, you’ll get a federal bailout or in the government where it’s basically “who cares, it’s not my money.” These things are not important because you don’t really care about impact. BUT if you work for a living in $400 increments with no guarantees of where your next job will come from, it means a lot. The other guy in the process, who used to be a silent partner, is the government. They have enacted new legislation to “clean up” the valuation process when it was never broken to begin with. This has backfired on increased regulation that drives up borrowing costs in the process, some of which has been passed on to the borrower. It has also stifled the creation of loans, so while they still have money, they cannot borrow due to government pressures. Psychology is beyond the normal mind to comprehend. Everyone who is supposed to help likes to put more rocks in our packs as we go up the hill and tell us it’s for our own good.
It also produces lower quality evaluations and ratings. For example, Fannie Mae requires that all appraisals they obtain be from “certified” appraisers. Because the government requires banks to do the same. Now the difference between a regular appraiser and a certified appraiser is a couple of classes and taking a test. So let’s say you’ve been an appraiser for 20 years, do thousands of honest appraisals, have an MBA and have a great reputation, guess what, thanks to the government, you’re out of business until you spend hundreds or thousands more and take a test. But it’s the same job you did before. So now you get an assessment done by someone with little practical experience who happened to take a test but gets the job. That’s the answer to some of the basic questions you want to know in this market. If you’re in the middle of this process and you’re frustrated, take it to the polls, but don’t throw your appraiser out, he’s just the messenger.