“What are you looking for?” the man on the phone would ask me. At the time, I was a retail lender for a major bank.
“Uh, they need 680 thousand,” I would answer. A few days later, the appraisal would arrive on my desk. The home’s appraised value: exactly $680,000.
I miss the golden age of appraisals; the days when an appraiser would ask their banker what value they needed to complete the deal, and the result would neatly correspond. Of course, it didn’t always happen that way. Occasionally, when a client was buying a property that was obscenely overvalued, the appraiser just wouldn’t do it. “The most I can give you is “X,” they would tell me, apologetically.
The Golden Age of Appraisals (and the housing bubble itself) resulted from general human psychology, and a lack of regulation to counteract it. The government wanted a robust market so that voters would be happy. Bank executives wanted stunning results so they could exercise their stock options. Lenders wanted to underwrite mortgages to exceed their targets and get good bonuses. Appraisers wanted to keep lenders happy and get bank business. Clients wanted to be approved so they could buy homes to flip and get rich. And so, everyone worked together to create a royal mess.
At the time, I didn’t even realize that by answering the appraiser’s question, “What are you looking for?” I was contributing to a bubble. I recognized that the question was suspect, but thought I was simply helping them cheat at their jobs by giving them an anchor figure to work from.
Housing appraisals go by either “replacement value” or “the comparison approach,” the latter of which is the most common. In this approach, a home is compared to the recent sales of similar homes in the area, adding or subtracting value for any differences. In the bubble years, the values given to differences were often generous. After all, who’s to say that the $500 of gardening supplies and weekend of sweaty work didn’t add $20,000 to the value of the home? It’s a judgment call.
These days, most appraisers no longer ask their banker what he is “looking for.” They rarely assign a value of $20,000 to a small garden plot, or $30,000 to a new paint job. And, they often anchor their appraisal based on the price of the nearest foreclosure, knowing that foreclosures drag down prices for everyone. The old days are gone. Appraisals are becoming – dare I say it – accurate.
That is, until the next hot economy…
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“Until you play it, St. Andrews looks like the sort of real estate you couldn't give away.”
Sam Snead
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