Spilling Tears Over Bad Appraisals – Stop Already!

Can the real estate industry please stop spilling tears over bad appraisals – stop already! Katie Cosner of AGBeat posted a well done article about “bad appraisals”, hitting the very same things I’ve been hammering for years. The disconnect between agents and appraisers (and now builders as well) inexplicably remains. To be sure, variables exist with any appraisal and they are subjective to a point – but one thing really is central to every appraisal – COMPARABLE DATA. If agents, builders, owners and whomever else is on the tearful whiner parade can’t grasp the simple fact that COMPARABLE SALES drive appraisals then nothing will change. Understand as well – our friends in Washington MANDATE what data appraisers HAVE TO consider; yup – I mean distressed sales that are similar to the subject.

Katie did a fantastic job of defining an appraisal - 

An appraisal is an opinion of value, it determines how much a home is worth on a given day and time, based on age, size, condition, and several other factors. There are three methods on how this can be done – the income approach, for commercial or (duh) income producing properties, like multi-family homes, the cost approach, often used for manufactured homes, and occasionally for new construction – how much it literally costs to build or rebuild a home, and finally the most common, is the comparison approach, using active and sold comps in the neighborhood. 

When done for a home purchase, an appraisal is done to protect the bank from lending more money on a home than it’s worth. It isn’t completed to meet the agreed upon price in the contract. It’s not there for the buyer’s peace of mind. It sure as heck isn’t there for the seller or Realtors involved. The lender is the client, they are the ones who are insuring their investment in the transaction by getting an appraisal ordered.

Succinct, well said and right to the point. Let me add something – the closed sales available at the time of appraisal are the pool of comparables. They may not be perfect and there may not be many but they are what they are and the appraiser has to select from that pool.  Distressed sales, if similar in major categories, are eligible and must be considered. Appraisers follow specific underwriting guidelines – this is required and agents and builders would be wise to understand them.

Lost Deals, Whining & Tears

For nearly a year, between 10 and 18 percent of NAR members surveyed have reported at least one deal which has been delayed or killed due to appraisal issues. Usually the issue is that the appraisal is not meeting the contract price, and either the transaction falls apart completely, or the sales price needs to be renegotiated. NAHB are also reporting issues with appraisals:

December 8, 2011 – One out of three builders are reporting losing signed sales contracts during the preceding six months because appraisals on their homes are less than the contract sales price, according to a recent nationwide survey conducted by the National Association of Home Builders (NAHB).  “The inappropriate use of distressed and foreclosed sales as comparables in determining new home values is needlessly driving down home prices, killing home sales, causing more workers to lose their jobs and delaying a housing and economic recovery,” said NAHB Chairman Bob Nielsen, a home builder from Reno, Nev. 

Too often, due to faulty appraisal practices, brand new homes with sparkling appliances and interior upgrades get compared to a distressed property that has been sitting vacant and in disrepair. The result, in many cases has been that the new house winds up getting appraised at less than the cost of construction.  That is precisely what is occurring in today’s marketplace, according to the NAHB survey, where a full 60 percent of respondents reported they were experiencing appraisals coming in below their contract sales price. Of those reporting that they had encountered this problem, 53 percent said the appraisal amount was actually less than the cost of building the home. 

Very dramatic. Bob needs to understand the current appraisal requirements and suggest that his builder members do the same. By the way, this is the same crew that said a fireplace adds 24K of value to a home….Agents that want to challenge an appraisal need to understand the process or it’s a waste of time.

Keep Calm & Carry On

Here’s an idea; understand what is required of an appraiser BEFORE problems arise. Give the appraiser an info packet about the home BEFORE the appraisal is written; include the wonderful things about the home and supportive data that they can use – IE: legitimate comps. The appraiser is writing for the underwriters and is following industry standards, they have no desire to deal with underwriting questions or tearful agents.

Not meeting contract price, for whatever reason; the home was overpriced to begin with, it was over-improved, the market is rapidly declining- possibly due to job loss or other economic issues, the market is driven by distressed properties, or even the condition of the home itself, this simply is not a reason to get dramatic.  The contract price, and sometimes even upgrades, don’t mean a whole lot, when the rest of the immediate area can’t support the value. Agents need to find a backbone and educate their clients to this very simple fact and the process. Understand and explain how market value is supported.

No appraiser is perfect and three appraisers evaluating the same home will likely have three slightly different opinions of value. One constant is the applicable data available – that which is specifically required to be considered. If you, as an agent or builder, don’t understand that then your tears will continue to flow.