Imagine if you were given the winning numbers to the Super Lotto drawing on Friday one day ahead of the drawing. Or if you suddenly had access to the victorious teams and point spreads on Saturday, the day before the football games take place on Sunday. How do you think you would do? My guess is that you would do pretty well; you would win the bet and take home huge sums of money.

Now imagine your house for sale. You have just accepted a contract for purchase. The buyer’s lender contacts an appraiser for an estimate of value on the property. Before the appraiser makes a trip to actually see the house or begins to pull up comparably priced properties the bank clues them in to a little secret and says the CONTRACT PRICE IS “X”. When I was in college if I could have only had the answers to the test questions beforehand, I could have done so much better.

Value Defined

Market value is typically defined as the price a buyer is willing to pay and the price a seller is willing to accept. Banks and lenders can be a little sensitive. They need the third party opinion (appraiser) to justify loaning as much as 100% of the value of the property, or at least they used to loan up to 100%. Understand the banks do not want to be left in the position of owning a property where the mortgage balance exceeds the equity, otherwise we have foreclosures, and we have people walking away from their homes because they are upside down. As you can see this program and the standard operating procedure has worked really well. Just ask Countrywide, New Century, and Alliance Bancorp or the list of many others at the Mortgage Lender Implode-O-Meter.

Changes Appear Inevitable

The lending process as we know it today may cease to exist 6 months from now. New requirements are being bandied about as an attempt to provide the consumer with more protections. I have written before about real estate lenders and the need for accountability. But how about the vertical integration involved with making a real estate loan? More specifically the appraisal process.

More Accurate Appraisals

I believe if the system is to have integrity an appraiser should not be given the sales price in advance. Quite frankly, I do not know if this could ever be enforced or enacted. To place a value down to the last dollar and bring the appraisal in at “value” is ridiculous. Appraisers should evaluate a subject property based upon its own merits as well as the comps and trends in the neighborhood. It is only an estimate of value on the day it was performed. How do you account for property in declining areas with a 60 day escrow? Many banks now do an “appraisal review” usually at the last minute verifying the work and information contained in the report.

Maybe the roles should have been reversed. The appraisers should have been reviewing the files of the banks and their applicants.