In theory, an appraisal is an independent evaluation of a property by a neutral third party to determine its likely worth in the open market.
In practice, it has become the de facto final word on a property’s worth, overriding the agreement between a willing buyer and seller.
How is it that the guestimation of value has supplanted the actual sale as the ultimate arbiter of worth? That the tail has come to wag the dog? Thank your friendly financial institution.
You see, appraisals are rarely ordered for cash transactions. Why? Because the buyer has already reviewed the recent sales comparables and negotiated the best terms he/she could with the seller before arriving at the final sales price. Appraisals are requirements of (most) financed transactions because they are really not for the benefit of the buyer. They are an added layer of protection for the lender that is putting up the bulk of the purchase money.
Certainly an understandable requirement from an institution that is taking on the risk of lending money against a property that may or may not represent suitable collateral, depending on the drooling-idiocy factor of the buyer. The bank demands an appraisal to validate the purchase price before ponying up the cash; makes perfect sense.
Where things have gotten a bit off-kilter as of late is in the bank’s internal review process of the appraisal. Times were, the appraisal came back at value, and you were good to go. Your shrewd purchase was confirmed by a non-biased review by a licensed professional. After the housing meltdown, however, banks have taken to assigning the bulk of the blame for the whole fiasco to unscrupulous loan originators and appraisers for falsifying loan applications and willfully inflating values, respectively; ignoring their own ridiculous loan products that were offered to people who never should have been candidates for stated income, interest-only financing vehicles, they are determined to stamp out any potential for fraudulent dealings that exposes them to similar risk in the future.
Tightened appraisal standards came to pass, including restrictions placed upon direct selection of appraisers (most orders go to faceless appraisal management companies now, who in turn select the appraiser). Loan originators and Realtors have limited access to appraisers these days, lest we corrupt their sensibilities and bend them to our devious aims.
The appraiser is now free to perform his evaluation in an ivory tower, unencumbered by the incentive-laden hands that would pull at him to bring in a value reflective of the sales price.
Or is he?
While charges of fraud and artificial inflation of value have been heaped upon the working stiffs from up high, I posit that the exact opposite is now occurring.
With the current barriers in place, the banks themselves are the only ones with unfettered access to the appraiser during the course of a transaction. Beholden only to those banks, appraisers have been put in the impossible position of providing fair evaluations of properties for institutions that have a vested interest in suppressing value/risk.
Bluntly, banks are actively pressuring appraisers to devalue properties.
By using the veto power of the underwriter review, they may demand that an appraisal which came in at value be reworked to use different comps or adjustments made to the physical attributes of the house that they dispute (square footage adjustments, etc). They may demand that adjustments (downgrades) be made for market trends, etc.
In short, some bean counter in an office in South Dakota is using his position to dictate the final version of the appraisal to the licensed professional who has actually physically viewed, measured, photographed and evaluated the property.
This is how appraisals initially come in at $400,000, only to get knocked down to $350,000 upon underwriter review. And when that happens? You get to appeal the appraisal … to the very institution responsible for the final disparity in value.
Akin to taking one’s death sentence appeal to the hangman himself.
Appraisers have little choice but to comply if they want to keep their accounts with the big banks in good standing. Further, until the underwriter signs off on the appraisal, it really doesn’t matter what value is reflected in it. He decides the house isn’t worth what you are paying for it, your loan is scuttled. Unless the seller agrees to sell the property to you at the reduced price (unlikely in a market that is now generating bidding wars) or you have additional cash to plunk down to make up the difference, you are out the cost of the appraisal, inspections and emotional investment in the property.
The big banks are artificially suppressing our values, and they are charging you $350-400 a pop to do it.
What’s the best way to ensure that you are working with an institution that is actually interested in helping you purchase the home of your dreams? Think local. Many small, local banks not only work with select appraisers who actually know the areas they cover (as opposed to trucking them in from Tuba City on the luck of the draw), but are more likely to keep your loan in their portfolio. One of the primary drivers of a big bank’s decision to take on your loan is how sellable it is on the secondary market. Any quirks with the property, such as it being recently “flipped” by an investor, and the loan becomes less attractive to them. Out come the knives.
Add the suppression of value and subsequent hindrance to the market’s recovery to the list of charges I wouldn’t mind seeing in a financial perp-walk. Such manipulation of the market and coercive impact on property values does not merely effect buyers, but it robs sellers at large of what little equity they may have left. Of course, I suppose it is only fitting that the very institutions that spawned the ponzi schemes that led to housing’s demise are the same that would stand in the way of its nascent resurrection.
Such practices are an affront to us all, and must be stopped.
