Several weeks ago, I wrote a column about the Home Value Code of Conduct, which is recent legislation designed to put a wall between mortgage originators and appraisers in hopes of preventing undue pressure on the appraiser to “hit a number” in order to get the deal done.
I attacked the legislation, saying it is akin to “curing dandruff by decapitation.” Appraisers are not only licensed, but the opinion of value in their reports must be supported by the data and be accepted by the underwriter, who is the gatekeeper of mortgage loan approval.
I questioned why some appraisers appear not to take into consideration the notion that the best determinant of value is what a qualified third party is willing to pay for the property. After I wrote that column, an appraiser from Delaware emailed me, clobbering me on my “ignorance” of the appraisal process, and what indicators are used to come up with a value.
I don’t pretend to be an appraiser and admit that I am not qualified to appraise a property. But let’s not overthink this issue. Whatever the appraisal guidelines are, it seems to me that common sense dictates that a property is worth what someone is prepared to pay.
I recently had a purchase fall apart because the appraisal report came in at $250,000, $18,000 less than the purchase price. The real estate agents involved are professionals with decades of experience.
The appraisal report used comparable sales that included inferior properties that recently sold for $215,000 to $235,000. The appraiser used one comparable that was very similar to the subject (an end-unit town home with the same square footage) that sold for $280,000. He omitted two homes that recently sold for $245,000 and $260,000.
Even with my uneducated eye, it was obvious that this report was overly conservative. I don’t blame appraisers for being conservative. They have been a target of criticism for inflating values and causing the real estate bubble. On the other hand, however, shouldn’t an appraiser take into consideration a perfectly qualified buyer’s opinion of value?
This is exactly why our real estate slump is not going to improve anytime soon. The seller in my transaction cannot lower his sales price because his mortgage balance is too high. He would have to write a huge check at settlement to sell his home. The buyer would be perfectly happy to pay the original purchase price, but because the appraisal report came in too low, the maximum allowed loan amount drops significantly, and he simply doesn’t have the cash for the increased down payment. The fellow is a first-time home buyer, has excellent credit and a great job.
I guess the seller is stuck in his home for several more years and my qualified buyer will be forced to rent for a few more years.
The government keeps blabbering about taking steps to improve the real estate market, but with this kind of nonsense, it ain’t gonna happen anytime soon.
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By Andrew P. Napolitano
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