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Who Cares What The Purchase Price Is… WILL IT APPRAISE?

The classic definition of what a home was worth has always been “what a reasonable buyer will pay a reasonable seller.”  That’s because MOST real estate transactions have historically involved reasonable people– people not under duress.  But today, with the enormous number of foreclosures, bank-owned property, strategic defaults, and short sales, all the reasonableness has vanished and duress reigns supreme.

Today, appraisers are faced with some dilemmas:

  1. If a reasonable buyer and seller come to terms on the price of a home, but at the same time there are other available properties at lower prices, what’s the home really worth?
  2. If a bank lists a property they own (via a foreclosure) at 10% below market value to get a quick sale, is that a reasonable representation of a neighborhood’s true value?
  3. With all the short sales starting to move through the system now, does the fact that the seller isn’t getting any money from the sale eliminate them as a reasonable party to determine a legitimate value?
  4. How about the actual condition of the housing inventory?  How does that get reflected in the appraised value?

And at least another dozen quandaries the market has created…

Recognize that appraisers are charged with the responsibility of independent thinking, geared to protect the lender and buyer from over-lending and overpaying.  They should be revered as our best defense; however, today many are scorned.

The industry norm calls for appraisers to examine value from three perspectives.  One, the Cost Approach: what would it cost to rebuild the structure?  Two, the Income Approach: what could the property be rented for and what multiple of that number would make the house attractive to a real estate investor?  And three, the most impactful, the Market Approach: what have comparable sales in the same market have sold for?

The Market Approach is in sync with the old axiom…. “location, location, location” (with some adjustments for style, square footage, lot size, age and condition of the home, etc.).  It was a look at the past to determine the present. and until recently, it all made sense.  Unfortunately, in a declining market, looking backwards leads to overpricing today.  And predicting all the components of home prices in the future (available inventory, future interest rates, and consumer confidence) is even trickier.

Add into the mix the proliferation of Sales Concessions whereby a seller agrees to pay some or all of the closing costs for the buyer.  How should that impact an appraisal?  If a seller says they will pay $20,000 in closing costs for the buyer on their $320,000, are they really saying they think the house is worth $300,000, or has the market compelled them to offer this inducement to the buyer to get their house chosen from all the other $320,000 homes?

On top of all that, our political representatives and regulators are Monday Morning Quarterbacking the real estate bubble and are looking to blame people….and appraisers have a bull’s eye on their backs.  (As if appraisers overvalued properties from 2001-2006 when every home had MULTIPLE OFFERS at the time.)  These political forces came up with new regulations (HVCC) that restrict communication with the appraisers, allegedly to lessen the influence of lenders and real estate agents.  Let’s face it, appraisers are scared.

When you recognize the challenges facing appraisers today, it’s easy to understand why the “meeting of the minds” between a buyer and seller is only the first “meeting of the minds” necessary to consummate a transaction.  I never believed that appraising was a mathematical science, nor should it be a purely artistic endeavor, but today, it has become chaos…..with no real end in sight.


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