Boing, Boing, Boing, Boing
The above subheading is the sound of interest rates bouncing up and down, and today they are way up. This is exactly the type of volatility I predicted in Wednesday’s blog. Rates shot up because of Fed comments about inflation concerns yesterday and because of a higher-than-expected Producer Price Index print today. Rates are 1/4% HIGHER today.
How Much Power Do Appraisers Have over Market Values? (Hint: Not Enough)
We once had an appraiser come in $200,000 UNDER contract price because he was convinced that “the market was going to correct.” This was in 2017 in a particularly hot market. The price was $1.6 million; the appraisal came in at $1.4 million despite the presence of numerous comps supporting $1.6 million; and that house is now worth at least $2.5 million. So, that appraiser did influence that market … for about ten minutes – as the house still ended up selling for $1.6 million. The only thing that the appraiser really influenced was his career, as we immediately punted him permanently from our appraiser panel.
All too many people believe that appraisers do have too much power over home values, when appraisers actually do not have enough power.
A highly seasoned appraiser recently wrote this excellent article for NAR, explaining why appraisers do not have the power that people think have: How Much Power Do Appraisers Have?
The author points out why appraisers have no power over the market, pointing out that good appraisers (and most are “good”) simply “discover” market value within the confines of the definition of market value.
He then defines “market value,” illuminating key aspects:
- Buyer and seller are typically motivated;
- Both parties are well-informed and acting in what they consider their own best interests;
- A reasonable time is allowed for exposure in the open market;
- Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
- The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
The author then reminds us that appraisers have no influence over the above factors.
The author also points out how “undue stimulus” can influence the market much more than appraisers ever can. Such undue stimulus includes large gifts to a buyer, special loan programs that make it much easier to finance a property, or excessively low rates.
I highly recommend reading the full article though because I am not doing it justice.
And yes, I know that sometimes we all think appraisers sometimes miss good or valid comps, but more often than not, there are better comps available.
This is why we share this blog so often with agents: Comps Appraisers Can and CANNOT Use.
Almost all of the appraisers we work with are highly diligent, honest and accountable people who make a great effort to support contract prices with the data that is available within the confines of appraisal guidelines and market value.
And when do appraisers have too little power? This is my opinion and not the author’s, but I think appraisers have too little power when they are not allowed to take into account the numerous offers above listing price in hot markets (appraisers can correlate to closed sales only).
Those offers often represent excellent indications of market value, as per the definition above, but appraisers are not allowed to consider them.
I tell the story often about an $850,000 listing that had ten strong offers over $1 million (indicating “market value”), but the appraisal came in at $850,000 because there were no comps to support a higher value.
Founder | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167