10/10/2012 BY: ESTHER CHO
Inflated appraisals were identified as one of the causes of the housing bubble, and now undervalued appraisals are viewed as a reason for a stalled recovery.
In a September National Association of Realtors (NAR) survey related to home appraisals over the past three months, 11 percent of Realtors said a contract was cancelled because a home was appraised at a value below the negotiated price.
Another 9 percent said a contract was delayed, and 15 percent said a contract was renegotiated to a lower sale price.
A much larger majority, 65 percent, reported no contract problems stemming from home appraisals.
One reason for the low values, according to the NAR, is because some appraisers are not taking into account the difference between distressed and non-distressed homes when making comparisons.
“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,” the group stated in a release.
Compared to traditional sales, a foreclosure sells for a 20 percent discount on average and a short sale for a 15 percent discount.
NAR acknowledged issues appraisers deal with, noting “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.”
NAR further added some appraisers have to use eight to 10 comparable sales when previously, three comparable homes were sufficient and the norm.
When using a high number of comps, discounted, distressed homes end up in the equation. NAR explained this can lead to traditional homes in good condition being compared to distressed homes without appropriate adjustments.
However, with the distressed market share decreasing, the impact of distressed inventory on appraisals should also subside.
According to the NAR, distressed sales accounted for about one-third of all sales in 2011, and by 2013, the association expects to see the share of distressed sales fall to 10 to 15 percent.
Even if the issue of distressed properties starts diminishing, there are still other issues in the appraisal industry NAR addressed, including out-of-town appraisers who are not familiar with the area or local market conditions, slow turnaround times, and inconsistencies and fluctuations in appraised values.
NAR President Moe Veissi, broker-owner of Veissi & Associates Inc., in Miami, explained the NAR’s position on the issue.
“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.
“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,” he added. “In some cases, a second appraisal may be justified.”
Michelle Castle provides mortgage loans to all of North Texas and Southern Oklahoma. Call Michelle Castle at (903) 892-1998 if you are looking for a home loan in North Texas and Southern Oklahoma. Click here to visit Michelle’s website and apply for a loan.