Year-End Pick-Up in Activity

The Limits of Statistics
in Valuing Homes

It's only Wednesday, and I've already fielded three calls this week from appraisers wanting "scoop" on recent, closed sales that I've handled.

A year-end pick-up in deals?

Well, that, too.

However, in each case the appraiser was working on a refinancing application.

To approve the new loan, the lender needed to establish current market value, which in turn means performing an appraisal and identifying/analyzing the Comp's -- just like they would for a sale.

The fact that appraisers need to talk to actual, live Realtors -- who can fill them in on floor plans, updates (or not), and other home features not otherwise captured in statistics -- should give anyone relying on Trulia, Zillow, etc. for home values pause.

P.S.: Time permitting, I'm happy to talk to appraisers. Often times, something I know can be the difference between a deal (or refinancing) happening -- or not.

In an environment where banks are looking for any excuse to shoot down a deal, as a plugged-in, on-the-ground expert, I'm ideally positioned to serve as a counter-balance.

Of course, a healthier, more active market benefits everyone.

Appraiser 'Batting Averages?'

Adding Back Checks & Balances

If you haven't been paying attention, there seems to be widespread consensus that much of the "recent unpleasantness" (what some people in the South called the Civil War) has to do with too few checks and balances in the financial system.

So, one of the reasons that securitized mortgages became such a mess is that everyone involved had an incentive to simply collect their fee, and keep the "product" moving along the assembly line.

Clearly, that "assembly line" -- now very much idle -- is going to be overhauled at best, dismantled at worst (or is it the other way around?).

No matter what happens, though, we are still going to have mortgages, banks, appraisers, etc. (and hopefully, Realtors!).

In that vein, one of the ideas I've heard lately is to rate -- or at least track -- appraisers by the default rate associated with homes they evaluate.

Appraiser "Batting Average"

Ultimately, the appraiser's job is to give the bank that dispatched them a "pass/fail" verdict on the subject home: if the bank proceeds to make a loan (mortgage) on the home in question, will it get paid back? And if not, is the collateral (the home) worth enough that the bank can sell it and recoup its capital?

Obviously, there's more that goes into that determination than the home's market value at the time of purchase. For example, if the Buyer subsequently suffers a major illness or loses their job, they may default on the mortgage even though the appraiser nailed the price.

However, that's what averages are for.

Just like a major league baseball player needs to hit over .250 or so (a Hall of Famer hits over .300 lifetime), you'd expect a good appraiser to have a "success rate" over .95 (ideally, .97 or .98).

P.S.: speaking of accountability, I loved this sentiment from Caroline Baum's most recent column for Bloomberg: 'members of Congress should be compelled to wear uniforms like Nascar drivers, so we could identify their corporate sponsors.'

So, Chris Dodd, head of the Senate Banking Committee, would sport a pink Lacoste shirt with “endorsements” from Citigroup, Bear Stearn, AIG, etc. emblazoned across his chest in large, black letters (the corporate logos go on the back).

Appraisal Issues Return

More Locked Barn Doors . . .

Yet another example of "locking the barn door after the horse has escaped" is newly vigilant appraisers.

Anecdotally, I'm hearing of more sales, especially in the upper brackets, that are derailing because of appraisal issues.

In a typical deal, the appraisal occurs several steps along. Before you even get to that point, the Purchase Agreement has to be negotiated, and any Inspection issues surmounted. By then, both the Buyer and Seller (and their agents) have been in regular contact for days, sometimes weeks.

Once the Inspection Contingency has been removed, the focus turns to the Buyer's financing, which in turn hinges on a successful appraisal.

In a rising market, that's seldom an issue.

However, in a falling or flat market, appraisers take their marching orders from defensive lenders who have become much more conservative. As a result, there can be a gap between what appraisers see, and what Buyers and Sellers agree is fair market value.

What then?

Most Financing Contingencies provide that if the Buyer can't get their financing within a specified time period, the deal is automatically cancelled.

So if the Buyer wants out, they can typically get out.

If instead the Buyer and Seller are still committed to the deal, the Buyer can put up more money to cover the appraisal shortfall; the Seller can reduce the price; or both parties can try to challenge the appraisal.