Home prices have fallen to 1990s levels. Land values still appear to be in freefall, and double-digit commercial vacancy is pushing down prices on all those pretty but empty boom-years buildings in town. It’s not all bad news, though. People who were priced out of the market and stuck to their guns can play the game now. And even with a stock market gone haywire and dark daily warnings of enduring hard times, real estate deals appear to make sense again.
But when there are willing buyers and sellers, a necessary “disinterested” third-party, the appraiser, also needs to weigh in on the deal. And that’s been complicating hopes for a real estate revival.
In 2005, the appraisal was a piece of paper we all laughed at. The value an appraiser gave a property always seemed higher than the purchase price, and it made buyers feel smart. But today, an appraisal carries more weight: An unexpectedly low one can slow or kill a real estate deal in a market that still needs to wade through a lot of foreclosure inventory in order to get back to some sense of normalcy.
About 25 percent of today’s residential real estate transactions are either delayed or canceled as a result of appraisal figures coming in lower than an agreed-upon price, says Paul Bell, the president of the Greater Las Vegas Association of Realtors.
To make matters worse, short sales are often bogged down with multiple appraisals requested by banks, says Linda Rheinberger, broker for One Source Realty and Management. “In some cases,” she says, “it appears the bank is going to keep ordering appraisals until they get what they want.”
When a bank sells a home, the lender will usually drop the price if an appraisal comes in lower than the figure the buyer and seller initially agreed upon. But in person-to-person sales, the seller often bristles at the low appraisal—and buyers may decide they’re unwilling to pay for more than they (now) think they’re getting.
Take Ken Brazil. He owns six gas stations in the Valley, a mix of Chevron and Arco stops, as managing partner of Pit Stop Oil Co. Brazil opened his last location in 2007 and has been watching ever more favorable land prices come across his radar. One would think he’s trying to time the bottom of the market, but he’s not. In the past year, he has backed out of two land deals to build a new station, and that doesn’t count the dozens of flirtations he’s had with parcels over the past four years.
A couple of months ago, a corner lot at Sunset Road and Rainbow Boulevard in the southwest Valley matched all of his expansion criteria. At $20 a square foot for nearly two acres, plus construction costs, he was looking at a $4.2 million project. He would bring on 25 more employees to add to his existing 125.
On paper, Brazil and his team are rock solid: They have 10-plus years of operating experience and are weathering a brutal economy quite well. Financing was pre-qualified from Bank of Nevada, which would lend 80 percent with a 20 percent down payment, an amazing ratio on the commercial side, admits Brazil, who says it’s not uncommon for banks to request 30 to 40 percent down these days.
But Brazil backed out of his deal, citing a nearby parcel that recently sold for $7 a square foot as the reason. Even though he was willing to pay $20 a square foot, he was certain the nearby comparable sale of $7 a square foot would drag down his land appraisal. The bank will only lend up to 80 percent of whatever the appraised value is. In this case, a lower appraisal would force Brazil to pay more money out-of-pocket than the initially expected 20 percent down payment.
Brazil’s group is willing to give a higher down payment for the right situation. But with a very low appraisal figure, sometimes down payments can creep up to nearly 50 percent of the project’s cost.
“It’s not bad to have money into property. Not having it is what got us here in the first place,” he offers. “But it can just leave you a little short and vulnerable.”
Today’s appraisers—the alleged “deal breakers”—were initially scrutinized for too much deal-making at the start of the recession. After the real estate bubble burst, they faced accusations from legislators of inflating prices during the boom years. But now new appraisal regulations may be muddying sales and pulling prices down.
In March 2008, Freddie Mac instituted the Home Valuation Code of Conduct (HVCC)—a set of guidelines intending to limit lender influence on appraisals. In 2010, the Dodd-Frank Act reasserted essentially the same rules while adding other bits to the appraisal equation, such as making sure the borrower sees a copy of an appraisal report. But more importantly, it forced appraisal management companies (AMCs)—who funnel work to appraisers—to pay registration fees to states.
The problem? The appraisal management companies that are owned by banks, such as Bank of America’s LandSafe and Wells Fargo’s RELS Valuation, are exempt from the fees. AMCs tied to large banks are almost like puppy mills in the eyes of experienced appraisers, who consider them profit centers for banks: In some cases the AMCs take a cut as high as 50 percent of the appraisal fee. Some say that bank-tied AMCs also influence inexperienced appraisers to bring in lower valuations. AMCs are “motivated by the lowest price and fastest turn time,” says Craig Jiu of Brunson-Jiu, a local appraisal firm.
Bank of America spokesman Richard Simon declined to elaborate on these perceptions, saying simply, “Landsafe appraisers go through a thorough application and review process, and their work is monitored and reviewed on an ongoing basis.” Wells Fargo did not respond to requests for comment.
The lender’s influence on an appraiser is a touchy subject, but some real-estate professionals believe there is pressure for appraisers to bet low.
Bell says he has seen firsthand lenders setting “parameters” for data in an appraiser’s valuation, undermining the appraiser’s knowledge of the market. The law of unintended consequences is hard at work here: Increased oversight began as an attempt to prevent the rampant over-valuation of the boom years, but now it may be artificially stifling the market.
“When the market was strong, one out of 10 appraisals were under review,” says Chris Lauger, president of the commercial appraiser firm Asset Insight of Nevada. “Today, every appraisal I write is being reviewed by somebody.”