It's amazing to me.
The residential real estate industry has the strangest ways to order the essential parts of the transaction. When I say essential parts I am referring to the timing and process used to value the property, inspect the property, disclose critical conditions related to the property.
There are many examples but let's take the first one and work through the list over the next few blog entries.
OK, here goes. First up, property valuations.
So you want to list your home for sale. You do what everyone else has been taught to do - you parade five or six real estate agents through your home and ask them what it is they intend to do to get your home sold. And oh yes, how much their services will cost you.
It is then that you are introduced to the CMA. The competitive market analysis or the comparative market analysis - the name depends on the agent. The CMA quickly becomes the focus of all Sellers and will soon be the focus of the entire marketing offer. It is supposed to represent a comparison of sold properties (MLS and public records), those properties that are for sale now and those properties that for whatever reason were offered for sale but did not sell or were withdrawn from the market.
So what is a CMA? It is the agent's opinion of value based on the use of data from the local MLS, often some public record data adjusted by a local opinion of value adjusted by the agent.
It is the CMA that sets the listing price that quickly becomes the source of much distress and anguish as the Seller and Buyer go back and forth trying to agree on a sales price.
So here's where I believe this last step really needs to be first.
Beyond the use as an educated guess of the value of the property a CMA is not a measure of anything that will ultimately assure the close the transaction. A CMA is really just one degree above the accuracy of an AVM - an automated valuation based on the use of public record data. An AVM is what Zillow provides today on its web site - an admitted estimate of value.
So what should come first to improve the property valuation process in the transaction? It is the formal appraisal of value.
This is the valuation prepared by a licensed appraiser. The appraisal determines the most critical valuation of the property. It is only the appraisal that will contribute to getting the transaction closed and it is ultimately the only measure of what a bank will lend on the property.
The appraisal results from the work of a licensed professional that understands how to value properties based on numerous measurements to include; MLS information, public record data, replacement cost estimates, rental multipliers and specific standards for determining a valuation banks will rely upon to fund a purchase of the property.
So what could the use of a licensed appraiser earlier in the transaction do for the consumer?
Start with reducing the back and forth over what usually comes down to the level of haggling over pennies is often blown to pieces when the appraisal arrives and is injected into the transaction. This is when the value of the home usually differs with the "sales price" that has painfully been agreed to by the Seller and the Buyer with the use of numerous counter offers and counteroffers to the counter offer. Unless it is an all cash offer to purchase or the Seller intends to finance the property for the Buyer - it is only the appraisal that really matters as it relates to getting the transaction closed.
So why is the formal bank appraisal last and not first in the transaction? Good question. And in this very difficult financing environment - a really good question.
If the property doesn't qualify for a loan then the transaction doesn't happen. Period. The appraisal is the banks only means to determine if a property qualifies for a loan.
So why last and not first in the transaction?
I'm told by agents that the reason is because it costs money for a real appraisal and the CMA is free. Really. A free CMA versus an opinion of value from a licensed appraiser? Which would you chose to use in marketing the single largest asset you now own? Is the investment of $400.00 worth knowing what the bank will ultimately finance for a qualified Buyer on your property?
I don't know about you but I would pay the cost of the appraisal as a Seller. Anything to avoid the high likelihood of a root canal experience that most real estate agents now put their Sellers through in the seemingly endless renegotiating the sales price of the home during the closing process.
The only real question here is what is it going to take to break the "CMA mold"?
Your guess is as good as mine but in cases like this one I tend to defer to the two most powerful words when envisioning change. They are - viable alternative.
Someone who agrees with this observation and offers an improved way of doing things and then goes to the bank sooner and more often.
Someone like what Apple did to Motorola. Like what Virgin Atlantic did to British Airways. Like what Google did to Yahoo. Like what Trulia did to REALTOR.com. And on, and on.
Think about the increased level of satisfaction in the real estate marketing and sales experience. Think about the differentiated service offering for reordering the transaction by putting what everyone else does last - now first.
So where are the other "last things, first" opportunities in the standard residential real estate transaction?
Stay tuned.
You presume that the Appraiser will be any more effective at their opinion of value than the REALTOR. Remember, they use the same data.
ReplyDeleteWhat is more interesting in my opinion is the AVM - like the Realist AVM. that is the standard that 18 of the top 20 banks use in consideration of a loan. When it comes down to it. The number that the seller is looking for is the cash amount a buyer can put down that will reduce the loan amount to 80% of the AVM.
Victor.
ReplyDeleteThe real question being asked here is who ever certified the Realtor to value property? I see no evidence of a MAI or CMEA\SIA in the code of ethics to become a Realtor.
I do see promise to abide by the NAR Code of Ethics, get a license, and oh yes, pay the dues. All that falls far short of the qualifications that are necessary for a bank to use a Realtor to determine value and then to underwrite a loan to someone of hundreds of thousands of dollars on a property sale.
That is precisely why the banks rely only on the appraiser's opinion of value before lending a dime. The appraiser is a certified, licensed and trained valuation professional.
Besides, it's really hard to ascertain if a buyer has 20% of anything if you don't know what a bank is willing to loan on the property.
If the Seller were to rely only on the Realtor for such a determination and it was based on the CMA - the true amount needed for a downpayment could be much more than 20% if the property was over valued by the Realtor and appriased at a lower value by the bank.
An 80/20 LTV ratio only applies if the appraisal equals 100% of the negoiated sales price. Less value means more down payment or yes again, another painful root canal process of renegoiatig the sales price after the appraisal comes in.
And if you are referring to the RVM - Realtor Valutaion Model - that is a whole different discussion for another day and maybe even another few blogs.
I think the title for that subject will be "RPR - The Ultimate Shell Game".