The Unintended Consequenses of Change
June 26th, 2009 categories: San Diego Real Estate
For years now we have heard all about the changes in our real estate industry from Lending issues, inspections, forms and disclosures, the marketing of properties, lead generation, you name it it has changed. And selling a home in the San Diego real estate market has been affected just like all the other areas around the country. As the Voice of San Diego Real Estate, it is important we all grasp these unintended consequences of change and I am pleased to present this explanation here in the Real Estate Text Book.
In a comment I made to well known and highly respected Real Estate Professional and Blogger Lenn Harley, I suggested a new definition of this change. Change is when something happens that you didn’t want to happen but must now adapt to it ( as in just live with it). Some have wished that we could continue to do business the way we used to do business. The answers that come opposed to that recent way of thinking and doing things are from those that were able to adapt early and take advantage of modifying their business and doing it early.
At the time of the sub prime crisis, many were faulted and to head off the possibility that this scenario of runaway home prices could happen again, the entire system of lending basically collapsed and is being refashioned not necessarily by those that would be the most skilled at it. Along with the lending underwriting changes, another segment of the industry not always thought of as the one segment that actually facilitated the ballooning of property values has also been modified. The appraisal.
Not to leave a single stone unturned, in May of this year the new rules were put in place to make sure that appraisers do not facilitate an inflation of values from getting out of control again. Or so that is the way the changes are being justified.
The appraisers were as a group charged with having been too influenced by lenders to facilitate values to get the deal done. Well not any more. In making the new changes much more onerous than the older much easier to understand lending guidelines, appraisers were said to have a “too cozy” of relationships with lenders and that must now be prevented. The appraisal was always by definition to be an arms length estimation of value, and the arms length part seemed not to be long enough. My image immediately went to those shorter furry animals that often walk with their hands. They have long arms.
Just how that is too happen was the subject recently of Real Estate columnist Kenneth Harney’s article on what the new appraisal rules mean to the industry and the consumer. What are the expected and unintended consequences of these changes?
Since that the appraisers had what was believed to be that “too cozy” relationship with lenders, it was decided that lenders must now choose from a pool of appraisers on a rotating basis instead calling on their trusted relationships with known appraisers of the past. In the arbitrary selection process, it is thought that there will no longer be any possibility of strong arming by the lender to have the appraisal “ came in”, a term that implied that the value the Buyer agreed pay would be the value that the appraiser would also see minimally as the estimate of value.
Kenneth points out several of the unintended consequences of these new appraisal guidelines as released by Fannie Mae. Since lenders are no longer directly involved with the appraisal process, the fees now have to be charged up front and can no longer be just a part of the loan costs at settlement. That now takes the form of the Buyer having to supply a credit card payment up front. The appraisal fee that used to cost $325 now goes for in the range of $450. That adds up to a 20 to 30% increase in costs for the consumer to pay for the same service that might not be performed as well.
Ken noted that we should not assume however that this increase in fees paid actually benefit the appraiser, it often goes to new appraisal management companies that facilitate the processing of the appraisal assignment and management including the processing costs.
If this sounds like we added another new layer in the real estate transaction, if it walks like a duck and quacks like a duck, not much use in thinking of the possible exceptions like its a goose with a bad cold. Since these management companies decide what the fee will be and job out the actual appraisal and they handle the management and requirements of the who, what, and when, you can expect that their costs will over time escalate and be justified that their costs are higher and the appraisal cost will go up as demand goes up, just like other services.
As independent contractors and to protect the profitability of the new management companies, there is also the unintended consequence that new appraisers who might work for less could end up pushing the more seasoned and experienced appraisers out of the business.
The real unintended consequence of these type of changes is a greater likelihood that appraisers will not be familiar with the uniqueness of the local areas and will not be as capable of making the correct adjustments. Appraisers that typically worked certain areas and were expert in valuations may be a thing of the past. And that happened over night. Talk about unintended consequences.
So lets recap this. In the past, local real estate professionals knew better than anyone what the value of property was in the neighborhoods they specialized in. Not anymore. We based it on comparables sales with adjustments for particular characteristics or even unique area characteristics and our opinions of value had most often been validated by knowledgeable appraisers. Those days, it sounds to me like they are also over. Now, we must relearn what the respective value is from persons that may never have even been in any particular area before. And don’t go taking it out on the appraisers, they most likely had very little influence in these changes.
Oh and as for those thinking that you can share with the appraiser what you think they don’t know, better think twice before doing that. If you have to ask why, you aren’t paying close enough attention to the new rules. Ah, the unintended consequences of change.
This is so true, William.
You should repost this on AR for the members to read, excellent recap of what we are all experiencing.
Hi Missy, I first wrote and shared this with AR. I wanted consumers to be able to read and understand what was happening in the market place. I lost 4 very valuable transactions already and it has been barely 60 days that these new rules were put into effect. And there was no real discussion about it. The rules were shared with somebody though, the new level of appraisal management companies , never known before, were already in place when the rule became effective. Now how do you suppose this all happened so quickly and so blindly from the eyes of consumers as well as most of the real estate and lending industries not giving it much attention ? Does the word Agenda seem like a good word here?