According to the National Association of Home Builders (NAHB), it’s not the economy, stupid. It’s not those avaricious lenders of sub-prime loans to unqualified buyers. It’s not exotic hedge funds. Nor is it government regulators.
No, it’s. . . appraisers!
Get this from an NAHB press release this week (and just wait until you read the last paragraph of the release, in boldface way below):
“Using foreclosed and distressed sales as comparables with appraisals on single-family homes without adequately reflecting the differences in the condition of the respective properties is needlessly driving down home values.”
That’s the lead paragraph. The release then quotes its chairman of the board, whose photo is below. Says Joe Robson, a home builder from Tulsa, Okla.:
“Any home buyer can recognize the difference between a well-kept home and a distressed property that is damaged or not properly maintained. So it only makes sense that an appraiser should be required to consider the overall condition of a property and the specific factors related to a foreclosure or distressed property sale when selecting and adjusting the value of comparables.”
If you are buying or selling real estate, this is an issue that you’ll discover runs close to home. One reason is the resurgence of appraisal contingency clauses, that gives buyers an escape hatch if an appraisal comes in too low and the seller won’t reduce the price.
Is it not true that all comparable properties make up the market in a given area and therefore
provide the environment in which market value is established?
Only occasionally can appraisers determine with any accuracy the condition of all potential comps. The outside of a home may be pristine, but what about the interior? Does the NAHB think that appraisers should be knocking on doors? Or breaking into foreclosed properties? Or casting a net that is far too wide?
When the condition cannot otherwise be discerned, a conscientious appraiser will call real estate brokers who might know the condition of comparable apartments or houses as a result of their active involvement in buying and selling. But that doesn’t happen often enough, and some brokers are neither well informed or energized enough to help out appraisers.
In the best of all worlds, the appraiser will already have his or her extensive knowledge of a given market.
Chiming in, no doubt coincidentally, the National Association of Realtors NAR Chief Economist Lawrence Yun complained about appraisers as well. Said he:
“Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales,. In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment. There is danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected.”
As New York appraisal executive Jonathan Miller notes, appraisers should never use as comps properties of which they cannot determine the condition.
The underlying issue, he convincingly argues, is the quality of the appraisers themselves. That concern has intensified with the recent advent of the Home Valuation Code of Conduct (linked to a PDF), which, Miller says, “has enabled a whole army of inexperienced or incompetent appraisers at the expense of competent experienced appraisers who can’t afford to work for half price and turn around assignments in 20% of the time without verifying the data.”
The situation that Miller describes arises from that Code of Conduct, which resulted from New York State Atty. Gen. Andrew Cuomo’s bearing down on mortgage brokers–the links between lenders and buyers–who ordered the majority of appraisals and, said Cuomo, thereby injected bias as a way of greasing lenders’ acceptance of the loans. So, now, Miller contends, lenders themselves –via appraisal management companies–are hiring appraisers who are distant from the markets in which they are charged with valuing properties. The lenders are paying them less and asking them to do more work in less time.
Calling for “proper regulatory guidelines, the NAHB release ends this way:
“In neighborhoods where comps include a large number of short sales or foreclosures, appraisers should have the option of expanding the geographic area or extending the time frame for eligible sales to get a more representative basket of the value of homes sold in the area, Robson added.
“Currently, improper or insufficient adjustments to the comparable values of foreclosed and/or distressed homes often results in the undervaluation of new sales transactions.
“’This practice must be corrected because it contributes to the continuing downward spiral in home prices, forestalling the economic recovery,’” said Robson.
(For the latest sales, price and mortgage statistics, plus the predictions of a number of forecasters, check out my biweekly newsletter.)
The bottom line is this: If a property in which you have an interest doesn’t appraise, don’t blame the market. And don’t blame the appraiser.
Your blame is best directed at the listing and selling brokers who have failed to provide the appraiser with all the information he or she needs to value the property correctly. No one knows–or should know–the market better than a good broker.
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022