Just a Number

A real estate sale is a series of hurdles. The appraisal hurdle is the tallest, and if it’s knocked over, the other hurdles fall like dominoes. Game over. Escrow is cancelled, everybody goes home.

Dead escrows litter the landscape of real estate sales. More often than not, the cause of death is low appraisal. It’s epidemic.

“I just don’t get it,” said realtor Mary Beeber as she stepped over the body of a freshly killed escrow. “My buyer was one of three competing for the property. We know it’s worth the price. They were so happy they got it. Then the appraisal came in ridiculously low. Stupidly low. It killed the sale. To think my buyer had to pay their lender $450.00 for the appraisal that killed their own deal. That’s the second home they’ve lost to low appraisal. They’ve lost money and the chance to own a home.” Mary paused, and then upped the volume: “Appraisers are idiots!”

An appraiser might take offense; maybe not.

“I see her point,” said Troy Judge, appraiser. “We’ve seen a lot of deal-killer appraisers coming through our area the last few years.” He attributes the epidemic in large part to “geographic incompetence” by appraisers working too far from home. “They don’t know our market,” said Judge. Appraisers unfamiliar with a neighborhood are likely to turn in an appraisal under-value.

The parade of uninvited appraisers invading our market is the result of new rules. The Home Valuation Code of Conduct (HVCC), crafted by the U.S. government, is a rulebook designed to prevent collusion between lenders and appraisers. The HVCC is a reaction to the hyper-active years of the recent past, when real estate values soared, and lenders allegedly pressured appraisers to inflate numbers, so new loans could fly faster and higher.

Well-intentioned as the U.S. government may have been, the HVCC backfired.

“The HVCC turned it all upside down,” said Judge. “I’ve been in this business over 25 years. I know the properties in my area, the neighborhoods, and the boundaries that affect values. The local banks and lenders I’ve built relationships with can no longer call me.”

Now lenders are required to “blind order” appraisals through an Appraisal Management company, and make no direct contact with appraisers. Appraisal Management companies order from a long list, which often results in out-of-area appraisers exploring unfamiliar territory.

The Appraisal Management companies aren’t non-profits; they take a cut of each appraisal fee. The fee they offer the appraiser varies from company to company and job to job. Judge has the opportunity to negotiate, but if an Appraisal Management company doesn’t like his number, they move on down the list.

As a result, buyers are at the mercy of low-bidders, geographically incompetent deal-killers, and they pay for the privilege. Sellers watch helplessly as they lose a sale. Competent local appraisers lose business. The housing market takes another kick in the shin.

HVCC has become a bad word. Appraisers, lenders, and realtors alike are jumping and waving at the U.S. government to get attention and hopefully intervention.

The good word is the HVCC rules are under government review.

The question is, how long does it take the U.S. government make a policy decision?