Wednesday, May 14, 2008

In the eye of the beholder

Back when I was in college I took an art appreciation class one semester. Thought was that I could skate through it and earn 3 credit hours that would not tax me too terribly. I have to say that it was a major struggle. I worked long and hard to get a passing grade. I looked at stuff that was supposed to be art that I swear my 5 year old grand daughter could now produce.

I think of Pablo Picasso, particularly. I remember looking at his works and thinking what the heck. This guy has been doing some serious hallucinogens. The instructor would ask our opinion of the artists expressions in his paintings. Where I saw a woman with a giraffe neck with halibut eyes on one side of her head someone else saw an expression of life's struggle within and frustration spilled out all around until it painted her personality in a surrealistic tone. The latter comment would get the A+. I was asked to stay after class and put in some extra study. To top it all off this painting hung in the Louvre and was worth millions of dollars. I still am not seeing it.

Since I have gotten into real estate I struggle with another artistic expression. The appraisal. I was taught in the University of Real Estate that appraising was not an exact science , it was more of an art. That is the understatement of the century. Now, please don't think that this is an attack on appraisers. I have great respect for the path they trod to become certified in appraising. They put in enormous classroom hours and pass some really hard tests to make the grade. They then are not allowed to be the head appraiser until they have been someone's apprentice for two years. So it is a distinctive role.

I read a little blurb in the USA Today just this morning that real estate fraud was rampant and being put under the microscope and the hammer was coming down on those who committed it. One area they sited was over-evaluation of property by appraisers.

That works like this: A Realtor writes a contract for a certain amount of money on a property. There is built into the contract that an appraisal must be performed. The buyer's lender usually orders the appraisal. The appraisal ALWAYS comes back at the price or slightly above the price. In my experience I have not ever been involved in a property transaction where the property did not meet appraisal. I worried about a few of them as I thought that the price was pretty aggressive compared to the market comparables that I had looked at. Time wasted. The appraisal would always hold water.

Imagine, please, that you are in the business of loaning money. You finance lots of properties and you need appraisals quickly and reliably. The appraisal company is in the business of valuing property and you have solicited several lenders to send their appraisal business to you. Now what is going to happen if you bring back low appraisals to that lender? Well, the buyer has a right to opt out of the deal leaving you, the lender, holding the bag. That is why the price of the property is communicated up front to the appraiser. The appraiser figures a way to hit that number. You are not going to get repeat appraisal business if you come low too often.

It is sort of like the only accountant joke I know. A Fortune 500 company has need of hiring a CFO for thier company. They want a CPA with some experience. They arrange to interview several people over the course of one day. The candidates are lined up outside of Mr. Big's hotel suite to be interviewed. He asks each candidate the same question " What is one plus one ?" to which everyone answers the obvious, " Why, that would be two, Mr. Big." This continues until one fellow comes in and Mr Big poses the question, " What is one plus one ?" This candidate goes and draws the blinds and then locks the door. He then leans in close to the corporate bigshot and says, " What would you like it to be, sir?" He gets the job.

I recently had a transaction wherein an appraisal was performed about 9 months prior to the sale of a property. The appraisal at that time was around $200k. A contract was written and sent over to the Title company. The lender ordered the appraisal and lo and behold it came back $3K over the contract price, about $25k south of the earlier appraisal. Same house, same neighborhood, etc. Hallucinogenic expression? No the bubble bursting on the real estate market.

You can take your home and figure what it is worth in your head and what you will take for it. In our current market you will need to take about 10% off of it just to get it in line with where home values are currently.

Market value and Appraised value have not always seen eye to eye in real estate. You see, appraising is not an exact science it is more of an art. The value comes down to what the seller wants for the house and what the buyer is willing to pay. In this market adjustment the equation has only gotten more complicated. The lady with the giraffe neck has now added a third eye and some warts on her neck. It still confuses and mystifies.

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