Mortgage News

Don't shoot the appraiser for the message about home values

(4/25/2012) ERATE exclusive- Limited demand, tight lending conditions, foreclosures, short sales and a host of other market conditions have pushed home prices down -- some as low as half their value at the peak of the market.

Except for those who kowtow to pressure, appraisers aren't responsible.

That's a recent message from the Appraisal Institute, its members beleaguered for years for "appraising too high" are now getting it for allegedly "appraising too low."

Real estate agents, homebuilders, sellers and others have a stake in a price that's as high as possible have tried to blame the market's distressed condition on appraisers, saying that real estate appraisers are at fault for producing opinions of value that don't match a home's listing, contract or sales price and that's delaying a recovery in the housing market.

That's "nonsense," says Appraisal Institute President Sara W. Stephens.

"The fact is that appraisers are undertaking the same thorough research and thoughtful analysis that they always have in order to continue producing reliable, credible opinions of value," Stephens said.

Buyers and sellers often have emotional value attached to a home or are unaware of market conditions. That doesn't change the approach to appraisals.

Appraisals are completed to assist lenders in making lending decisions, not to confirm a listing, contract or sales price. A selling, asking or contract price isn't the "correct" value simply because it's higher than the appraisal.

Unless a seller hires out for a special appraisal, which he or she has a right to do, the appraiser is usually hired by the lender, not the buyer, seller or agent. Professional appraisers are independent, third-party, unbiased experts who work without motive.

"Appraisers don't set the real estate market; they reflect what's happening in the market," Stephens said.

"Think of the appraiser as a mirror, reflecting the market. Obviously, the market is depressed - home prices have fallen far below the values of a few years ago. Many homes simply aren't worth what their owners think they are," Stephens said.

Earlier this year the institute published "Guide Note 11: Comparable Selection in a Declining Market" , guidance to help appraisers know when and how to use distressed sales, such as foreclosures, as comparable sales.

Distressed sales comprise nearly a third of the market these days, according to the National Association of Realtors.

According to the Guide Note, "Appraisers cannot categorically discount foreclosures and short sales as potential comps in the sales comparison approach."

However, due to differences between their conditions of sale and the conditions outlined in the market value definition, they might not be usable as comps, the guide emphasizes.

According to the institute, foreclosures and short sales usually do not meet the conditions outlined in the definition of market value, but there are variations.

• A short sale or a sale of a property that occurred prior to a foreclosure might have involved atypical seller motivations (e.g., a highly motivated seller.)

• A sale of a bank-owned property might have involved typical motivations, so the fact that it was a foreclosed property would not render it ineligible as a comp. • If the foreclosed property was sold without a typical marketing program, or if it had become stigmatized as a foreclosure, it might need to be adjusted if used as a comp.

• Some foreclosed properties are in inferior condition, so adjustments for physical condition may be needed.

The guide also says: "A declining market will likely exhibit very little sales activity. When the sales comparison approach is necessary, but there are virtually no current sales in the market area to analyze as comps, the appraiser must: 1. Expand the geographic area for comp search, then adjust for location as appropriate, and/or 2. Use less recent sales, then adjust for market conditions as appropriate."


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