Weak Appraisals Hamper Home Sales, Experts Say
Weak appraisals are “driving down the real estate market” and “borders on buffoonery,” says William Maxwell, an expert in finance and professor at Southern Methodist University’s business school, who has seen his own Dallas property fluctuate in appraised value by $60,000 in just a year.
While the sluggish economy has pushed home values down the last few years, some real estate professionals and economists say that low-ball appraisals are pushing values down even more and undermining a housing recovery, The Wall Street Journal reports.
The National Association of REALTORS® reported that 16 percent of real estate pros surveyed in June reported a cancelation in a sale, mostly due to a large number of low appraisals.
Erin Wanner, a sales executive with Stirling Sotheby’s International Realty in Orlando, Fla., told The Wall Street Journal that one of her deals fell through when an appraisal came in 40 percent lower than expected for a 7,000-square-foot custom-built lakefront home; the home was under contract for $650,000 but the the appraisal came in at $380,000.
Some real estate professionals are accusing lenders of pressuring appraisers to come in with lower estimates and for basing their valuations largely on nearby distressed sales that often sell at discounted prices. That has prompted at least four states — Illinois, Nevada, Missouri, and Maryland — to consider legislation that would prevent appraisers from using distressed sales when conducting their valuations.
But the Mortgage Bankers Association says more conservative appraisals are needed. The trade association says it’s a way to protect the banks from future problems with investors who buy mortgages.
Source: “Judgment Call: Appraisals Weigh Down Housing Sales,” The Wall Street Journal (Aug. 12, 2011)
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Appraisals Increasingly Becoming ‘Deal Killers’
Appraisals are increasingly being blamed for preventing deals from making it to the closing table. In a common scenario playing out across the country, sellers are accepting buyer offers to later have an appraisal come in at a dramatically lower amount, which threatens to derail the entire deal. Unless the seller comes down in price or the buyer puts down more money, the deal often fizzles.
“The appraisers have so much power to kill deals,” Jennifer Snyder, president of the St. Paul Area Association of REALTORS® in Minnesota, told the Pioneer Press.
Appraisers determine a property value by evaluating over the past six months sold transactions, current listings, and pending sales. But some critics argue that appraisers are giving too much weight to foreclosed properties in their comparables. While appraisers once rarely factored in short sales and foreclosures, appraisers would be negligent not to do so now, said Paul Sellwood, owner of Real Estate Appraisal Services in White Bear Lake.
“We’re not playing God and saying what is your property worth,” says Neal Harrah, owner of Regional Appraisals Inc. in Lakeville, Minn. “We’re offering an opinion based on current data out there.”
Real estate pros are educating sellers more about the appraisal process, realizing that sellers will need to consider the appraisal process more than they ever have and how it can threaten the sale. For example, one of Snyder’s clients had an appraisal come in $10,000 under the buyer’s accepted offer. To save the deal, the seller agreed to drop the home’s price to offset the difference.
In another incident, a buyer offered $110,000 for a condo in St. Paul, Minn., which was then appraised at $65,000. That deal was able to survive, thanks to a buyer who had deep pockets and was willing to put up more money, but the agent says with a normal buyer, it would have never gone through.
Source: “Appraisals: The New Deal Breaker in Real Estate,” Pioneer Press (Jan. 24, 2011)
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Appraisals Continue to Be Low and Sink Some Deals
With foreclosures a large share of property sales in some areas, appraisers continue to factor in the sale price of foreclosed properties when setting values of regular properties. Appraisers are aware the practice isn’t ideal, but in some markets they’re left with little choice because of the large number of foreclosed properties.
Bill Geiger Jr., an appraiser in Cocoa Beach, Fla., told a local magazine that when he has to use a distressed property while doing an appraisal, he contacts the real estate practitioners involved in the sale and reviews computerized listings for the property to find out as much as he can about the condition of the home when it sold. He adjusts the appraisal value accordingly.
There are other factors at work in holding down valuations. Rob Johnson, vice president of lending at San Diego Funding, says lenders demand greater scrutiny of a property if the buyer has a credit score on the low end or a high debt level relative to income. That extra scrutiny can impact whether the lender decides whether to make a loan at the originally appraised value
A third factor is the fluctuation of the market, with some sellers reluctant to let go of their previous expectations.
Industry professionals had hoped that repeal of unpopular appraisal standards would help address concerns with low valuations, but repeal by itself doesn’t change the conditions appraisers face. The repeal of the standards, called the home valuation code of conduct, was enacted into law as part of the big Wall Street reform bill passed a few months ago.
Source: UPI, Steve Cook (09/28/2010)
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GSEs Eye Standards Shift for Appraisals
Recently enacted Wall St. reforms require the Federal Housing Finance Agency, the regulator of Fannie Mae and Freddie Mac, to come up with appraisal standards to replace the Home Valuation Code of Conduct by Oct. 21.
The law retains the basic intent of HVCC, which is for lenders to keep an arm’s length distance between them and the appraiser, and it continues to allow appraisal decisions to be left in the hands of appraisal management companies, if lenders so choose.
But it attempts to prevent abuses by, among other things, blocking AMCs from negotiating fees with appraisers. Lenders and AMCs must pay appraisers at the market rate.
Source: American Banker, Brian Collins (09/22/10).
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HVCC: Bad or Badly Implemented?
The Home Valuation Code of Conduct (HVCC) is getting a bad rap for causing what real estate professionals say is a rise in inaccurate appraisals, Alfred Pollard told a packed room of REALTORS® Friday in a risk management-regulatory issues joint forum at the 2009 NAR Conference & Expo in San Diego. Pollard, the general counsel [...]
Faulty Appraisals Harming Housing and the Economy
Twenty-six percent of builders are seeing signed sales contracts fall through the cracks because appraisals on their homes are coming in below the contract sales price, according to a nationwide survey conducted by NAHB. “Home builders are increasingly concerned that inappropriate appraisal practices are needlessly driving down home values. This, in turn, is slowing new [...]
“You Get What You Pay For”
The Boston Globe Magazine has an interesting piece on appraisers. The article encourages consumers to closely monitor the appraisal process.
While this is not a horrible idea, there is a fine line between asking an appraiser to consider new information and pressuring that appraiser to reach a predetermined value.
The article also includes this section on the Home Valuation Code of Conduct.
Under the new guidelines, appraisal management companies (AMCs) will act as middlemen between mortgage companies and appraisers and hold greater influence over the entire process. “We think it’s going to hurt the quality,” says Peter Vadala, president of the Massachusetts Board of Real Estate Appraisers. “These AMCs put pressure on the appraisers to do two things: Do an appraisal cheap and do an appraisal quickly.”
The National Association of Mortgage Brokers filed a lawsuit against the Federal Housing Finance Agency in late February, arguing that proper contact among mortgage brokers, lenders, and appraisers helps ensure high-quality, cost-effective, efficient appraisals. Appraisal firms like Newton-based Lipof Real Estate Services make a similar case. “The essence of the [new code of conduct] was doing good,” says company president Rick Lipof. “It was to take the pressure and intimidation off the appraisers.” But for appraisal management companies, he says, “the goal isn’t to find the most competent appraiser to make sure the value is right. The companies look for the appraiser who can turn it around in a day for the cheapest price. What do you think you get for that? You get what you pay for.”
Lenders and consumers want appraisals that are fast, cheap and accurate. Appraisers can accomplish two of those qualities, but never three.
National Association of REALTORS®
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One reason you can’t get a mortgage. Residential sales are cratering,
which is making it more difficult to appraise homes. And that is making mortgages more difficult to obtain.
NEW YORK (CNNMoney.com) — For real estate appraisers, determining what a house is worth has become increasingly difficult, which is making it even harder for buyers to purchase homes or for homeowners to refinance.
The main tool in the appraiser’s kit is the sale prices of homes in the area. If they can find similar houses nearby in similar condition that sold recently for, say, $300,000, they can assume that the home they are appraising is worth a comparable amount.
But with sales volume falling, there are fewer homes with which to compare. In fact, sales of new homes crashed in January to the lowest level in 45 years, and existing home sales fell to a 12-year low.
And even when there are recent sales figures, they often don’t hold up as a reliable baseline. Appraisals are estimates of market value at a given time, and with prices in free fall, values “age” quickly. Full Story.
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