It’s not easy being a residential property appraiser these days. Even with the rules barring influence from loan departments, appraisers are still open to plenty of criticism from those they serve. It is a tough balancing act.
The headline of a recent syndicated column in The Washington Post highlights just one of the pressures appraisers face: “House sales hampered by appraisers who fail to recognize appreciation.” The president of the National Association of Realtors is quoted as saying that when appraisers do not adjust valuations upward in implied immediate response to increased local sale prices, they are guilty of “poor appraising,” and are obstacles to a real housing recovery.
The real estate community is understandably frustrated when a desirable property becomes the object of a bidding war and the valuation comes in well below the selling price. But is the appraiser really to blame?
In most cases, the answer has to be no.
True, appraisers have been battered by criticism to the point where it is easy to understand if they have become conservative. If they don’t meet the value of the sales contract, they are deemed by agents and loan originators to have “failed.” If they come in high, they are viewed as being overly liberal by auditors and subject to rebuke, or possibly influenced by ulterior motives.
Attorney and fraud expert Rachel Dollar pointed to a recent case in MortgageFraudBlog.com where a federal court judge found an appraiser guilty of deliberately overvaluing properties as part of a fraud scheme. He could be sentenced to 20 years in a federal prison and a $250,000 fine—penalties that hardly encourage the appraisal community to veer from accepted practices for any reason.
And what are the accepted practices in areas that are seeing some much-needed appreciation? They are mentioned late in The Washington Post column, but deserve more emphasis.
The Market Conditions Addendum Form of the Uniform Residential Appraisal Report, which is required whenever the necessary data is sufficiently available, is designed to show trends. It looks at comparables over the last 12 months, bucketed into three-month periods and the appraiser’s interpretations of the information are entered in the “neighborhood” section of the appraisal report.
The most recent three-month data is interesting, but increases will rarely be considered for that period for the simple reason that the data may be meaningless almost as soon as the appraisal is completed.
Appraisers typically need longer histories of local trends on homes very much like the subject property before they will be moved to consider upward adjustments. Normally, they will look for trends to continue over a six-month period at a minimum, because they know that distressed sales and special situations can skew apparent trends.
Lenders typically do not want listings used to support upward adjustments because that is just the sort of thing that will result in a buyback. Listings, while revealing much about markets and potential trends, are just not treated equally with sales.
Comparables need to be verifiable sales, and in the case of a market trend adjustment upward, lenders will want a full page of sales to justify a short-term trend of less than six months. Despite feeling the pain of a frustrated real estate sales community, appraisers are just doing their jobs by waiting for trends to prove themselves.
It is a difficult market for all in the industry, and in fact for all in the country, since real estate values ultimately affect every sector of the economy. The value of any asset is what someone is willing to pay for it, and if there is a buyer who will pay a premium for a property, that is their option.
But should an appraiser and a lender accept the premium simply because the buyer and the agent do? And is it “bad appraising” or a failure on the appraiser’s part if they follow accepted practices by requiring market movements to stand a reasonable test of time before being declared a trend?
The appraisal should be as objective a document as possible, free of influences like the prospect of future business or the heated invective of those desiring a certain number to be reached. Its importance in the loan file is unmatched as lenders and investors decide whether to put funds at risk.
In the case of the buyer who bids up a property because they are willing to pay a premium price—more power to them, but at the same time, they should be accepting the risk of the over-market value amount. Not the lender, not the investor, and certainly not the appraiser.
Jennifer Creech is president and CEO of InHouse Solutions, Ponte Vedra Beach, Fla.