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 overly active 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 the top questions we typically encounter when determining property 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 the property appraisal is to provide a current market value for a property compared 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 discuss strictly residential appraisals. Residential real estate appraisers are licensed by their respective states and have different license levels depending on the loan value of the property. They must take classes and pass certification tests to obtain and maintain their licensed status. They are also generally delimited by county due to the way Multiple Listing Services (MLS) maintain and sell their records. So a good appraiser really knows their geography and what to look for.
Why does it cost so much?
Real estate appraisers are traditionally independent contractors/business owners: no appraisals = no money. So, while paying 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 adjuster has to cover all out-of-pocket expenses just like any business person (education, health insurance, MLS fees, liability fees, commercial insurance, state fees, and the list goes on). In addition, a good appraiser may spend 3-6 hours preparing (looking for comparables, etc.), driving 45 minutes or more to the location, 2 hours driving comparables and taking photos, and then another 1-3 hours writing. . the report and then if the bank wants more information or rejects something, you have to spend the time to answer questions, etc.
Also, if they get your application from another appraiser or one of these new government-created brokers called AMCs, they may have to split the fee. These are all just the costs of doing business. So when someone stops by for 30-60 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 that owns the appraisal is the person who commissioned it. So if you’re shopping for a home loan, your loan company “owns” the appraisal, not you because you’re the broker. Even if you pay the appraiser, it makes no difference: you didn’t set up the transaction. Why is this important? The appraiser cannot legally give you a copy of “your” appraisal, it is not yours. If you request an appraisal for loan purposes, the bank may not accept it because you did not request it or because you do not know the appraiser. Catch 22: Yeah, but the appraiser didn’t do it, so don’t shoot the courier. There are different types of appraisals (home, land, cost-based, equity, chronological, etc.) and they are not interchangeable. If you are going to request 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 the value of housing has fallen by up to 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 appraised values have been made so fast 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 houses have a higher market value than they do and they get upset, real estate agents get upset that the deal doesn’t close and the bank says the appraised value is what it is. it 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 may ask what you want, but banks want to know what other similar houses sold for; don’t let your real estate agent fool you. While the process is intended to be precise, “similar” is a very ambiguous term. Are we talking square footage, age, updates, tile vs. marble, pool or garden, the variables can seem limitless. This is why online value services are worthless and if you pay for them you are wasting your money. Only a live inspection on site can properly see and assess the 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 make 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 first in this process?
People who refinance a lot or were thinking of refinancing in the last 6 months often ask this. Remember throughout the real estate process – the bank has the power – no one else. Recent complaints from others and pointing fingers at appraised property values is really a distraction as banks with their lending programs and compensation systems drive everything. Because the banks lent money so freely and caused the crash, they have drifted 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 great rates. Keep in mind that banks do not have clients they are interested in for repeat business: you are a commodity. This pressure game in the name of “making sure it doesn’t happen again” increases appraiser and loan officer costs that cannot be passed on to the borrower. If you’re a banker, it’s not a big deal, you’ll get a federal or government bailout bond where it’s basically “who cares, it’s not my money.” These things aren’t important because you don’t really care about impact. BUT if you work for a living in $400 increments with no guarantees 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 failed in further regulation raising borrowing costs in the process, some of which has been passed on to the borrower. It has also stifled loan creation, so while they still have money, they are unable to borrow due to government pressure. Psychology is beyond the normal mind to comprehend. Everyone who’s supposed to help likes to put more rocks in our backpacks as we climb the hill and tell us it’s for our own good.
It also produces lower quality reviews 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, done thousands of honest appraisals, have an MBA and have an excellent 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 work you did before. So now you get an appraisal 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 kick out your appraiser, he’s just the messenger.