It would be easy to slam the Home Valuation Code of Conduct (HVCC) in this post. Yes, the NAR and other real estate organizations blame this so-called voluntary code for road blocking the real estate recovery, and I agree with them. If you’re not familiar with the code or its origins, read the ‘Washington Report: Home Valuation Code of Conduct’ from the Realty Times to learn more. But, I thought it would be helpful to go a little deeper in this post.
Now before you appraisers out there get your pitchforks and torches out remember I said the appraisal process, not the appraiser. Easy does it…I’m on your side. You get an earful from the buyer, the buyer’s agent, the listing agent, the seller and the bank. I don’t envy you one bit. Kurt Vonnegut’s book, ‘A Man Without a Country’ comes mind.
If you’ve sold a home in the last six months, either your personal residence or an investment property, you’ve undoubtedly had a problem with the appraisal. And you can bet the problem wasn’t that the appraisal came in too high.
I purchased a home at the courthouse steps on 9/1/09. I had it painted, put in new carpet, stainless steel appliances and landscaping. It quickly went under contract for $124,900 with multiple offers, but the appraisal came back at $112,000.00. Of the comparables the appraiser pulled, two were short sales and one home had one less bedroom and bathroom than mine.
The appraiser assigned to this file told me that short sales and bank-owned homes were part of the market and must be included in her review. Keep in mind that this was a USDA loan so the HVCC does not apply. When I told her that six new homes built in the same subdivision by the same builder had just closed for $20,000 – $50,000 more than mine she said they could not be included in her appraisal because they were “different”. Excuse me?
Now I don’t blame her. She’s been programmed to spew this nonsense by the lenders she works for. But if a new home is “different” from a move-in ready, traditional sale (i.e. not a banked owned home or short sale), then how can a traditional sale be compared to a distressed property? The terms of sale and condition are completely different. Furthermore, using this twisted logic how would values in any real estate market ever go up?
Statistical multiple listing service data in my area proves that traditional sales, on average, are worth 20-40% more than short sale and banked owned properties. Here is the information directly from Mike Orr’s Cromford Report for the month of September:
- Bank Owned Homes: $68.66 per square foot
- Short Sales: $84.41 per square foot
- Traditional Sales: $116.73 per square foot
By the way, if you don’t have a subscription to Mike Orr’s Cromford Report, you should get one, even if you don’t live in the Phoenix area. It has to be the single best resource for any real estate professional and it tracks every market indicator you can think of.
So what needs to change? For starters, apple to apple comparisons for terms of sale must be made. If the appraiser can’t do an apple to apple comparison allow them to go further out. Next, factor in days on market (more value should be added to the property if it goes under contract quickly, and conversely value should be deducted if the home sits for months on end.) Additionally, consideration must be given to how many offers are received on the subject property. Finally, the HVCC must be eliminated (see Inman News story from yesterday, ‘NAR: Appraisal Rules Undercut Tax Credit’). Another by the way, if you don’t have a subscription to Inman News, you should. This is a must read for every real estate professional.
The bottom line is market value should be determined what the market is willing to pay, not what the lender is willing to lend.