I Got Hollared At By The Realtor

[Mike Garrett RAA]

I can cite you numberous cases where the contract was say, $150,000 and I appraised the property for $144,000. The deal closes for $150,000 with the buyer putting some more cash down because they really wanted the property. No other appraiser "hit" the number.

 

[Richard Carlsen]

Rapidly rising markets are generally the hardest to appraise. Since we as appraisers are basically good historians, by definition our "sold" data or comps are aged and therefore, somewhat out of line with real time values in a rapidly rising market. Short term supply/demand are very hard to document.

I have never seen this put forward anywhere but when I have a sale for a property in a market that is rising, such as our high demand waterfront properties, I always look upon the pending sale as a 4th comp. Why? Well, right now it is a pending sale but the moment it closes, it becomes a comp. So if the buyer is ready, willing and able to plunk down his hard earned cash and take on additional debt for a certain piece of property, then that is nothing more than the market functioning. And as you know, our definition of value is based on the market.

Whether we like it or not, in this kind of market, the question before the appraiser certainly begs; "What can I find that will prove that this property is not worth what this buyer is willing to pay for it on the open market?"

 

[Austin]

After reading some of the above posts, I perceive a fog bank hovering over the subject of the role of the appraiser in a rising price environment. Here is where it seems to me the problem arises: As I stated, theoretically if you appraise correctly and answer the appraisal question you are required to answer correctly in a Federal related transaction prices could never go up. The fact that prices have gone up demonstrates that some one somewhere, I know none of you guys would do such a thing, are skewing their results by grossly exceeding their authority and responsibility as appraisers.
It seems to me that some appraisers have different views of how to deal with this apparent conflict between the definition of market value and a general change in the level of supply and demand that results in a general price increase. My view is that when a lender hires me to appraise a property my job is to give the client enough information to make a decision in evaluating the risk involved in the loan. I see my job as to say to my lender client: I have examined a statistically significant number of comparable sales and based on my analysis the statistically most probable price is $100,000, with one standard deviation is $10,000. This puts the market in perspective for the client. What that means is, say the contract price is $105,000, that the lender knows exactly what the situation is and can risk rate the loan. There is about a 60% chance that the property will sell for $105,000 or less. If the lender is willing to take their chance, that is their call and not the call of the appraiser. That is another reason I contend the phrase “most probable price” has to mean the center of a bell curve for the market segment under study. It is the point of reference for determining risk.
For me as an appraiser to make that decision for the client is a gross violation of my duty and authority as an appraiser. What are your credentials for determining that the general price level of the real estate market is increasing and take it upon yourself to make that decision and incorporate your analysis into the appraisal results? Can any one show me in appraisal regulations, text, etc., or any other source, where it gives the appraiser any such duty or authority?
I don’t put the blame for this on the poor little appraiser. I put the blame on the ASB and regulatory authorities because it is my view that this is a serious question, there are many serious questions about this business, and I don’t see any regulatory entity even addressing the problems before us. This is just one of many. This problem goes far beyond even the ASB and involves the entire paradigm of the collateral evaluation process. It is my conclusion that as of this moment in time, we are leaderless. Not only will those in authority not offer solutions, they won’t even address the underlying problems of which this is but one.

 

[Austin]

PS to my above posts:

Read this from AO-8 of USPAP and it appears to me that most appraisers are not appraising market value when they make time adjustments; they are appraising “fair value” which is an accounting concept. Market value assumes as I stated above that the property has been exposed to the market for the average marketing period prior to date of appraisal but

“Fair Value is generally defined as the amount that can be reasonably expected to be received in a current sale between a willing buyer and a willing seller, other than in a forced or liquidation sale.”

 

[airphoto]

Gee, Austin ..

"It is my conclusion that as of this moment in time, we are leaderless. Not only will those in authority not offer solutions, they won’t even address the underlying problems of which this is but one. "

We're not talking about the Clintonistas any longer, are we?

 

[Richard Carlsen]

...and in a rapidly rising market, marketing time may be significantly shorter due to decreased inventory (supply and demand forces). Therefore, the comps 5 to 6 months old, and maybe even 4 months old, are perhaps sales from before the current average marketing period. And therefore, could not these comps be considered too old, out of date or in need of a date of sale adjustment?

If this is the case, then in a rapidly rising market, with very low marketing time, the definition of Market Value may proximate that of Fair Value.

I still think it comes down to as the good Professor Harold Hill said in the Music Man, "Ya gotta know the territory". If we know our territory (market) we will factor all of this into account and make our estimate accordingly. That's what the Reconciliation section is all about.

 

[Austin]

Richard:
I think you are equivocating or trying to rationalize the problem away. Examples:
1. As I stated above, on what authority is the appraiser practicing economics without a license, and how can you rationalize away the fact that when you make these time adjustments you are in essence of your own volition risk rating the loans for the client by assuming without any market support that the most probable value has shifted upward. Risk rating loans is not mentioned in appraisal literature nor in USPAP that last time I read any of them. Using this mind set you can justify almost any price estimate the appraiser needs to make the deal work. Sounds like a license to commit fraud to me.
2. As to time adjustments: To adequately support a time adjustment would require a massive statistical analysis of every market in the country, a process that is far beyond the capability of any appraiser I know. To make the case and demonstrate a statistically significant shift in price would require a large number of properties that have been purchased and resold within a short period. That scenario alone raises suspicions. Sounds a lot like sale flipping or non-arms-length transactions to me. Then too, due to normal random variance, it would have to be a hyper-inflated market before you could differentiate normal random variance from a price movement. In a word, it is a pipe dream and even if you could prove it that would raise an even worse scenario- what purpose would an appraisal serve in such an environment? If prices are going up by 7% per year and the contract price is 110% of most probable price as of date of appraisal, then where are the risks? Time heals all wounds as they say.
3. Richard mentioned comps being over 4 months old being too old for use due to supply and demand differences. I see two problems with this: A. The problem of inflating the housing market and getting it out of balance with general economic balance is that this is almost always a temporary condition. Sooner or later the market will return to equilibrium and some one will pay the price when prices fall. i.e., today’s market in a lot of areas, like mine for example. B. Again, this is a macro problem and not a micro problem. By that I mean if this is really happening and prices are really going up that fast, the banking and mortgage industry with their economic analysis capability are the ones that should make that decision. Maybe FNMA needs an addendum page so we appraisers can give Alan Greenspand our analyses and maybe another for our foreign policy advice to Sectary Powell.

Summary: To allow the appraiser to make time adjustments is to undermine the entire purpose of doing appraisals in the first place. Making time adjustments is a license to commit fraud. Add all of these factors up and you will see that the appraisal profession is presently in a sorry state of affairs: 8 known size adjustment algorithms programed into appraisal form software each resulting in a different price estimate and none data supported, numerous reconciliation methods that totally ignore the definition of market value because of scores of definitions of most probable price, there is no method of extracting the correct sequence of adjustments from the market, and time adjustments are an abomination to the entire process because they are out of realm of reality of appraisers. Richard, I agree with Professor Hill but would add that you have to know your limitations as well as the territory.

Airphoto stated:

We're not talking about the Clintonistas any longer, are we?

REPLY: Actually Clinton is the source of the problem. Ever read his famous “Executive Order?” He actually wrote it personally and it says to paraphrase: To all Federal agencies: Lift all regulations and inhibitions on lending and the economy will smoke. Clinton was correct-the economy is smoking at this very moment because of his Executive Order. The order is in the achieves of this forum if anybody wants to read it. I think ATC posted it so it will be under his name if you need a search name.

 

[Alan Simmons]

I am a firm believer that a contract DOES establish value, although this may not necessarily equal “Market Value.”

Although to me, value has two variables. Not only must buyers be willing to pay a certain amount, but they must also have the ABILITY to do such.

The reason for appraisals is that the ABILTIY of most buyers is limited by their need to obtain financing. In such cases contracts can not establish values unless agreed to by the lenders. Therefore the buyers abilities (and thus value) can by defined by an appraisal via the requirements of the lenders.

 

[Serge Paquette]

Someone wrote QUOTE “Market value assumes as I stated above that the property has been exposed to the market for the average marketing period prior to date of appraisal”. QUOTE

Say you are appraising a property as of today. Assuming all of the sales and contracts are equally comparable except for the sale date, the best comp is the arm’s length contract that was negotiated today. Whether this comp was on the market 1 day or 200 days doesn’t matter. It should, however, meet the other clauses in USPAP’s definition. I don’t buy the reasonable time is allowed for exposure on the open market clause. That would mean that the sales that were on the market for only one day would not be good market value indicators because they were not on the market for a reasonable time. Hogwash.

I’m not talking your tunnel vision, form appraisals here. I’m talking theory, not practice.

You don’t like using a contract as a comp? Well it’s market evidence and best reflects the current market.

To illustrate this, assume the soil in your community suddenly becomes contaminated and living there becomes unhealthy and hazardous for children and the elderly. Are you going to use deals (contracts or sales) that were negotiated before this unexpected contamination or deals that were negotiated after the contamination? The answer is you need to find deals that were negotiated after the contamination. If the contamination is recent and there are no closed sales, but only contracts, scratch and claw to get the info on those contracts, because they reflect current conditions.


It would be interesting to see some of you appraise in a market with hyperinflation or rapid deflation. In such a market, without a market conditions (time adjustment), one would almost certainly be a crappy appraiser.

Emulate the market.

Question: If prices for comparable properties have clearly been going up 100% per year up until your latest sale which is 3 months ago, what market conditions (time adjustment) should you use for the last three months?

My answer: Emulate the market. Use your judgement and make a judgement. Are you ever going to have perfect information to precisely nail down the right adjustment? Probably not. Know the market, listen to buyers, sellers, Realtors…… Try to detect the lies they tell and keep the truth. Do statistical analysis. Know normal distribution (bell curve). What changes are evident in the market over the last 3 months? Do you expect those market changes to apply to your comps and your subject? Remember that market value is the most PROBABLE price. Seek the truth. Emulate the truth.

Remember that you sign a certification that says something to the effect that you are performing the appraisal in an unbiased way. It says something to the effect that you are not aiming high or low, but that you are aiming true in your appraisal. And your signing that thing and certifying that it’s true. PLEASE REMEMBER THAT.

 

[Karl]

Question: I Appraise a home,, my OPINION of Value is 85,000 the home sells for 93,500 BECAUSE the buyer wants it, NO other Apprasial was done Buyer put in the extra money. The question: Is this now a comparable property @ 93,500 BECAUSE one particular buyer wanted that particular home? Another home was 105,000 Appraised value the buyer paid 114,000 because the home was on the market October 2002 & buyer couldn't move till Feb 1 2003 so agreed to pay full list price as long as seller would wait till Feb 1, 2003 closing. Is this a comparable property @ 114,000?