Bruce Norris is joined this week once again by appraiser and investor, Rick Solis.
Bruce and Rick start by talking about market value. Rick says market value is what a ready, willing, able, and knowledgeable buyer is willing to pay for a property. Bruce asks if this definition is being held up with lenders in today’s market. Rick says that lenders are not. Bruce talks about how real estate auctions do not reflect true market value compared to fixed inventory. The majority of the inventory needs fixing and must be sold in a certain time frame.
Rick says the market is very different from the 90s. In the 90s, Rick says that there used to be a box that said “declining market”. If that box was checked, the deal wouldn’t go through. Now, the lenders will do those transactions but lenders require more comparables. It becomes difficult to find similar inventory. The banks will want to see the appraiser adjust for the market. Appraisals used to be good for 6 months. With a declining market, comparables need to be 60 days or less from the day of funding. Lenders want at least 2, preferable 3, comps within 60 days of funding.
Bruce asks how long appraisals are accurate in today’s market. In some areas, Rick says prices continue to drop quickly so not long. Every area is different. Bruce says in the last 60 days, appraisals are becoming more of an issue. Bruce talks about a recent example of an issue with an appraisal on a property with multiple offers. Bruce asks Rick what will happen if lenders don’t change their stance on valuing properties and creating comps that reflect perfect condition.
Bruce heard recently that lenders are considering doing refinances without appraisals because of the price declines which Rick has heard as well. He thinks that’s an interesting way to solve the issue. Rick says they keep throwing whatever they can at the issue. Rick says they did the same type of things during the Great Depression. Bruce talks about similarities with policies from the Great Depression and now.
Bruce asks if before and after pictures on properties are helpful. Rick says videotaping properties before and after would be a great help but if there are too many repairs they may want to see permits. He says to document all multiple offer situations.
Bruce and Rick then start talking about the principle of substitution. Bruce says there’s a short supply of good inventory. There’s a glut of inventory that needs fixing. Bruce feels bad for appraisers who have to fight for real prices and they have to be careful. Banks are only looking at pictures and don’t really understand what’s happening in the area. Rick takes many more pictures than is required to show banks why prices are where they are at.
Bruce asks about arms-length transactions. Bruce asks about what would happen if The Norris Group carried its own paper and created higher comps. He asks if that would be a conflict because of arms-length transaction rules. Rick discusses the potential issues and uses the example of builders.
Bruce asks what percentage of sales has concessions in the current market. Rick says almost 100% of transactions on properties that are on the market for two weeks or more have concessions although it’s not always easy to figure out what those concessions are. Appraisers don’t always know the concessions.
Bruce asks what percentage is allowed for condition in appraisals. Rick says condition can be about 10%. If you adjust more, it can become and issue. It becomes easy with comparables but more difficult if the data isn’t there to support line item adjustments for over 10%.
If the appraisal comes in wrong in the eyes of the bank, you get blacklisted and there’s a possibility of not getting paid. Rick says review appraisals were not as common when the market was going up. Some did but they were way more lenient. Review appraisers typically do a desk review and never go see the property. They are looking at online information. These review appraisers are typically hired independent contractors.
Bruce asks Rick what he would like to see changed. Rick says not having the lender paying for the appraisal would be better. That way there would be no pressure and more honest appraisals could take place.
Next week is Christopher Thornberg with Beacon Economics.