COMMENTARY

Lately there seems to be an opinion among real estate professionals, and others, that appraisers are the number one reason for appraisal property values coming in at less than the sales price.  Admittedly, in some instances that is true but there are a number of other factors that come into play.  Namely, the significant changes in lending policies, appraisal requirements and guidelines and, the caution of mortgage underwriters. 

In March of 2009 the U.S. Department of Housing and Urban Development adopted the Market Condition Addendum (earlier adopted by Fannie Mae) and issued appraisal reporting requirements for properties located in declining markets.  Although there is no standard industry definition, a declining market is considered to be any neighborhood, market area, or region that demonstrates a decline in prices or deterioration in other market conditions as evidenced by an oversupply of existing inventory or extended marketing times.  Since March of 2009 most lenders have made the HUD reporting requirements standard procedure for all mortgages, conventional and FHA, regardless of market conditions and, at the same time, issued their own specific requirements.  Prior to the real estate market and economy melt down in 2008 as long as an appraisal for conventional financing met Fannie Mae guidelines it was acceptable.  Not so anymore.

Specific requirements vary from lender to lender but many lenders have very similar requirements.  The appraiser is now expected to include at least two sales that have closed within 90 days of the effective date of the appraisal in order to show recent market activity and one comparable sale that closed within 180 days.  Also the inclusion of a minimum of two comparable active listings and/or pending sales is required.  Listings and pending sales must be adjusted to reflect list to sale price ratios for the market.  Listings and pending sales must include the original list price, any revised list prices, and total days on the market.  An explanation is expected for days on market that do not approximate time frames reported in the "Neighborhood" section of the appraisal reporting form or that do not coincide with the days on market noted in the Market Conditions Addendum.  In addition to these requirements there are many other requirements that must be considered in selecting acceptable comparable sales.

Bracketing the comparable sales is another facet that comes into play in the selection process that is increasingly being scrutinized more closely by underwriters and reviewers.  Bracketing is most easily described as dividing the array of comparables into two groups - those that are superior to the subject and those that are inferior to the subject.  Underwriters and reviewers want to see at least one comparable sale price higher than the sale price of the subject and at least one comparable sale with a lower price.  Bracketing does not stop there but continues with gross living area and age.  The challenges of meeting the bracketing and time requirements in the selection of comparable sales are not the only hurdles faced by appraisers.

It appears that many underwriters are now employing the CYA policy or assuming the role of a pseudo appraiser.  It is not uncommon for underwriters, after reviewing an appraisal, to take it upon themselves to find sales or current listings not included in the appraisal and ask the appraiser to explain why those sales or listings were not used.  It doesn't seem to matter if the underwriter's selections are properties that are of a different style and design or have several hundred square feet differences in gross living area or other significant differences that would exclude them from being truly comparable properties. 

Don't get me wrong.  I am not blaming lender requirements, underwriters or trying to make excuses for appraisals that come in at less than the sales price.  The advent of the Home Valuation Code of Conduct and appraisal management companies have also played a part by creating a situation where there are appraisers accepting appraisal assignments in communities or neighborhoods that they are unfamiliar with.  Appraisal management companies have a list of appraisers in their database that they routinely rotate for appraisal assignments.   As a result, many appraisers are receiving fewer appraisal requests and therefore accepting assignments in areas that, in the past, they did not service.  With fewer appraisal requests and lower fees paid by appraisal management companies, many appraisers are accepting any appraisal request regardless of where it may be located or their knowledge of that area.  In instances where the subject property is a tract house in a large neighborhood of like housing with plenty of comparables that usually is not a problem.  But when an appraiser accepts an assignment in an area he or she is unfamiliar with and there is not an abundance of comparable sales or where the neighborhood has specific nuances it is likely that the appraisal will be less than accurate.  An example would be a westside appraiser accepting an appraisal on a waterfront property in Harrison Twp. or other eastside waterfront community without having any prior experience or knowledge of the area.  However, the HVCC, appraisal management companies, and appraisers hungry for business are not necessarily to blame either.

During times passed there were, for the most part, obvious recognizable patterns to sales prices making them easier to substantiate.  In today's market it is difficult to discern patterns if, indeed, there are any.  The job of real estate professionals, appraisers and underwriters has been complicated by, among other things, the collapse of the real estate market, declining values, REO sales, short sales, and distress sales resulting from eminent foreclosure or job loss.  In addition to these factors, the job of appraisers striving to satisfy the requirements of overly conservative lenders and underwriters has become more difficult and complicated.  If blame is to be placed for appraisals coming in at less than the selling price it is a combination of all factors previously discussed and, let's face it, sometimes the property just isn't worth the sales price.