Last Friday I had the pleasure of attending the "I Survived Real Estate 2011" meeting that was organised by Bruce Norris.
First of all, I have to say that Bruce Noris and his team really do a great job of putting together information and asking the questions that everyone has on their mind. Bruce Norris has a hard money company that is in Irvine that does a lot of the loans that I do, they also have a loan program that they extended to the public where they give loans for 8 years at a lower interest rate with higher points (kind of the opposite of what I do). Even so, at any event that I go to where Bruce speaks, he never pushes his product and I must really commend him for that.
The reason for this blog post is to address a certain topic that was barely touched on by Shaun O'Toole from ForeclosureRadar.com (great site for anyone that is interested in learning about trends of foreclosures or looking to buy properties at the auctions). At the end of the whole evening when the panelists were asked about what they would like to see happen in real estate this upcoming year, Shaun stated that the whole appraisal process is completely screwed up and I agree with him. He stated that if you go into a market where there are no comparables for an appraiser to pick out, they pick the closest comps that they can get and a lot of times the values don't make sense. His idea was to comp out properties not by other sales but by the cash flow that they produce. If you can make sure that the property cash flows with the market rent, then you can decipher the value from the rent that the property will produce. I don't necessarily agree with him on the whole idea but if someone is willing to buy a property based on the cash flow at a certain price, there should be some sort of variance that you can have on the appraised value.
I was just affected by this issue on a certain multiple unit property that I was selling. We went through the whole inspection, appraisal and walk through process and the buyer was completely satisfied with the sale. When the appraisal came back, it came back lower than the sales price and it put a hitch in our sale. Now this property is superior to any comp that the appraiser had on the appraisal report but because there was a value discrepancy according to some HACK appraiser, the buyer was thinking to back out of the sale.
The buyer was agreeable on the sales price based on the market rents of the units and the cap rate until the appraisal came in. This particular property was completely superior to other multi-unit properties in the area yet the appraiser could not bring the value up. There should be a 2% variance on the allowable discrepancy between the appraised value and the purchase price. When you go to buy a car, the loan company has an allowable 20% variance on the purchase price and that is just on a car. When you are buying a property that is in some cases close to a million dollars, you can't stretch even $10,000. This is ridiculous.
If the case is that the appraiser knows EXACTLY what properties are worth what do you need real estate agents for? Why doesn't someone that is selling a property just get an appraisal and put that appraisal in the classified section? The seller can save 5-6% on commissions that way and there is no second guessing what the property will appraise at.
The other problem is that if a bank orders an appraisal, they are held to the "Home Valuation Code of Conduct" or HVCC. According to HVCC the bank must use a third party company that will order the appraisal for the bank. The bank can not contact the appraiser directly as well as anyone else that is in the transaction. The company that is responsible for picking the appraiser only have a certain amount of choices to pick from (appraisers that have signed up with them). Most of these companies will not give the same appraiser more business than the others so what they do is switch appraisers that they send requests to so that everyone gets their fair share (kind of like communism). What ends up happening in many cases is they pick appraisers that are not from the area to appraise properties. If you are sticking with the current appraisal system, this presents a problem because it's really easy to overlook the railroad tracks that the appraiser is crossing.
In my business, this is not a big deal because most of it is hard money loans but I feel bad for my clients that are rehabbing properties because they are at the mercy of this royalty that we call appraisers.
Thank you for lending me your ear, or rather your eyes, and entertaining an issue that I'm sure many of you have run into.
I would lime to thank Michael Khunis for lending me some ideas for this post.
