The Appraiser’s Party Foul

By Ryan Dosen

 

When we were young, my brother Chris and I collected sports cards. My parents encouraged it somewhat, as it seemed a better use for report card money than candy or plastic toys. The cards at least had some hope of holding future value.

We subscribed to these monthly price guides that would tell us the supposed value of the cards, and we believed the guides. We had nothing else to go on. I mean, these were ancient times. Before eBay.

One day I was telling my father about all these “valuable” cards I had and he asked me how I knew that they were so valuable. I quoted him the guide. He said, “Son, something is only worth what someone is willing to pay you for it.” Eventually the Internet came along, and message boards came along, and we quickly found out that Dad was right and that our cards were worth far less than we thought.

Fast forward to today. Shift your focus from the baseball card market to the real estate market. And now kindly stand on your head.

The Home Price Perception Index

Quicken Loans’ Home Price Perception Index (HPPI) tracks the difference between appraiser opinions and homeowner perceptions of home values. The most recent HPPI revealed that “homeowners rated their home values higher than appraisers did for the third straight month, with the gap widening to 0.69 percent from 0.4 percent in March.”

While it may not be particularly surprising that homeowners think their homes are worth more than they actually are, that’s not where the story gets interesting, and many times frustrating.

In today’s improving real estate market, we are seeing many transactions implode, not because buyers and sellers can’t agree on a home’s worth, but because appraisers and banks don’t agree with the parties’ opinion on price.

A bank will typically agree to lend you a certain percentage of the purchase price, unless the appraised value comes in below the purchase price. If the home’s appraisal comes in below the purchase price, the bank will usually only lend the buyer the same percentage of the appraised value, leaving it up to the buyer to come to closing with additional cash to make up the difference. When this happens, it usually either kills the deal or the seller is forced to lower the sales price to the appraised amount.

This creates a bit of a “chicken or the egg” situation for hot markets and price increases. Higher sales prices require higher comps, which require higher sales prices, which require … Dramamine. Eventually, if the market is truly hot enough, more cash is brought to the table and the higher comps are created. But not usually without several deals lost along the way. Deals that may have even been priced properly, but which the system wouldn’t allow.

The Party Foul

So here we are, standing on our heads. Because much to my deceased father’s chagrin, the home is not worth what someone was willing to pay for it. Or perhaps it was worth it, but the bank and appraiser played the role of the awkward kid at the party that accidentally knocked over the punch bowl while trying to dance with the other kids.

To be fair, appraisers have to base their appraisals on past sales. If the past sales aren’t there, they can’t simply raise the appraisal because the market feels hot. They can’t just assume that prices will continue to increase. And banks have to know what their collateral is worth. An appraisal is pretty much the best they can do. They can’t assume that a random buyer has properly priced the security for their investment.

So, the awkward kid stays. Party fouls and all. The party’s not going to get totally crazy. A few people are going to leave early and upset. But that’s not a terrible thing. A terrible thing is what happened in the late 2000s. And maybe the awkward kid even helps contain the party so we don’t burn down the house…again.

This article was published by 21st Century Media and the Daily Local News (West Chester, PA). To read this article on the the newspaper’s site, please visit the Daily Local News.

 

 

To view all of Ryan Dosen’s 21st Century Media real estate columns, visit http://www.dailylocal.com/search?text=dosen.