Anyone selling a property right now in the USA is dealing with such a dysfunctional real estate market that it’s almost impossible to see how it’s going to break free. The government has got the real estate industry so messed up it’s sad.
In any marketplace, buyers set the price. You can ask whatever you want for a product or service but in the end it is always buyers that determine the price. No buyers, no sale. But currently in the USA, buyers by and large are not setting the pricing of real estate, appraisers are – and this is not working.
Because of the fiasco of Fannie Mae and Freddie Mac, TARP, and financial institutions lending money to people who had no ability to repay it, the US real estate market took a severe blow over the past few years wiping out enormous amounts of wealth and equity.
Since then the government has put in place a mind-boggling array of new rules and regulations for lenders that almost nobody can understand and which are doing nothing to help break loose the stagnant values of homes. The people who established the first round of rules that got the market into this mess have put in place even more rules that are keeping the market in shambles.
What do I mean?
A family wants to sell their home for $525,000. A buyer comes to the home, likes it, puts in an offer for $500,000 and Buyer and Seller agree. Buyer goes to lender for a a mortgage. Lender sends in the appraiser who comes in at $375,000. The lender tells the Buyer that they’ll do a mortgage but not for more than $375,000, and more likely not for more that $300,000 (80% appraised value), so if the Buyer wants to purchase the home he has to come up with $200,000 cash. Not going to happen.
So what does happen? The deal dies, the seller doesn’t sell, the buyer doesn’t buy, the agent makes no commission, the bank lends no money and makes no interest, the family is stuck, and everything just stagnates.
Where’s the problem. Due to the bailout deals in the past few years, one of the new rules is that lenders now must send out the appraisers when buyers want to purchase property. Almost nobody is allowed to deal direct with the appraisers, least of which the real estate agent trying to close a deal.
Very often the appraisers are coming from 50, 60, or 100 miles away to evaluate some property in a part of town they barely know. On top of that, the appraisers income has been cut in half because while he used to be able to earn maybe $400 for an appraisal, now he only earns about $200 because some clearing house that ordered the appraisal for the lender takes a big cut. All new government rules.
Now the appraiser comes to the property, takes some photos, looks around, measures things and looks at comps. The comps stink. What’s the appaiser do? He mostly goes with the comps. Why?
1. It’s safe
2. He can’t be blamed for coming in to high or too low.
3. He doesn’t really care, he’s not making the kind of money he used to anyway.
4. He truly has no idea right now how to properly justify the value of a property anymore outside of the comps….so appraisers just continue to mostly go with the comps.
Well if we now have a country full of homes that used to be worth something (and intrinsically still are) but are near other properties that had owner issues, we are never going to break out of the real estate funk unless buyers, and not appraisers, start making the market.
If a Buyer wants to buy your home at the price you want to sell it, you’d think there’d be a deal. No way, not in 2011. The bank sends in the appraiser and kills the deal.
Of course there is a place for appraisers, but ultimately Buyers have to determine the price of property otherwise there simply is no free marketplace. With appraisers only or mostly going with comps, everything simply remains stuck when it doesn’t have to be that way.