How Appraisers and Management Companies are Stifling a Real Estate Rebound

Southeastern Michigan real estate sales have been brisk over the past 6 months with sales up and inventories down. The law of supply and demand dictates that when supply is down and demand is up then prices can rise. We’ve all been hoping for a rebound in real estate values to help put the economy back on a sure footing but appraisers and management companies are thwarting the natural order of things by capping, and even lowering values.

Market Value is defined as the price a buyer is willing to pay for an item and the price a seller is willing to sell the item for. Both parties agree to the price and that is the market value. As a mortgage lender in Bloomfield Hills, Michigan, the most frustrating thing I’ve been experiencing this year is low appraised values and simply poor appraisal work.

If a homebuyer has looked at dozens of homes in the marketplace he has a very sound idea of what the correct value of a home is at the present time and crafts an offer that fits into the current market. If the seller accepts the offer then that is the market value of the home. However, along comes the appraiser and he values the house at less than the sales price. What happens now? Of course the buyer wants the price reduced but the seller is angry because he got a price he could live with and agreed to it and now an outside factor is having a negative impact on that agreed price.

Effectively, the appraiser has capped the value of the house and hurt future sales of homes around the subject property. So, appraisers are currently one of the biggest factors keeping real estate values from improving and are even pushing values down! I don’t take issue with an appraisal that accurately portrays the current value of a home when it is less than the sales price. The problem is when the appraiser uses bad data to come up with a wrong value, or chooses poor comps that are either too far away, too old or are simply not comparable. Last month I had an appraiser use a ranch and tri-level as comps for a colonial! The appraised value was equal to the sales price but the loan was denied due to the poor value support in the appraisal analysis. When we asked for additional comps the appraiser said there weren’t any. Then we provided sales data to the appraiser and they said it couldn’t be used. They said one of the comps we sent could not be used because it was substantially larger than the subject property. Well, the subject property was 1,900 square feet and the comp was 2,060. That’s less than a 10% difference in size. Are you telling me that a buyer looking at a 1,900 sq ft home is not going to look at a 2,060 sq ft house with the same number of bedrooms and baths??

In the last 90 days I have seen numerous cases where appraised value is less than purchase price. Recently, I had a sale where the purchase price of the home was $265,000 and the appraisal came in at 260,000. The comparable sales used could have easily supported a value of the $265,000 but the appraiser’s opinion of value was $260,000. This individual obviously thinks very highly of themselves as they are able to pinpoint the value of a house! So, the sales price went down and we all suffer. Why?

Appraisal Management Companies (AMC) contribute to and exacerbate the problem because they remove the appraiser’s responsibility to the lender and neither the AMC nor the appraiser cares if the lender is happy with the appraisers work. As the lender I cannot even talk to the appraiser about issues I have with the report. When I call the management company they say they can’t tell the appraiser how to do the job. Nobody does anything to correct the appraisal and loans are denied and real estate that could have sold goes back on the market. Everyone walks away mad except the AMC and the appraiser who get paid regardless. That’s another problem – the AMC is taking a chunk of the appraiser’s fee and that must make the appraiser angry which leads to lousy work. What value is added by the management company anyway? The whole idea of an Appraisal Management Company is a farce and has lead to nothing positive for home buyers, sellers or lenders. Eliminating AMC’s would be a very positive step for a troubled real estate market that could be healing right now.

As a homeowner, I am asking myself how can real estate values ever increase under these conditions? Even when buyers are willing to pay more for a property, appraisers will not allow the sale to be consummated because they are either being so conservative in their valuations, they are ignorant of specific local market characteristics, or they are simply doing poor quality work and coming in with low values. This puts a cap on real estate values and stifles any possible rebound in home prices! The Home Valuation Code of Conduct (HVCC), which created AMC’s is basically derailing current market strength that could restore confidence and stabilize values in real estate across the nation.

We homeowners, sellers, buyers, lenders, real estate agents, and yes, even appraisers need to stand up and tell congress that the HVCC does not work and to eliminate it!