Realtor: 'Bank valuations keeping market down'

Overly conservative valuations by bank-appointed appraisers are causing agreed property transactions to fall through and are holding back the real estate market, says Cayman realtor Sheena Conolly.

Addressing a panel of real estate practitioners at the RICS Cayman Property & Construction Conference on Thursday, the broker/owner of Sotheby’s International Realty said from the audience, “It’s really a fascination for me that you can take four or five RICS appraisers on the same property and get such a variety of opinion.”

Ms. Conolly said estate agents often experience having what appears to be a successful transaction, only to see it fail when the valuation of the property for the bank comes in lower than the agreed price.

“What we are seeing in the market is that you are getting a willing buyer and a willing seller who will set market value. [Then] the bank will appoint an appraiser and the appraisal will come in short. We a lost significant amount of business in my office this last year. And I do believe that many of the CIREBA members here have had a similar effect,” she said.

Her comments suggest that Cayman banks, which in some cases have been stung by high property valuations as the property market deteriorated after the financial crisis, are now increasingly risk-averse and instructing property appraisers to be restrained in their valuations.

Simon Watson, partner at Charterland, noted that when comparable valuation or transactional data is unavailable, property values can be outside of the expectation and cause complaints. However, every practice should have a complaints policy in place for such cases, he added.

Mr. Watson pointed out that “just because a price is agreed [between a buyer and a seller], it does not set market value.” There is a wider definition of market value, which includes the need to act prudently with full knowledge of the market to arrive at a value, he said.

Ms. Conolly questioned how the market can be moved forward if the appraisals are not arriving at the price buyers and sellers already agree on.

“I understand from our industry that many of the leading offices are having this problem and it’s happening regularly, and as the market moves forward, we are losing a lot of business,” she said. “The banks are now directly instructing appraisers and choosing them. And we believe in many instances are keeping the market down and strangling it and stopping it from moving forward.”

Some appraisers are new to the island and not familiar enough with the market and the significant differences, such as upgrades or renovations, between seemingly similar properties, she said. “Yet they are the ones who are making the determinative decision whether the business should proceed or not.” However, Ms. Conolly said she welcomes discussion and dialogue between the real estate industry and the appraisers.

Mr. Watson agreed that greater dialogue would be beneficial. For instance, formalized access to all updated information through the realtors’ CIREBA system would be a great help. Since it can take a few months for sales to be registered, relying on “old” data in the land registry can have an effect, especially in a growing market, he explained.

The second RICS Cayman Property & Construction Conference at the Marriott Beach Resort attracted about 200 delegates.

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  1. Is it legal for banks to instruct property appraisers to be restrained in their valuations and to directly instruct them as it relates to their valuations? I was of the impression that the market value should be the market value and would recommend that legal action be taken by any individual that feels that they have been a victim of this type of conduct.

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  2. If i have a house and i want to sell it for 500 and i have someone who wants to buy it for 500 why should the bank tell me i can only sell it for 300?????? The value of a house can not be totally valued by a valuation that is only the starting point of the valuation. Appraisers on island will never match up because a valuation is just a opinion and opinion can change at any time. They have taking the sellers and buyers rights away.

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  3. It is after all the Bank who is buying a portion of the property, if you are asking them to offer a mortgage.

    UK banks were partially responsible for a property crash there – over-inflating values (offering above market value mortgages with the expectation of an increase) as that yielded higher value mortgages and greater profits, now they are much more realistic about both the values of properties and also the borrowers ability to pay it! A mortgage ceases to be profitable if they have to foreclose.

    The metric or indicator often used to determine the health of the property market is the Price / Earnings ratio. In the UK this has almost always been in the 3.5 to 5 range except in a ‘bubble’. i.e. the average house price is 3.5x to 5x the average salary.

    So while the commission to a Realtor may be less, the caution from the banks is better if it creates a sustainable market.

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  4. Roy Bodden,

    The obvious answer to your question is that if you are borrowing money to buy the house, it’s the banks decision of how much to loan you. If you and a buyer agree to 500 for a house only worth 300 and the bank didn’t do their own due diligence, what’s stopping the buyer from closing on the transaction, stop paying his mortgage and splitting the extra 200 with you? Now a bank owns a property worth 300 and takes a loss of 200 on the loan. This is what leads to bank failures.

    As to your other statement, sure sellers have the right to sell for whatever price they can get. Buyers on the other hand have no such right if they are using someone else’s money to purchase.

    Mack,

    If the bank is paying the appraiser, I’m sure they can tell them whatever they want. You can’t force a bank to lend money to someone, so let’s assume they couldn’t instruct their appraisers to be conservative. They might do one of a couple things: Hire 3 or 4 appraisers, who will all give a different answer, and then choose the lowest to base their lending decision on. Or go with one appraiser’s value but tighten their lending standards so they will only loan out 70% of the value versus 80%. Either way you can’t force a bank to lend, and we’ve all seen what happens when they get too loose.

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  5. Another point to make here is that there are many banks on the island. We are after all an international financial center. So there is no stopping a buyer from shopping banks to find a lender willing to stretch the valuation. If all the banks are being similarly conservative, then I highly doubt it’s a problem with the banks. It might…just MAYBE be that realtors, who have a vested interest in inflating real estate prices, are a little too optimistic on what properties are currently worth. I doubt it’s a coordinated effort by the banks to avoid making money by lending on properties worth the agreed upon sales price.

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