One of Stone Cold Steve Austin’s memorable catch phrases was “DTA”: “Don’t Trust Anybody.” Although wrestling is a TV show, there is a seed of truth in that saying and very appropriate when you go to make the biggest purchase of your life (e.g. your house.) All humans are motivated by incentives especially financial ones and so in a real estate transaction it is important to understand how sellers, buyers, lenders, appraisers, and real estate agents get paid. I will focus on the first three in this article and discuss the latter two in upcoming weeks.
The easiest incentives to understand are the sellers and the buyers. The former wants the most money possible and the latter wants to pay as little as possible. Emotions can be involved in both parties’ decision as we try to justify to ourselves the decision to buy and sell. Case in point, most buyers don’t care about the purchase price but rather the mortgage payment. They don’t mind paying 50% more for a house if the mortgage payment is affordable. Many sellers are using 2022 prices to list their homes instead of seeing how the doubling of interest rates has depressed home values. In theory, lenders have the most incentive to get the price correct since they are making the loan. However, since most mortgages are packaged and resold to investors, the government now requires an assessment by an appraiser so that banks don’t make overleveraged loans.
In the end an appraiser should be unnecessary because theoretically this back and forth between the buyer and seller should lead to the middle price which is “fair.” The cyclical nature of the real estate shows how emotions and market forces (e.g. federal interest rates) play an outsized role in real estate. Just ask anyone who over paid for their home last year if they want to move this year? Ultimately who can you trust to get an accurate value for a house?
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