Friday, March 6, 2009

The Price is Right

Where is Bob Barker when you need him? Aside from telling us to have our pets spayed or neutered, or getting in a fist fight with Adam Sandler, we could really use his pricing prowess to settle a little real estate discrepancy going on right now.

In the Obama Administration's new Homeowners Stability Plan, it suggests that home prices be valued via BPO (broker pricing opinion) or AVM (automated valuation models) when restructuring home loans. Current bank agencies guidelines require new appraisals in restructuring loans when a material change in market conditions exists, but in some states do not specify rules dictating how or who is to determine such values.

The nation’s four largest organizations of professional real estate appraisers-the Appraisal Institute, American Society of Appraisers, American Society of Farm Managers and Rural Appraisers, and National Association of Independent Fee Appraisers-recently delivered the second of two letters to Treasury Secretary Timothy Geithner urging the Administration to protect homeowners and taxpayers by requiring that the market values of homes under President’s Obama’s Homeowners Stability Program be determined by professional appraisers who are state certified and licensed.

To ensure that all parties have accurate and reliable information when restructuring loans, the letter cautions against the use of real estate sales people to provide broker price opinions. These individuals have no valuation training, do not observe uniform valuation standards, are accountable to no one for their estimates of home prices and may sometimes have an economic interest in whether loans are modified or defaults occur requiring a resale of the property to another buyer. By contrast, all 50 states license, certify and supervise the work of appraisers; and 23 states specifically prohibit realtors from valuing properties for any mortgage related purpose, including loan modifications.

Of course, this is all a giant game of finger-pointing, and both appraisers and real estate brokers have a conflict of interest, standing to gain or lose business to the other. Similar to the residential market, in the commercial real estate market, appraisers are important mostly from a financing perspective. If the property doesn't appraise at the value it is being sold for, the buyer's return would either dwindle, or they will walk away from the deal because the bank will not give them the financing they seek to make the deal work. It is for this reason most real estate brokers, and some buyers, don't particularly like appraisers, because they only stand to get in the way of their potential transaction if their valuation comes in too low.

Appraisers are mostly using comparable sales (a total rear-view mirror approach, and an inefficient one in a rapidly changing market) in addition to the income approach to get their values. But every transaction is different, and there can be a considerable amount of legwork, that most appraisers don't bother to do, that explains why a particular property traded at a certain value. Real estate brokers have better access to this information, and to the parties involved in these transactions to uncover this information, than do most appraisers who are largely relying on parties to be both be honest and detailed in answering their cold calls.

The residential housing market and commercial real estate market are still very similar in one regard. Whether its trying to figure out how much properties have depreciated in the last 12 months on the residential side, or how much CAP rates have risen on the income-producing property side, determining value boils down to one, simple idiom. At the end of the day, something is only worth what someone else is willing to pay for it, regardless of past, present or speculative future "value." It shouldn't matter whether a broker prices a home at $400,000 or an appraiser prices it at $300,000. If a ready, willing and able buyer offers $350,000 for it, and can close, then that's what its worth.

Bankers use appraisals as a safety net just in case they make a bad loan, and we all see how well that safety net has worked over the last 12 months as the housing market has collapsed. As brokers are fond of saying, "it only takes one buyer to get a deal done," and on every deal, that buyer will have to live with the fact that the reason they bought the property is because they were willing to pay more than anybody else. C'est la vie.

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