The state of the housing market has just about everyone, especially builders of new homes, disgruntled about property values. On Feb. 24 the Commerce Department reported that new-home sales had dropped 12.6% since January. Reports show that 2010 was the fifth straight year of decline in sales of new homes since the housing boom. Scary considering 2010 was the worst year in new-home sales in nearly half a century.
Although newly built homes are being sold, they are in an exceptionally competitive market. Cities that substantially felt the downturn of the market are now dealing with an abundance of foreclosed properties, resulting in the worst market conditions in decades.
Major metropolitan areas like Las Vegas are now saturated with foreclosures, making it exceedingly difficult for new homes to compete.
Once builders are able to solidify a qualified buyer, they find themselves struggling with stricter lending requirements, new regulations and, sometimes, appraisal values that are below the sales price. In some cases the real estate transaction will even fall through solely based on the appraised value of the home.
For many Realtors, loan professionals, consumers and sellers a rejected loan package can be very discouraging. So who is to blame?
Unfortunately, blame tends to be shifted to the appraisal, the appraiser, even the appraisal management company. Appraisers frequently are criticized for being too conservative, failing to perform their duties properly or not completing due diligence.
Luckily, the Dodd-Frank Act provides a firewall requiring lenders to use an AMC or some other form of third-party appraisal ordering system. This lets appraisers perform their duties without the risk of coercion or bribery regarding the appraisal value.
Over the years it has become apparent that the general public has forgotten that appraisers have a responsibility to protect not only the lender, but the consumer and general public. It is not the appraiser's job to appraise a property at the contracted sales price. The notion that a sales price is equivalent to value is wrong. According to the Appraisal Foundation's Uniform Standards of Professional Appraisal Practice, "price is defined as the amount asked, offered, or paid for a property." "Value is defined as the monetary relationship between properties and those who buy, sell, or use those properties." Value itself is an economic concept that is an opinion of the worth of something.
So, what is the appraiser's duty? It is to complete data analysis and review market history, absorption rates, exposure times, supply and demand and more in order to provide an opinion of value. Whether this means that the appraisal value will reflect the contracted sales price is not the appraiser's concern.
The appraiser is protecting the bank's investment and the well-being of the general public; sometimes they even protect consumers — from themselves. Anyone can put a price on a house and find someone willing to buy the house at that price. A willing buyer does not make that property worth more or value it at the selling price.
To put it simply: I could put a price of $40 on a brown paper bag. If you buy the brown paper bag from me for $40, it doesn't mean that is how much the bag is worth. It only means that you were willing to pay $40 for a brown paper bag.
The public has to remember that buying and selling is often an emotional experience. Not every loan package is meant to be approved, nor is every home to be valued at its asking sales price. So although some real estate professionals, consumers and sellers may be disappointed with the appraised value of a property, professional appraisers are simply fulfilling their ethical obligation not only to the profession, but to the community.
