I worked in the banking industry from 1996 to 2006 so I'm not unfamiliar with the appraisal process. During that time, as many of you might remember, home prices rose at an unprecedented rate! As all "bubbles" eventually burst, so did the housing market. 2008 was a bad year for home owners that needed the equity in their homes. Knowing how much a home is worth is dependent upon the real estate appraiser.
Contrary to common beliefs, appraisers go through a rigorous training process including a two year long apprenticeship. It's not just about spending time on the internet looking in the neighborhood for what others have sold their homes for, but for comparable upgrades, downgrades, landscaping, neighborhood conditions and many, many more aspects that are often unknown by the general public.
The appraiser is sometimes thought of as the "bad guy" because they are often the bearer of bad news. While experience creates consistency in the process and techniques an appraiser uses, once that foundation of experience exists, it can be counted upon to be consistent over time and not be compromised. In the process of buying and selling real estate, if someone wants to sell their home, in the end, it's only worth what someone is willing to pay. This "market value," especially today often comes at a premium to "appraised value" due to a lack in the supply of homes in areas well established without the land for new constructions.
Home buyers want values to come in low so that they pay less. Home sellers want their values to come in high as to make more money... All the while, banks want the value to come in where it should be as to minimize the risks involved in the fluctuating loan to value of said property. The appraiser's job is to be impartial so that everyone's best interests are insured, but the best interest of the economy is very important as well. Here are some similarities between the real estate appraisers and a scuba diving instructors I found fascinating.
When the consumer (prospective student) is ready to sign up for scuba diving lessons, often, one will do a search for and compare prices of lessons in the market they live in. Market prices sometimes influence what the dive shops (or independent instructors) can sell the lessons for. While prices vary in different parts of each respective town, they also vary from state to state, especially in land-locked states versus states (and to that extent, cities) that are near water.
One of the topics we talked about was the value of homes versus what people were paying for them. As home prices rise and availability decreases, buyers are often willing to pay more for a home than it's worth. Years ago, the purchase of a primary residence often meant that one would count on living there until the home was paid off, children were raised, moved out, off to college, etc. It is not unheard of that today's buyers will jump from home to home as they jump from job to job. Because of this, it is realistic to expect that the value of a home (a place to live, a place to raise a family, a place to retire to) -- the intangible investment that comes with home ownership -- is replaced by believing that a primary residence can be an investment vehicle! As what I expected would happen in 2008 saw my departure from the banking industry in 2006.
There is a preponderance of home buyers today, again are starting to believe that a primary residence makes a good financial investment. Family structures, career goals, financial goals, and changes in communities are occurring quicker the events that ran concurrently with home ownership that encompassed a traditional 30 year fixed-rate mortgage. In years past, home owners had time to wait out the highs and lows of market fluctuations. As the decades pass it was likely that one would expect a return on the cost of financing a home over a 30 year time frame. Today, there is little to no expectations that one will stay in a home for 30 years. Relatively speaking, it is unheard of! As lifestyles changes decrease from decades to years, so does the expectations of waiting out the tides of housing and financial markets.
Scuba once was an activity that took considerable more time to complete than the programs of today. The ability to choose from activities never before open to the general public that were few and far between, today are open to everyone. The instant gratification that comes from promises of learn today, dive tomorrow is because the industry created programs to meet "market" demand. The unfortunate side effect of speeding through an activity like scuba diving is that more drop out, more are less qualified, and more end up having to unlearn bad habits that might not have been learned in educational programs decades before.
There has been a movement in the industry to undervalue the price associated with learning how to scuba dive. While it is logical to conclude that when groups of students get larger and thus would influence the price of what each student pays, regrettably the prices have dropped but the cost of running the programs have not -- in fact they've gone up! What that means for the industry is that in order to finish the program and award certifications, programs that once had extensive training requirements and the months to learn, don't line up with today's students with limited time on their calendars. This means that programs ultimately became condensed and instructors took shortcuts. Programs that don't get the students in and out are thought of as outdated or inefficient.
While it is still possible to get adequate instruction at current market prices, as the old saying goes, you get what you pay for. It's no difference in real estate and it's especially true in scuba diving. It is reasonable to find that most dive shops will make so little profit on education that if it wasn't for equipment sales, they would no longer be in business. In order to maximize time and value, what ended up happening is that selling equipment became the priority and teaching became superfluous.
Value for services that are undervalued only result in one thing -- divers that don't know how to dive -- we are seeing it in today's students.
Here are some other correlations:
- Banks want to pay less to appraisers in favor of "automated value models" (electronic appraisals)
- Agencies become more receptive to e-learning and electronic methods of instruction
- Real estate agents put pressures on appraisers for higher and unjustified values so commissions are higher
- Dive shop owners put selling pressures on instructors to sell equipment as education doesn't have immediate or perceived value
- When experienced appraisers (receiving higher compensation) leave the industry, less experienced appraisers settle for smaller paychecks just to get a job -- get into the industry
- Dive shop owners pay less to their instructors due to increased operating costs, passing those expenses onto "up-and-coming" new instructors that settle for lower wages because of the touted "benefits" that come from working as a dive professional
- As experienced appraisers leave the industry, newer inexperienced appraisers enter that may be manipulated by lenders and real estate agencies
- As experienced instructors retire, they are replaced by younger instructors without the experiences that the wisdom of decades of diving and various situations brings
- Home buyers are paying inflated home prices that are contrary to prudent financial planning because of the belief that the benefits of "home ownership" are greater than the actual costs (and savings) associated with renting
- Dive shops entice prospective students into signing up with all inclusive (resort-style) training and pricing -- one low price that covers everything -- no investment in themselves as a diver that can't be continued upon returning home
- State and Federal regulators are influenced by banks, lenders, and the real estate markets to approve riskier lending and financial products with questionable underwriting standards
- Certifying agencies fail to hold their instructors accountable for failing to follow standards and training guidelines without repercussions because they are in the business of selling scuba, not making divers