A "sizable share of
real estate appraisals are holding back home sales" the National Association of
Realtors® (NAR) said Wednesday as it released results of a September survey it conducted
among its members.
of Realtors who responded said they had experienced no problems related to
appraisals over the previous three months, but 11 percent said they had a
contract cancelled because an appraised value came in below the negotiated
purchase price. Nine percent reported a
delay in a transaction and 15 percent said a contract had to be renegotiated
because of a low valuation.
NAR stressed that
most appraisers are competent and provide valuations in compliance 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 valuations 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.'
NAR said that some appraisers are using distressed properties as "comps"
without making adjustments for being foreclosures or short sales or for the
condition of run-down property. "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" a press release from NAR said.
In addition, where three comparable homes were once the norm for most
appraisals, now some appraisers are required to provide as many as eight to 10. This, NAR said, almost guarantees the use of
distressed properties as comps in many cases.
Appraisals also fail to reflect changing market conditions such as
rising prices, a climate of multiple bids, or low inventories. The turn-around time by both banks and
appraisers is sometimes slow, which also delays closings and values are
inconsistent and fluctuate widely. .
Another big concern according to NAR is that appraisers working for an Appraisal
Management Company (AMC) often operate under strict and limited parameters due
to bank lending criteria possibly arising out of banking regulations or the
leaders risk aversion. The put back
risks imposed by Fannie Mae and Freddie Mac, which NAR termed "unreasonable"
could also cause banks to set unrealistic requirements for appraisers.
Lawrence Yun, NAR's chief economist, said none of this is new; 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
NAR said it 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.
"In short, there has been an inconsistent appraisal process leading to
disruptive delays for home buyers and sellers," NAR President Moe Veissi said. "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, NAR said.
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 said. "In some cases, a second appraisal may be