The real estate market is recovering but still faces hurdles, notably from tight mortgage credit, but problems with a sizeable share of real estate appraisals also are holding back home sales, according to survey findings by the National Association of REALTORS®.
Most appraisers are competent and provide good valuations that are compliant with the Uniform Standards of Professional Appraisal Practice. However, appraisals generally lag market conditions and some changes to the appraisal process have been causing problems in recent years, including the use of out-of-area valuators without local expertise or full access to local data, inappropriate comparisons, and excessive lender demands. In addition, before the beginning of last year, some lenders’ loan processors edited valuations, cutting them by a certain percentage.
Although 65 percent of REALTORS® surveyed in September report no contract problems relating to home appraisals over the past three months, 11 percent say a contract was cancelled because an appraised value came in below the price negotiated between the buyer and seller, 9 percent report a contract was delayed, and 15 percent said a contract was renegotiated to a lower sales price as a result of a low valuation. These findings are notable given that homes in many areas are selling for less than replacement construction costs.
Lawrence Yun, NAR chief economist, says there has been a steady level of appraisal issues for quite some time. “Though the real estate recovery is taking place, the combined issues of stringent mortgage lending requirements and appraisal frictions are hampering otherwise qualified buyers from purchasing a home in a timely fashion, and in some cases are preventing them from buying at all,” he says.
Major problems reported by REALTORS® include:
• Some appraisers are using foreclosures, short sales and run-down properties as comparable homes, and are not making adjustments for market conditions or the condition of the property.
• Appraised values that do not reflect market conditions such as rising prices, the presence of multi-bidding and low inventory.
• Appraised values are very inconsistent and fluctuate widely.
• Out-of-town appraisers, who are not familiar with the area or local market conditions, are being used.
• Turn-around time by both appraisers and banks is slow, which delays closings.
A large concern is that some appraisers working for an Appraisal Management Company are operating under strict and limited parameters due to bank lending criteria, which appears to be related to banking regulations or risk aversion on the part of the lender. Furthermore, unreasonable “put back” risks imposed by Fannie Mae and Freddie Mac could also cause banks to set unrealistic requirements for appraisers.
There is a clear difference between the value of distressed property and non-distressed homes, and some appraisers do not currently distinguish between these types of properties when making comparisons for valuation purposes. NAR data shows that the typical foreclosure is sold for an average discount of 20 percent relative to traditional homes in good condition, while the typical short sale is discounted by 15 percent.
Many of the inappropriate comparisons appear to be made by appraisers lacking local expertise, who generally live outside of the market where the appraised property is located – often without full access to local data from a multiple listing service.
NAR President Moe Veissi says some appraisal practices lack common sense. “Our long-standing policy is that all appraisals should be done by licensed or certified professionals with local expertise, which also is what Fannie Mae and Freddie Mac recommend, but clearly this isn’t practiced universally,” he said.
NAR has long advocated for an independent appraisal process and enhanced education requirements that allow appraisers to produce the most accurate reports possible. However, appraisers have faced undue pressure – whether from a lender or an AMC – to complete appraisals using distressed sales as comps, to complete an appraisal in an unacceptably short time frame, and to complete a scope of work that is not justified by the fee being offered.
These are major problems. In addition, some appraisers are required to provide as many as eight to 10 comparable sales, which almost guarantee the use of distressed properties as comps in many cases.
Previously, three comparable homes were the norm for most appraisals. In many cases there simply aren’t enough apples-to-apples comps to comply with the excessive demands by lenders, so discounted distressed homes are sometimes used in valuating traditional homes in good condition without appropriate adjustments.
“In short, there has been an inconsistent appraisal process leading to disruptive delays for home buyers and sellers,” Veissi says. “All home valuations should be made without undue pressure from any source. Even so, buyers, sellers and agents are free to ask appraisers to consider additional data and to correct errors, or discuss unique aspects of the home, the neighborhood or properties used as comps.”
The appraisal industry has made strides in adapting to market conditions, expanding education and making appropriate adjustments for distressed homes that are used as comps. It appears many of the remaining problems are tied to appraisals made through AMCs.
Fortunately, the level of distressed sales is trending down – they accounted for about one-third of all sales in 2011, but have averaged roughly a quarter of sales in recent months. By 2013 NAR expects the distressed market share to decline to about 10 to 15 percent. As distressed inventory is cleared from the market over the next two years, it should help to correct ongoing problems.
“In the meantime, buyers, sellers and real estate agents need to be aware that there are problems with some real estate appraisals, but also be aware of their rights to communicate with appraisers and lenders about errors or concerns with individual valuations,” Veissi says. “In some cases, a second appraisal may be justified.”
The National Association of REALTORS®, “The Voice for Real Estate,” is America’s largest trade association, representing 1 million members involved in all aspects of the residential and commercial real estate industries.