McClelland Minute - July 26, 2009

Balancing Cost with Service

Last week’s column led to some interesting conversations with appraisers, bankers, and other Realtors.  It started with a concern that I may be unfairly criticizing two players in the real estate industry – loans officers and appraisers for carrying out policy of their respective employers.  As we talked some information came to light that I thought I would share with you.

The appraisal sector is under tremendous pressure in Canada to deliver written assessments on property value at the lowest possible price.  Many of the largest banks and mortgage companies have moved to using appraisal management brokerages to dispatch local appraisal firms.  All of our local appraisal firms are small independent businesses, with owners and staff proud of their role in the community.

The national entities demonstrate little or no knowledge of the conditions these firms work in year around – weather, roads, distance, never mind the emotional state of the owner of the subject property.  Their sole purpose appears to be to assign appraisals to the lowest bidder within a certain region.  They don’t care which firm consistently gives the best service or has a track record respected by other professionals within the real estate industry.  The bottom line of the originating contractor is what it is all about.

Now I am Scottish by descent so understand the principle that the best money you make in business is the money you don’t spend.  But I also believe that most of us would want the best advice that we can get from the appraisal professional.  If the bank or mortgage company is only focusing on sourcing documentation at the lowest price, then their decision makers may in fact be working from flawed data.

It is a rare day that I don’t get a call from one appraiser or another, seeking information on completed sales, pending sales, or just to compare opinions on a specific property.  I enjoy these discussions as it keeps my skills sharp.  I use the same channel in reverse when advising my clients on value prior to bringing their property to market. 

Valuation is a complex mixture of logic and street smarts (I call it an art and a science!).  Frankly, it can be downright difficult at times.  For example, what is the per square foot reproduction cost of a 1 ½ storey log home placed on a full basement with a potential life span of a hundred years?  How much more is a metal roof worth over asphalt shingles?  If it is in a rural location with a large shop, does the value lean more towards residential or commercial use? 

At least one major player in Canadian mortgage lending, the Farm Credit Corporation, has decided to use in-house talent for most of its decisions.  It sees the correlation between value, purpose, cash flow, and personal integrity.   FCC staff also seem willing to listen to the owner’s perspective on worth, as well as doing due diligence with others in the industry.

To me there is a distinct difference between being prudent on who you loan money to, and what security is being offered.  But then, when I was a loans officer years ago for the Alberta Treasury Branch, the old school managers drummed it into our head that you never loan money to someone you don’t trust no matter how good the property is.  It is just not worth the trouble trying to collect it back.

Vern McClelland is associate broker with RE/MAX of Lloydminster.  If you have questions or comments on this article or other real estate matters, he can be reached at 780.808.2700 or through the McClelland Group website www.mcclelland.ca

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