This is another question we get asked a lot and the quick answer is value is in the eyes of the beholder. It also depends on who you ask.
If you ask the seller, they’ll tell you about how they personally built the house, what kind of insulation is in the attic and walls, how many screws are holding up the shelves in the kitchen pantry, how they clean the solar panels on the pool twice per month for maximum longevity, how they just cleaned out the dryer vents, the fact that they imported fruit trees from Malaysia for maximum fruit yield, and the date and time each fruit tree was planted. All of these things carry emotional value to the seller and should equate to monetary value in the seller’s eyes.
The lender wants to know how sound the buyer is, if the homeowners association is fiscally sound, and the opinion of value from the appraiser.
The property appraiser looks at value from last year and tells you what they think your home used to be worth last January 1 based upon sales from last year. This is done on a mass-appraisal system because the property appraiser cannot possibly do a full-blown appraisal on all parcels in the county. While this is a monumental task, the property appraiser is at a big disadvantage ascertaining actual value on any one particular property because of the scope of the task. While we would never rely on the property appraiser’s assessment of value due to these issues, we are amazed at how many times they do a good job of getting in the ball-park or close to value, but they are subject to error because the values are based upon a previous time frame and done on a mass scale.
This brings us to the last two people in the equation; buyers and appraisers. Buyers look at several homes and size them up against one another. Buyers are always on the lookout for property that meets their needs, and presents the best value to them. Typically they’ll make an offer on the best value property that meets their needs. They don’t often waste time by offering on over-priced properties; they go straight for their favorite and offer there. Only when negotiations fail on their favorite do they typically move on to their second choice, so over-priced sellers remain the bridesmaid instead of the bride.
Lastly the appraiser becomes involved. Since May 1 there has been a new governmental rule in effect called the HVCC (Home Valuation Code of Conduct). It was intended to improve the appraisal system and provide more accurate appraisals, but as is anything government related, it’s been a disaster. Appraisals have been far from accurate, and you could easily argue that the mass appraisal system the local property appraisers system uses has been far more accurate than some of these appraisals.
The HVCC setup a management company to act as a middle-man so to speak. Costs to consumers have gone up, and turn around times have increased. The lowest priced appraisers have gotten many of the orders, so consequently many appraisals have been handled by out-of-town appraisers unfamiliar with our local values. The management companies give appraisers little time to do their work-typically 2 days, but appraisals take sometimes weeks to receive back because the middle-man has to review them.
FHA accounts for 70% of the financing today, and if you get a bad appraisal you’re stuck with that value for 6 months under FHA. We’ve seen many properties under-appraising by $70,000 and more. The sad thing is the buyer wants to buy the property, and the sellers wants to sell, but the faulty appraisals are preventing not only the current buyer, but also future buyers from purchasing the property. It is literally forcing many properties into foreclosure.
You can literally blame the Federal government since May 1 for wrecking our market. Oh, we can’t blame them for all the faults leading up to May 1, but we’re in serious recovery mode right now and the new HVCC system is preventing prices from moving when they should, and sales from occurring when buyers and sellers want to do business.
The banks are powerless. Even though they want to lend money to a qualified buyer, the faulty appraisals are preventing it, and appealing the process is almost futile. A loan officer cannot speak with an appraiser, and the appraiser has total control, even when facts are presented clearly showing value is present.
We recently had an appraisal done where the appraiser would not use a comparable two houses down, but preferred to use a foreclosure two neighborhoods over. The neighborhoods were not the same. The appraisers are so afraid a bank may come back on them later that they’ve gotten too conservative, and many times use poor condition and gutted properties against good condition properties. Appraisers should be worried buyers could sue them to level the playing field, and in fact one state has introduced a law stating just that.
Congress really needs to step in and fix this mess. The government created it through additional regulation, and the unintended consequences are wrecking the market, and this market needs help, not an outside entity kicking it when it’s down and trying to get up.