Attempting To Raise Home Prices With Crazy Laws

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What do you do if you are a politician concerned about declining home prices? Simple. You do what politicians do - create a law designed to raise prices.

In Illinois, Maryland, Nevada, and Missouri legislators have proposed laws that would prohibit the use of foreclosure sales in appraisals. The Illinois law, HB 0092, would be in effect for the next 5 years and would prohibit appraisers from using "a residential property that was sold at a judicial sale at any time within 12 months" as a comparable sale. The Illinois law was introduced by Rep. LaShawn K. Ford of the 8th district.The Maryland law was shot down after outrage erupted over its stupidity.

No surprise that a lot of members of the real estate community support legislation like this. Apparently the NAR claims that 1/4 of all deals are falling through because of low appraisals. The basic argument of these industry cheerleaders is that it's not fair to compare "regular" homes to foreclosure sales.

Let's review some of the issues here:

  1. Didn't we get into all of our mortgage mess with inflated appraisals?
  2. Aren't foreclosures part of the market? After all, in Chicago over 50% of all sales are distressed.
  3. I will agree that if a foreclosed property was not in the same condition as the subject property then an adjustment needs to be made. That's what appraisers are supposed to do. But to legislate that foreclosures be excluded entirely?
  4. The Illinois law does not provide for any sort of exclusion for appraisals on foreclosures! So in these cases direct comparables can not be used at all and the appraiser needs to introduce a reverse bias. LaShawn didn't think of that one did he?

There is no end to the dumb ideas that politicians can come up with. Why not pass a law that all appraisals should be made for 25% more than the proposed purchase price? That will really solve the housing problem.

Comments

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  • True, but sometimes they can figure it out from the photos (if there are any) and the description. Also, the better ones will call the agents involved in the transaction and ask for more information.

  • I just received an appraisal on a property with a value of $38,000! The borrower just wants to do a simple rate/term refinance to take advantage of lower rates. Every comp is a foreclosure because that is all that has sold recently in the immediate neighborhood to cash buyers. The subject property has granite/stainless, 2 bed/2 bath, hardwoods, etc. Admittedly, it isn't in the best southside neighborhood but to say this property is worth $38k is a joke. That is less than what it would cost to build the place from scratch. Borrower paid $180k five years ago for it.

    I can see both sides. However, rarely are foreclosures an alternative to non-distressed sales. A buyer looking to purchase a property with financing and needs a place in move in condition in a reasonable time frame is not the same market as an all cash investor willing to buy a place for pennies on the dollar even if it is a step above a crack house.

  • In reply to Edumakated:

    It all depends upon the condition of the property. If same condition foreclosures are available then no one is going to buy the non-foreclosure at a higher price. The real question is what condition those foreclosures are in and what the appropriate adjustment factor is.

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    After 20 years in the corporate world and running an Internet company, Gary started Lucid Realty with his partner, Sari. The company provides full service, while discounting commissions for sellers and giving buyers rebates.

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