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Location, Location

MAY 16, 2013 4:10pm ET
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WE’RE HEARING from the Michigan Association of Realtors, specifically their reference library and May 2013 guidance for Realtor members. The MAR indicates that there is a common complaint among Realtors in virtually all of Michigan. Namely that many residential deals are blowing up because properties are not appraising high enough to allow a buyer to finance the purchase price and close on the home. Why? Many Realtors are taking the position that out of town appraisers are not “geographically competent.”

Remember that the three most important words in a real estate deal are location, location, location. The MAR guide speaks about the Dodd-Frank rules designed to keep real estate appraisers independent. A consequence of Dodd-Frank’s effort to avoid inflated appraisals is that a number of homes are being appraised by out of town appraisers who may not be familiar with a local area. Hence, the term “geographically incompetent.”

I heard this out of a town appraiser complaint some time ago by a mortgage broker but did not pay a lot of attention to it. Now, though, the MAR is making everyone aware of the issue. One would think that a local appraiser would be a good idea since they should know the area. I get appraisals done all the time for clients in connection with trusts and estates and sometimes house sales. I contact a local appraiser. The IRS has had no problems with this. In fact I would think an out-of-town appraiser would raise a red flag in determining market value for capital gains tax purposes.

Real estate appraisals are also used by divorce attorneys and bankruptcy attorneys all the time. I have not taken a survey but, again, if I wanted to challenge a stated value on an appraisal one of the factors would be if the appraiser had a local knowledge of the area.

Basically the MAR is venting the frustrations of its members and trying to provide some guidance on how to resolve the situation where an out of town appraiser is involved in a transaction. At the same time the Dodd-Frank rules need to be followed otherwise nasty fines can result. A Realtor has to avoid coercion of an appraiser along with the basic no nos of bribery extortion, etc., etc. The MAR guide does provide examples of permitted conduct of Realtors towards appraisers which it somehow found among Dodd-Frank’s 800-plus pages of reading.

Has anyone seen an appraisal higher than the purchase price? What exactly are comps anyway? There are a lot of unstated factors in any sale of real estate. The motivation of the seller is not factored in. Sometimes a seller is reimbursed for closing costs from an employer. This seller will be more likely to accept a lower price than someone who does not have the reimbursement luxury. How does that relevant factor get noted in a comparable sale?

This all points out that the real estate appraiser has a thankless job. If the appraisal comes in low and the deal dies everyone is upset with the appraiser. If the house gets foreclosed and the bank loses money it is the appraiser’s fault. This sounds something similar to killing the messenger.

Based in Chelsea, Mich., John McDermott is a real estate and elder care attorney who represents both consumers and businesses. He can be emailed at jamcd@comcast.net.

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