Editor’s Note: In this installment of Valuation Issues and Answers, John Lifflander, ASA discusses how to avoid problems in the new world of bailouts, tax credits and, as he points out, business as usual.

Liability Landmines– Appraisers Beware
By John Lifflander, ASA

The current economic crisis was largely precipitated by loose credit and loose lending standards. Part of the loose standards involved buying properties with no money down. Last year, it was reported that over 40 percent of recent buyers had purchased their homes without paying one cent. In fact, with concessions given to buyers, many actually received money out of escrow, so they were effectively paid to buy a house!

The Federal Reserve kept interest rates at historic lows, which effectively increased prices. The reason is that when shopping for a house, most people look at the monthly payment and not the total price. Consequently, values typically increase when rates decrease. There are, of course, a myriad of other reasons for our current debacle but these are a few of them.

Understanding this, one might think a solution would be to stop the bad practices that caused the problems. However, that is not what is happening. Instead, interest rates are now lower than they have been in over 50 years, with the Fed’s Prime Rate at zero percent. Moreover, an incentive has been offered by the government and an $8,000 tax credit for new homebuyers. The Veterans Administration and the United States Department of Agriculture are still offering no-money-down loans and the Federal Housing Authority is still offering loans with a down payment of about three and a half percent.

Moreover, real estate agents are writing offers with concessions, which effectively mean that buyers are still purchasing with no money down and often getting money back.  This means that some buyers are still being paid to buy homes. Obviously the government hopes to get us out of this crisis with the same bad behavior that got us into it.

$8,000 Tax Credit 
What are the ramifications of the current market for appraisers? The $8,000 tax credit is artificially increasing the values of some properties. Our firm is finding that buyers who are getting this credit are often paying more than typical market values. This is why an appraiser may not find comparables that support some sales: this is an artificial bounce to values but it is not a value increase which is inherent in the property. In other words, it cannot be passed on to another buyer and if the property is foreclosed upon, the value of the tax credit will not be realized. For this reason, appraisers should be very careful with new sales which do not line up with the purchase price.

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