Low Appraisals Causing Problems with Market Recovery

he real estate market is recovering, but still faces hurdles, notably from tight mortgage credit.

Problems with a sizable share of real estate appraisals are also holding back home sales. Most appraisers are competent and provide good valuations. However, appraisals generally lag market conditions, and some changes to the appraisal process have been causing problems in recent years. This includes the use of out of area appraisers who are not familiar with the area or local market conditions.

Some appraisers are using foreclosures, short sales, or run-down properties as comps. Some appraisals do not reflect market conditions such as rising prices, the presence of multiple bids, and low inventory. A large concern is that some appraisers working for an appraisal management company are operating under strict and limited parameters due to bank lending criteria, which appears to be related to banking regulations or risk aversion on the part of the lender.

Furthermore, unreasonable "put back" risks imposed by Fannie and Freddie could also cause banks to set unrealistic requirements for appraisers. 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.

The typical foreclosure is sold for an average discount of 20 percent relative to homes in good condition, while the typical short sale is discounted by 15 percent. NAR 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 unacceptable short time frame, and to complete a scope of work that is not justified by the fee being offered, which at times can be just $ 250.00.

These are major problems. In addition, some appraisers are required to provide as many as 10 comps which almost guarantee the use of distressed properties as comps in many cases, when previously 3 comps were the norm.

Fortunately, the level of distressed sales is trending downward. As distressed inventory is cleared from the market over the next two years, it should help to correct ongoing problems.