Wowza…..pretty bold headline, isn’t it?
How can that claim be made or the question raised?
First – a quick note on technicalities on appraisals – Comparable Sales are compared to the Subject property to try to lead the appraiser to a supportable “opinion of value”. Differences in properties are accounted for by “adjustments” to the comparable sale, which then leads to an “adjusted value” of the comparable. The adjustments are supposed to equalize differences in properties. Adjustments are supposed to be supported through market analysis, specifically “matched pair analysis“.
A simplified example of a “matched pair analysis” would be two houses that are identical in every way, with the exception of one of them having a fireplace. House A, without the fireplace sells for $100,000, and House B, with the fireplace sells for $101,000. What’s the value of the fireplace? Since the houses are identical in every way, the value of the fireplace is clearly $1,000. In that market area, in that price range, fireplaces are worth $1,000 and until proven differently, the appraiser is justified in adjusting comparable sales $1,000 for fireplaces (having them or not having them).
One of the things we’ve seen adjustments for lately, is the adjustment in “time”. This adjustment is made for changes in the market between when a comparable sale is sold and when your subject sold. If the market is dropping, then the adjustment to the comparable would be downward, and in a rising market, upward.
As you might suspect, appraisers have been making this adjustment…..a lot….lately. The problem is, they have been skipping the “matched pair analysis” process and just using median prices to justify the adjustment. This is NOT acceptable appraisal practice. But, if it’s become the norm, if it’s become acceptable, it should apply when median prices escalate.
Thus the headline. A recent market report indicates that median prices have been on a 90 day upswing in Clackamas, Oregon. Have the appraisers reversed their course and adjusted upward for time? No they haven’t. Why?
Lender pressure is why. The whole point of industry reform (HVCC and/or Dodd-Frank) was to eliminate lender pressure, but now the lenders have even greater methods of applying pressure with the new rules. Really, the problem starts in two places, regulation and the GSE‘s. The GSE’s are Fannie Mae & Freddie Mac. Their forms require the use of Median Prices. Fannie/Freddie, Barney and Chris (a criminal “friend of Angelo”) are behind this lender fraud. The rest of the market is captive and held to their criminal standards, including the poor appraiser.
Frankly, this only helps the banks, and it doesn’t do anything for the borrower, the seller. It doesn’t help stabilize our markets or improve our economy.
What to do? Well, don’t shoot the appraiser – he/she can’t do anything about what the lenders force them to do. Complain to the lender, complain to your legislators, complain to regulators, call Elizabeth Warren, complain long, hard and loud….maybe if enough voices are heard we can get out from under the tyranny of the banks and Fannie Mae and Freddie Mac.
- The Median Price Fallacy, by Brett Reichel, Brettreichel.com (oregonrealestateroundtable.com)
- Why Are Appraisals So Bad?, by Brett Reichel, Brettreichel.com (oregonrealestateroundtable.com)
- Don’t Be Fooled Again! by Brett Reichel, Brettreichel.com (oregonrealestateroundtable.com)
- Choosing Your Real Estate Appraiser (springssummitgroup.wordpress.com)
- Fannie Mae Homepath Review, by Thetruthaboutmortgage.com (oregonrealestateroundtable.com)
- Is it possible to commit fraud unknowingly? (fflop.wordpress.com)
- The Approach to Value (fflop.wordpress.com)