The Lion's Den

The Houston Chronicle did a story about appraisals are killing home sales, but I wonder why it is such a bad thing?

Appraisers are now appraising below agreed upon sales based on their analysis.  Brokers are stating that they have multiple offers coming in at a price, and this should justify the appraisal. However, the appraisal process is not driven by potential deals, but instead  they are evaluated by recently closed ones.

When appraisals are being targeted based on potential deals, there is less accuracy. It cannot be evaluated whether those person would qualify for the price that they are offering,etc.

Construction cost or comparable sales are better indicators of historical value. This is what banks are looking for to make hard decisions.  Prices were over inflated over the past decade due to easy credit and sales persons pushing up values. When a properties value is not in line with cash flow analysis for rentals there are deeper issues to consider. Does a property whose cash flows exceed rental values have factors that make it only valuable to home owners and not as a investment?  Is there  a historical basis to the property? Is there a sentimental basis for the high valuation?

If there is not a reason for the excessive values, then why does the property value get to go higher? In Texas, we have so much land that people keep moving further out.  This means that buyers can find a substitute value, and this hurts reselling homes in suburban areas.  Only a paradigm shift caused by high fuel values or similar kind of similar factor will cause this substitute to remain unattractive. 

Until more buyers value, “green homes” or lower commute time or fuel cost; then you will continually have issues.  People could argue that the offers prove that the home is valued at the offer, however there is no evidence provided that those offers are made by savy person with a full range of information. To truly accept that the market place is working correctly, the buyer and seller have to have a free flow of information. What if the agent did not do any research on comparable market values? Is this offer really a good offer?

People are going to suffer in this real estate environment, but as I have noted before; we have to take our medicine to get better for the long run. If the appraisers are doing their job based on unbiased information, then why should we fault them? We were mad when they did not do it, so lets applaud unbiased analysis.

(Jay Raman is a real estate investor and he is the owner of a full service real estate property management firm, Ashoka Lion- www.AshokaLion.com. You can send emails to him through the “Contact Us” portion of the site)

This entry was posted on Thursday, June 18th, 2009 at 4:50 pm and is filed under Buying Property, Houston Real Estate, Owning a home, Real Estate General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.