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Are You Loosing Deals Due to Low Appraisals the resulted from Foreclosures as Comps?

I am seeing an increasingly common trend here in Northern Michigan. We are busy writing deals but now we are loosing deals because appraisers can not find suitable comps. Are you seeing this anywhere else?

That backlash to a lot of foreclosure sales is an appraiser's inability to find suitable comparable sales to justify a ready willing and able buyers offer to purchase. In the past 3 weeks alone I know of 1 buyer who wrote 3 bottom lined offers, had financing approved thought he VA and all 3 were rejected due to the inability to get a suitable appraisal. I know of 2 others this past week.

Even when we have what appears to be a "done deal" with a strong buyer, willing seller and executed purchase agreement...don't couldn't it done until you cash the check. In talking to lenders we are discovering that since appraisers are now chosen from a pool, rather than by the lender, many deals are coming in short.

It seemed that in the past a lender would choose an appraiser that they knew would make every reasonable effort to make an appraisal come in the purchase price. We all know that for years appraisers were stretching the boundaries of legitimacy on many appraisals.

Common sense tells me appraisers knew that if they wanted business they had to try to make it work. I used to get calls from appraisers asking me how I justified a price or to find out if there was something they missed in the report before turning it in. Many times a deal was salvaged by talking to the appraiser first.

Now the lender doesn't see the report until the appraisal is done. I personally think this is a better what except when an appraiser makes a mistake. This happened to me this past week when a former B&B was being sold as a single family home and the appraiser mistakenly called it a commercial business.

My buyer was turned down for a loan and I lost that sale. Hopefully I have found a new lender who is local and knows the property but my point is had the appraiser called to ask a few questions we would have had a deal.

I'd love to hear if you are seeing this in any other part of the country?

Posted by Jules Yates on 07/05/2009 05:17 PM

Comments (70)

foreclosure, exit realty paramount, jules yates, appraisals

70 Comments on Are You Loosing Deals Due to Low Appraisals the resulted from Foreclosures as Comps?

JUL

Your a little late to the party. There has been so much discussion on this from the appraisal viewpoint, lenders sticking their nose into the appraisal process. Everyone was so worried about the agents influencing the appraiser - WHAT ABOUT THE LENDER INFLUENCING the appraiser? They review each line and adjust as THEY desire. Pitiful.

Jules, we certainly are in California. I imagine it is across the Country.

Lyn, I agree that lenders have had a great influence on these appraisals in the past. It stems from greed as no one cared as long as they got paid. It really was not a great system was it?

Jules

Yes the appraisal is a major issue these days. When the market was going up 1-2% a month the appraisals usually came in without much work. Now in a declining market it is a lot more complex.

What seems to be working for my buyers sale team is a simple system that is based on making the appraisers job easier to try and make sure everyone is on the same page.

#1 Before writing a offer be sure and pull the current listing and sold comps to be sure that the offer is in-line with the available comps. No use to write a offer well above the current comps knowing that it will not appraise. Working as a REO listing agent i seen asset managers reject a above market offer and accept a lower offer if the higher offer does not have current relevant conservative comps to support the offer price.

#2 Restrict access to the property so the appraiser has to contact you for access to the property to do the appraisal

#3 Meet the appraiser at the property and provide him or her as a courtesy with a copy of your selected good conservative current accurate listing and sold comps, your current CMA, a copy of the purchase contract and your contact information. Tell with them that you know they will be pulling their own comps but since you had this information available you thought you would share it with them just in case it might be of any possible use in their independent analysis. Answer any questions they may have regarding the property, neighborhood, schools district, and local market conditions if asked.The appraiser may be from out of the area and not completely familiar with the property.

Do not in any way attempt to influence the appraisers future valuation of the property. Just provide them with current accurate information and they can and will reach their own independent opinion of value. Most of the inaccurate appraisals i have seen in the past have be based on inaccurate information. The problem is once the appraisal is typed up and submitted to the lender based on inacurate information it is very difficult to challenge and get corrected.

Main Point is Murphys Law any thing that can go wrong will go wrong. So we need to be proactive in helping keep every thing and every one involved in our transactions on the same page.

#4 Ask them to contact you if they have any questions regarding the information provided

I have a deal now that almost fell apart the appraisal came in way low-thankfully, the sellers came down to appraisal price. I'm not counting on anything until it closes.

Me to. You're not alone.

Hey, as they say...."it ain't over till it's over!" ANything can happen along the way to the closing table.

Patricia Aulson/portsmouth nh real estate

This is something I feel very strongly about. I know the appraisers need comps but using properties that are no match is truley unfair to the seller. To be compared to properties that have been ripped apart and then neglected is not really a comp at all. If you have to pour money into it before you can deliver the first stitich of furniture then this should be taken into consideration.

Jules,

Unfortunately, as appraisers, we have a number of "rules of the road" that we must abide by. In a market dominated by REO sales, we generally must utilize REO sales in our appraisals. If the market is not dominated by REO sales, we generally must use non-REO sales. Regardless of which of these sets of data we start with, we must then choose the most chronologically recent, geographically proximate and physically similar sales. We must also adjust each comparable for those differences with the subject property which have contributory value, such as quality, condition, gross living area, site area, amenities, etc... Lenders prefer to see comparables with few adjustments. My appraisals, historically contain more adjustments than most. Many appraisers, however, will "consolidate" their adjustments by hiding them amongst other adjustments, thereby limiting the actual number of these adjustments. Although my appraisals often have more adjustments than most, they also contain narrative addenda explaining any exceptions to FNMA's recommended guidelines. I get very few callbacks asking for additional data or explanation because I take the extra time to put it into the original report. Many other appraisers do this as well, and many more are starting to pay more attention to what they put into their appraisal reports as their clients certainly are.

Try to remember, the market is defined by the majority, not by any specific transaction. If a market is REO dominated, by extension, the comparables used must be REO sales. Even if your particular transaction is not an REO sale, we still have to use these sales in our appraisals if they are what define the market. This is not the appraiser's fault, it is a reflection of what the market is currently dictating. When numerous sales fall through because appraised values are below sale prices it is generally a reflection of a soft market. Soft markets don't benefit appraisers any more than they benefit realtors or lenders, so trust me when I say we appraisers have no punitive or malicious intentions - things just are the way they are. We all benefit financially from healthy real estate markets, but we appraisers don't create these markets - we just interpret them.

I hope this information is of some help. Hang tight - this should all shake out within a few years or so and re-stabilize.

JUL

This has been a repeated problem here in Florida. Some entire zip codes don't have more than 1 or 2 "regular" sales in them for months. The whole area is dominated by REOs and short sales. That makes it near impossible to find true comps. I've lost multiple deals because of this and have now stopped trying to sell regular retail homes in those areas until things turn-around. Why fight it? It isn't going to improve for quite a while.

#9- David,

That is a very coherent well-said response. We been moving a bunch of REO's around here. However, what I am dealing with is out of area appraisers that are delivering appraisers that don't make allowances for the quality difference in builders. In the most recent saga my Buyers received one comparing the home they are trying to purchase with homes that were built by either a "economy" builder (rhymes with Astaire) or a builder that has gone bankrupt and has properties that, among other problems, never had final inspections, plumbing not finished, standing water inside the foundation and shoddy finish work. The subject property and the comps were all described as "adequate construction" with NO narrative descriptions of the difference in build quality. Oh, and he called me up a week after inspecting the subject property and asked me to "re-take his required photos" since he had allegedly deleted his camera memory card. And he was located 60+ miles away. I stopped what I was doing, took the photos, e-mailed them off an we received the appraisal six days later.

We are contesting this one..

This seems to swing both ways first appraisals coming in too high for Short Sales and then too low for loans. So what's the happy medium? It does seem to mater if it is for a Loan Broker or Direct Lender. The direct lenders are not as much a problem as Loan Brokers for FHA and VA loans. Alot of cover your a$$.

The appraisal pool nonsense is a lot like the REO/asset manager located in California or New York choosing the listing broker from a distance. "Oh, North Carolina can't be that big-this person here in Greensboro no doubt knows the market and is capable of appropriately pricing/appraising this property in Southern Pines." It is completely ludicrous to expect someone with no access to the MLS listings/data of the area where the property is located, not to mention no knowledge of the specific local market, to provide a professional level of service, whether marketing an REO or appraising it, or anything else.

The appraisal pool has the potential, and seems to be living up to that potential, to stop any housing recovery in its tracks. Someone needs to wake up.

Hi Jules, Just worked with an appraiser last Thursday on a difficult deal. The lender wants comps within a 1 miile radius and having closed within 60 days. Problem: Fort Myers Beach is a barrier island and typically about a quarter mile wide. This severely limits the total number of Gulf front propertuies available as comps.

Lost a sale because the appraiser (from a different county) used houses that were not even close to the house being appraised - even one that was ON THE MARKET still. The other Realtor and I had given good comps and they were ignored! The appraisal came in 40,000 short when we had shown that it should have come in at the contract price or very close. Seller would not come down that much and that was the end of that. All of us were mad over that one since it should have closed.

I can't see appraisers coming from another county and not knowing what they are pulling for comps, never going IN a house to see if it's wrecked or not, and doing just a drive by or pulling from the internet. What is with that???

This is really pretty easy to figure out. If the comps are not there... if the lender cannot justify the value, then why should the lender, in their eyes, lend money on a house they don't feel it worth the purchase price. ? It's the Golden Rule. He who has the gold (the mortgage money) makes the rules. Now, in specialty cases... some latitude must come into play, obviously, but if it is just a regular neighborhood... and the comps are not there... the lender cannot justify taking the risk.

If the market determines the price the buyer is willing to pay and the seller demands a listing price that an agent agrees to just get a listing, and the appraisal is lower than the selling price, how can you blame the appraiser? Shouldn't more responsibility for the marketing and sale of the property be directed to the listing agent or broker?

How could the realtor get comps and the appraiser couldn't? There has to be more to the stories realtors are commenting about, so if you're unwilling to tell the rest of the story without offering a solution, why waste your time?

I was trained to get the listing regardless of what the seller wanted to price the property and after 30 days on market adjust the price, reducing it until offers were made. I was new so i followed my brokers direction until i discovered I was wasting my time and found a professional broker and learned how to be a professional, not an order taker.

My first question to sellers who insist on a certain price for their property is simply, "do you want to sell your property and move or do you want to make money on the sale because you can't have both in this market? My second question is "what would you do if your property doesn't apparaise at the buyers offer, because nobody is going to pay a premium for a property in today's market"?

Why would any realtor waste their time with unreasonable sellers or buyers? Working smarter not harder is easy if you have a plan and the discipline to work your plan. My most important asset is my time and trying to use it wisely is challenging, however, taking listings and hoping to close transactions with unrealistic and unreasonable people isn't acceptable in my plan and shouldn't be at any time for anybody, shouldn't it? Karen Stone understands and I agree.

Jules, I think that they are more able to manipulate the numbers NOW vs. before. Now they will make it low for their benefit (or so they think). No one mentions how the buyer feels in all this?

Jeez, David says this will shake out 'in a few years'.

Karen: Foreclosures are sold at a discount remember. Now our comps are at a discount.

Mike,

Being from out of the area is certainly not a valid excuse for a sub-standard appraisal. Every area I've ever appraised in was new to me, (at least with regard to appraising), at one time or another. When we don't know an area well we have a responsibility to educate ourselves. I usually talk with other appraisers and/or realtors who have experience in that particular area.

With regard to appraisers failing to account for differences in quality or other physical characteristics, there just isn't any acceptable excuse. It is our job to recognize and if necessary adjust for these differences. If an appraiser makes really egregious errors due to either lack of competence or ethics, they need to be held accountable. You realtors have the power to effect some change here. First, you need to be reasonable. If the differential in values is negligible, or could reasonably be attributed to a difference of opinion, I would leave it alone. If, however, the appraiser made one or more really major errors, I would recommend the following:

1) Confirm, and, be ready to prove factually that the appraiser made one or more significant errors. You may want to consider consulting with a highly experienced and highly competent appraiser first, to make sure you're on the right track with regard to what the appraiser did wrong.

2) Inform the appraisal management company, (AMC), that the appraisal is materially flawed, and why. Ask them nicely to have the error(s) corrected. Remember, somebody, (usually the borrower), has paid for this work of art - the result doesn't have to be what they would like it to be, but, they do have the right to expect reasonable levels of competence and quality.

3) If the AMC tries to get the borrower, (or whomever paid for the appraisal), to pay for a new appraisal, or, pay to have necessary corrections made to the original appraisal - refuse - and insist that because the borrower didn't get what they paid for the first time, it is the AMCs responsibility. Along with the (usually very large) chunk of the appraisal fee they get, comes a fiduciary responsibility. Remind them that the appraiser they chose lacked either diligence or competency. Your client did not choose. Your client paid for a service and has a right to expect that service be performed in a professional manner.

4) If the AMC still will not budge, tell them you will be reporting them to your state's equivalent of an appraisal board, (whatever it may be called), and, to your state's attorney general. Additionally, tell them you intend to file suit against them - and follow through!

It's only going to take a few lost lawsuits to stem this flow because the only thing that matters to these guys is money. Remember, other than basic, necessary legal requirements, (i.e., licensure), these companies assign appraisals based upon who will do it the cheapest, and often the fastest. As long as the appraisal looks OK on the surface, (interpreted as maximal conformance with FNMA's recommended (not required)) guidelines, all is well, and they are satisfied. They could care less about the actual accuracy of the report, or whether or not it was completed in accordance with applicable appraisal theory and in conformance with the constructs of good appraisal practice. It will take some group effort amongst the true professionals out there to accomplish this. Cohesiveness is key. We can do what I can't.

Last, but not least, choose your battles wisely. Complaining that the appraiser ascribed only $15,000 in value to your seller's new $40,000 swimming pool when a pool is in fact only worth only $15,000 in your market, will only make you look foolish. If, however, you're sure you are on solid ground, and can back it up - go for it. I've been fighting against appraiser incompetence and dishonesty for decades, and unfortunately, it's been an uphill battle all the way. If enough of us pull together, we can, in fact do something. Good luck!

For all who are complaining about this have you signed the HVCC petition.

Don Quixote would be so proud of all of you. You're "waving at windmills". Whether we like it or not the definition of "market value" has died (At least in the foreclosure dominated markets now and coming soon to a market near you!). No longer is market value determined by buyer and seller, it's determined by (choose one or more) the appraiser, the review appraiser, or the underwriter.

When it comes to determining values, lenders are in the CYA (cover your assets) mode. There is a huge discrepancy between the number of homes that have been foreclosed upon and the number that have hit the market and the banks know it. They know that when these thousands of homes hit the market they will further depress values. They know the homes they are lending on now will be worth a lot less when this "tsunami". Call it foresight (when was the last time that was applied to lenders?) or whatever but lenders now control values and getting rid of HVCC isn't going to change that very much.

Check out my blog: http://helpforfirsttimehomebuyers.wordpress.com and the post: "The banks are cookin' the books - AGAIN! for another perspective on this mess.

Call me a cynic, call me a skeptic, call me whatever, just don't call me late for supper!

Low appraisals reflect the market. If you have two houses (in an REO dominating market) with similar features and the asking price for one (normal sale) at $500k and the one down the street or around the corner (REO) is asking for $450k, which one would you choose? THAT IS THE THEORY OF SUBSTITUTION. TIP: Check the market before making an offer.

I am an appraiser (formerly independent) that has been caught up in this HVCC smoke screen. I now have to work for a company(Appraisal Management Co.) that has reduced my income up to 50% and I spend most of my time figuring out the company's rules. (Each AMC's has different rules)

The problem is not the appraiser and the mortgage broker scheming with this master plan for the appraiser to get $400, then no employment when caught. This policy insults everyone in the industry. The bottom line lies with the underwriter. If it looks like a snake and sounds likes a snake, it is probably a snake. Do your job; report it; GET RID OF THE SNAKE.

The HVCC policy was put into place due to investigations of BANKs ill-dealings with AMCs. Now the SOLUTION is to let the BANKs deal with the AMCs exclusively, blame all appraisers and mortgage brokers while punishing the entire industry. This includes the sellers and the buyers.

It would be extremely productive if the HVCC was reversed and fraud reported when detected. AMCs have too much control considering they are not required to be licensed, educated or bear any liability; which are the three main requirements of an appraiser. Oh yeah, did I mention that they also get up to 50% of the INDEPENDENT appraiser's income.

We (everyone in the industry) need to help fight to reverse this HVCC; it is poisonous to us all. Communicate your frustrations to any and everybody that you even think can help. I WILL.

Reminder: HVCC does not include FHA loans. KEEP THE INDEPENDENT APPRAISERS ALIVE.

DA McClinton / California Appraiser / 1appraisal4u@comcast.net

#11 - Mike,

It sounds as if you are speaking of over-improved properties. Likely, the properties of which you speak were built by the same sub-contractors. The fact that the developers (who you refer to as builders) went bankrupt is irrelevant, as many developers will form a new corporation or partnership for each project or sub-division they build (which will cease operation upon completion of the project).

It also sounds as if you are referring to the quality of the finish materials, which does not necessarily indicate the quality of the structure (or construction) or the habitability of the property. Finish materials are like a pool, they will not usually improve the value of the property by the amount you spent on them. I agree that better quality finish material will help in the presentation and appeal of a property, but they do not necessarily have direct relationship to the quality of the overall construction and structure.

#23-

I may not have made myself clear.

1- New small sub-division.

2- Multiple Builders erecting spec houses

3- Quality of construction meaning trimmed out windows vs. poorly finished drywall, granite counter tops vs. unevenly layed granite tile or Formica, exposed aggregate serpentine sidewalks and driveways vs. plain concrete, finished front yard landscaping with automatic sprinklers vs. three shrubs and a spindly tree. Not only was the material used better, it was built better.

4-The builder that went bankrupt owed his employees (and suppliers) and it looks like several employees took their final wages in appliances, cabinets, plumbing and building supplies.

5-The subject house is priced to compete with the better quality SOLD REO's and comps out with them.

The twilight zone aspect of this whole thiing is that I'm representing the Buyers.

#19-David,

Thanks for the advice and suggestions.

I loved reading this string of comments. I have taught agents for years that in order to do a good CMA, you have to do it from a buyer's shoes. Assuming a ready, willing and able buyer who is willing to pay the current value of the property, what would you tell them to pay for the property you are trying to list? Answer that question and you will have an accurate list price. Nothing else is important.

Buyers establish the value of a property, and almost every contract contains a "property must appraise" clause just in case the buyer is getting bad info from their agent or from their own interpretation of the closed data. The appraiser should then be proving the listing agent's current list price if the listing agent did their job accurately.

And remember when you list, you do not need a "negotiation cushion"! Prove it to the seller by showing MLS listings that have sold for the same price as they were listed. If they didn't need that cushion, why should your seller?

Now, all of that said, there are bad appraisers in the same way that there are bad real estate agents, bad lawyers, bad dentists, bad engineers, etc. But for the most part, I think most appraisers want to be proud of their work and would do it to the best of their ability. Therefore, who hires them is unimportant to the results for most of the appraisers we work with I would expect.

#24 - Mike,

Thank you for the clarification. Based on the new info, I would definately have to agree with you that the appraiser failed you and picked their comps poorly.

Good luck in contesting.

I was a victim of this last week due to short sales, despite also having a new construction and resale comp available. I'm trying to appeal the appraisel even though the buyer has walked away from my listing. This is problematic in the effort towards a housing recovery. Whatever happened to market value =what a buyer and seller agree on?? This has to have some consideration in the midst of foreclosures. Re-sales tend to be in better condition versus foreclosures but appraisers are not always taking this in consideration. Very frustrating!

Jules - I rencently had a deal where the appraisal came in $4,500 low. If I had not been on both sides of this transaction, I would have lost the deal.

I have not seen it yet, but I expect to. I do not see how they can keep this up. Just document the bad work and bad process, maybe a class action suit is in the works.

I love what Fred Martin says he does. I think I will try this approach and see if it helps. I have talked to my agents, buyers and sellers about this situation. It is not going to go away. We do need to work a little harder to make sure if there are legitimate comps out there we get them in the appraiser's hand.

I posted this to my blog not too long ago. The survey is over, but the petition is still alive and well. Please sign it!

http://activerain.com/blogsview/1131961/survey-hvcc-home-valuation-code-of-conduct-survey-make-your-voice-heard-on-this-important-issue-

Yup. We've seen that here as well. To me, there's no way around it, though....and if there is a way around it, there shouldn't be.

The housing market is living out the result of piggish decisions made by higher-ups in an industry that ran unregulated for way too long...and is pushing to remain unregulated, even in the face of countless families suffering consequences they never counted on.

Not sure how many Americans will have to get thrown under the financial bus before we as a nation wake up and realize that more of the same (financial deregulation) will bring us right back here at some point.

Appraisers are doing MORE WORK (meaning underwriters are asking for more paperwork, to see MLS sheets, to get back up comps etc) for LESS MONEY.

Out of area appraisers are being sent while locals are ingored because they are not on THE LIST. To be assigned a region, an appraiser on a AMCs list states what counties he is familiar with. This week I had 2 appraisers come in to appraise a house that's 2 hours from their office. How can they do this adequately? They don't belong to our MLS and have to go to the MLS office to borrow books. They are unfamiliar with our courthouse and how to get records

Doe any of that make sense?

Even in the market of a few years ago, you said the magic words of "VA appraisal". The VA appraisers in my area are always looking to get their VA person bottom dollar on a house and many times say the house isn't worth the price. Mostly, it's just a bunch of old men who still think houses cost $40k.

I have seen this problem a lot in Southern California. I have a contract in escrow right now for a buyer but the appraisal came in $48,000 lower than the contract price. Neither the buyer nor the seller wanted to loose the deal so the buyer went with a totally different lender and loan officer and the new appraisal came in $30,000 higher than the original one. So it looks like this deal will go through- though not quite at the contract price. The appraiser with the first loan was from a city more than 60 miiles away from the subject property. Amazing that they couldn't find someone a little closer and more familiar with this market.

I guess it's happening but I've not seen it in seacoast NH area yet, hope I don't.

Patricia

I work in the Central Texas market where we have been fortunate not to have a dramatic drop in values...but the foreclosure picture has definitely created some appraisal problems in our area as well. If it were not for the foreclosures, we probably would have a great situation in our market. I keep thinking...the values have to come back up eventually and one would think that the government and banks would want to aid in making that happen quickly...but who knows how they think...or if they think!

Jeani

I haven't seen it in my part of Central Texas.

jules,

it happend to me on a deal in huntington beach, ca the apprisal came in $50k less then the purchase price, luckilly the buyer kicked in the diferrence and the deal closed. My friend is selling her place in Mill Valley, they were good to go, then the appraisal came in 100k under the offer... on a 1 mil house, so the deal fell apart. crazy times.

I am in NC and I had a deal a couple of weeks ago that did not appraise. One of the properties that the appraiser used as a comp was in a depressed neighborhood of about 20 homes that 16 had just gone into foreclosure. We worked it out...but guess who took the hit?? Me and the lisitng agent. Imagine that??

Jules:

Do you mean foreclosure transactions are being used as comparable sales (i.e.: buyer = lender and seller = previous homeowner)? If this is the case, that is NOT a sale - the purchase price in such a transaction represents the outstanding loan amount that the property secured. This type of transaction should NEVER be used as a comparable sale, as it does not represent a buyer and seller who are typically motivated acting in what they perceive to be their best interests.

If what you are referring to are bank owned properties being sold to a typical buyer or investor, as David Mescon noted in #9 above, these type of transaction should be utilized if they are the typical transaction for the subject market, and the condition of these properties at the time of sale is a factor that should be adjusted for if necessary.

Thanks Jesse,

One little thing I forgot to mention in my earlier comments is short sales. Just like sales of REO properties, in neighborhoods where the sale market is dominated by short sales, those are the transactions we must use as comparables. Remember folks, the lender is looking for what the typical sale looks like as of a specific point in time. The terms of your particular sale are meaningless in this regard. The fact that your deal is not an REO sale and is not a short sale is all well and good, but if REO sales or short sales are more common than non-REO and non-short sales, than those transactions do in fact define the market. Your sale is now an atypical transaction and is not representative of the actual market.

PLEASE NOTE: MARKET VALUE IS NOT DETERMINED BY WHAT A BUYER IS WILLING TO PAY OR BY WHAT A SELLER IS WILLING TO TAKE!!! MARKET VALUE IS DETERMINED BY WHAT A TYPICAL BUYER IS WILLING TO PAY AND WHAT A TYPICAL SELLER IS WILLING TO TAKE.

I have included a handy-dandy real life definition of market value below for those of you who aren't sure exactly what it means. It is not my intent to be either demeaning or condescending here. You realtors have it rough too, and take it from all sides, and we are well aware of this. When we appraise properties we are bound by specific legal constraints and the definition below is one of them in the vast majority of our appraisals.

MARKET VALUE

Market value means the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

•(1) BUYER AND SELLER ARE TYPICALLY MOTIVATED;

•(2) BOTH PARTIES ARE WELL-INFORMED OR WELL-ADVISED, AND ACTING IN WHAT THEY CONSIDER THEIR OWN BEST INTERESTS;

•(3) A REASONABLE TIME IS ALLOWED FOR EXPOSURE IN THE OPEN MARKET;

•(4) PAYMENT IS MADE IN TERMS OF CASH IN U.S. DOLLARS OR IN TERMS OF FINANCIAL ARRANGEMENTS COMPARABLE THERETO; AND

•(5) THE PRICE REPRESENTS THE NORMAL CONSIDERATION FOR THE PROPERTY SOLD UNAFFECTED BY SPECIAL OR CREATIVE FINANCING OR SALES CONCESSIONS GRANTED BY ANYONE ASSOCIATED WITH THE SALE.

Source: Code of Federal Regulations (CFR), Title 12-Banks and Banking, Chapter I - Comptroller of the Currency, Department of the Treasury, Part 34 -Real Estate Lending and Appraisals, Table of Contents, Subpart C - Appraisals, Section 34.42 Definitions, Part (g), Source/Revisions: [55 FR 34696, Aug. 24, 1990, as amended at 57 FR 12202, Apr. 9, 1992; 59 FR 29499, June 7, 1994]. Electronic Source: Electronic Code of Federal Regulations at http://www.gpoaccess.gov/ ecfr/index.html

Hi Jules -- I have had several transactions of late since the new HVCC went into effect and haven't run across anything, but I hear it is causing havoc.

JUL

We are also seeing that with tighter appraising requirments, appraisers are required to get sales within the last 90days, and even with that underwriters are still adjusting values based on declining market areas. Unfourtantely, this impacts a clients attitude negatively.

HVCC is a travesty. NAR lobbyists are now calling for an 18-month moratorium at the legislature. Not only do the appraisals cost more now, but they are less accurate.

That's why FHA buyers are so darned attractive -- no HVCC rules.

However, a good buyer's agent always checks the comps before writing an offer. Nobody in their right mind in northern California would write an offer without checking the comps. But there are a lot of agents out of their minds here. LOL.

The fact is if most of the sales within the past 3 months are foreclosures and short sales, then it's foreclosures and short sales that dominate the market. The excuse: "Oh, but that's a foreclosure" doesn't hold any water. It's a comp. Period.

I ALWAYS restrict access. Many appraisers are unfamiliar with our Lake Oconee area and are sent out of Atlanta. This also means they don't even have access to our local mls. I have them come to my office to get a key and then ask them if they have access to our mls. If not, I will run a quick search for appropriate comps and let them have the spread sheet. If I know of one in particular that is very like the subject, I point it out. We don't influence but assistance is a good thing for all.

Happy Closings;)

We are seeing this come up in Florida as well. Foreclosures and Short Sales are understandable as a driving force, but adjustements need to be applied to since these are properties selling well below market value. My point is that you can't say market value of other homes is 100% a foreclosure comp. That property is sold and buyers do not now have the opportunity to purchase that property at that price now.

The lending source used by the buyer can make a difference. Depending on who your buyer is working with, they could impreove their chances of getting an appraiser who is paid fairly and knows the area well. They have to ask their lending source a key question.

Check out my blog "Who's Ordering Your Appraisal?" for more information.

Warning: Some of your favorite loan officers are not going to have a good answer for you. It's not their fault, this is our reality too.

Hi Jules this post is so appropriate to myself and my office at this time. Last week 2 of my coworkers fought for 3 days straight with this same problem and I am waiting (with butterflies) on an appraisal to come back today that I am extremely worried about. Yhere have been a few short sales and foreclosures in what used to be a very good subdivision in northern Volusia County here in Florida. The Daytona area has seen some of the worse dropped values in all of Volusia county so yes we are experiencing it. One appraiser told me a FHA Appraisal used to be pretty standard but now takes her 3 times as much time and paperwork and can be sent back to her repeatedly from the bank to be redone for the same fee. Lets hope this mess changes soon!

Appraisers are not solely to blame for comps coming in low. The underwriting is taking longer and one reason why is because appraisals are being beaten to death before the lender decides to accept the appraised value. That being said it certainly helps when the listing agent mets the appraiser when they are opening up the house for him/her and hands them some local comps. We have an in house appraiser and unless we have to use "the assigned" appraiser we always offer her services because she is local and does know the area.

Having this exact problem in Gatllinburg TN area--also another scenario where buyers who bought in very very very low a few months ago and want to sell at currrent just low price BUT --FHA is calling it a flip and will not finance homes owned less than 6 months....that was a nightmare:)

I could not help but quote what this started with, if there ever was a definition of how we got here.

"It seemed that in the past a lender would choose an appraiser that they knew would make every reasonable effort to make an appraisal come in the purchase price. We all know that for years appraisers were stretching the boundaries of legitimacy on many appraisals.

HVCC is a stupid plan and inhibiting business. But the argument put forth here that you had a price agreed upon that can not be supported by comps makes you a victim does not hold water. I am so glad that a mortgage broker who is not restricted by HVCC offers to get the appraisal that you all want to have no matter what the damage is down the road.

As an appraiser, I read with interest all of the comments from disgruntled mortgage brokers who "just can't make their deal work" because of a lowball appraisals. Yes, there are some bad appraisals out there, but I refuse to be the scapegoat for your "deal".

"Common sense tells me appraisers knew that if they wanted business they had to try to make it work. " from Jules Yates original post. Isn't this why HVCC was enacted in the first place? This sounds like lender pressure to me. "Make this appraisal come in or else you won't get any more business from me."

I'm an appraiser who only deals with reputable companies, and when asked to "come in" at a specific number, I tell them to go elsewhere. Has the HVCC affected my business, absolutely! I spent years marketing to reputable mortgage brokers, but still felt the pressure when the value just wasn't there. I'm just reporting on the market data-- it's not my fault! I know my market, I know the area, and in a lot of cases foreclosures and short sales ARE the market and cannot be ignored when they are competing with arms-length transactions.

I feel my duty is to the bank and lender, to tell them the truth regarding this property. Sometimes there is no deal to be made. It is not my fault, it is the market. As the old saying goes, you can't make a purse out of a sow's ear!!

I do feel AMCs are sending out inexperienced appraisers, and the "lowest common denominator" so to speak. I do not do work with AMCs because I will not accept their 50% or less fees. I deal with direct lenders and banks, and have a good reputation on developing fair and accurate appraisals, which is what everyone should get.

I hope that the HVCC is altered so that the AMCs will have less power, and that hopefully this will weed out the "desperate" appraisers who feel like they have to work for less.

Kris Chase
San Jose, CA

At the risk of incurring the wrath of everyone who has responded, let's take a look at this from the lender's perspective. I'm not going to try and justify, just shed a little light on the subject.

In my earlier response, I said that "market value" as we know it is dead and no one told me I was crazy but continued to make a case for the "old" definition.

Since the dawn of the human era mortgage lending has been based on one principle: risk analysis. The underwriter is charged with the duty of protecting the lender's money (or FHA's, Va's, Fannie's or Freddie's) and performs the final risk analysis.

When new loan programs are introduced to the market and guidelines established, risk analysis is performed to determine the likelihood of a "qualified" buyer continuing to pay given the terms of this program.

In my training of Realtors and loan officers we talk about the CH-A-I-R when explaining risk analysis.

Credit History-gives an underwriter a perspective of the borrower's willingness to pay based on past performance and ability to pay based on current debts (DTI).

Asset-The property, or what is being offered as security for the loan

Income-Determines borrower's ability to repay

Reserves - How much "skin" in the game does the borrower have and how much money will he have in the bank after to closing?

In reviewing the appraisal (Asset) an underwriter is charged with determining what the lender will have in the event the borrower default's on their payments. Lender's aren't really concerned with what the buyer and seller agreed upon, nor do they care if it is a "real" sale as opposed to an REO or short sale. They have come to learn that neither of those things are relevant if they get the house back. Obviously everyone in the business lost sight of this when we all thought "equity" would bail us out, now the pendulum has swung the other way and lender's will continue to err on the side of caution.

A previous post mentioned the "golden rule" (Them that has the gold makes the rules!), whether we like it or not that is the "law of the land" for now. HVCC is only the tip of the iceberg, there is a growing trend among lenders to use AMCs for FHA appraisals.

When an FHA appraisal is ordered an FHA case number is assigned to that property and whatever the value may come in at is tied to the property for six months. We're seeing a growing trend in SoCal of the lenders "rolling over" and taking the lower value because they know they are stuck for six months.

The underwriter is in his/her review of the documentation must determine the borrower's willingness and ability to repay the mortgage.

Great information David #43. Educating buyers and sellers is vital. Yes, sellers need a reality check...there homes are worth what the comparable around them state. Guess what? If your neighbor's home, which is identical to yours, just sold for $100K less...your home is now worth $100K less. YES...even if it is a short sale or foreclosure. WHY??? Because it is about buyer perception now. Why on earth would I as a buyer pay or as a lender loan $100K more for a home than and identical one that just sold in the neighborhood....I wouldn't...would you??? So why would you expect anyone else too....

Lots of factors are contributing to this mess with appraisals. Banks are erring on the side of caution. Lower appraisals protect them, particularly in a falling market. There is so much bad news out there: i.e., the other shoe is yet to fall on consumers, the commercial markets are shaky, our government has incurred too much debt. It's hard to see the good news. People still want to buy homes, but risk in lending is real. It will take a while for this to shake out. Job growth will probably be the catalyst.

We're seeing it here in Oregon, too. The national banks have a larger (and less localized) list of appraisers than the local banks and credit unions. We've had appraisals come in as much as $90K below offer from out of area appraisers. Our market values have held pretty steady, unlike in some places, and we don't have a large number of foreclosures. They aren't using the same type of property or even property located in the same area. We don't know what's going on but it's ridiculous.

JUL

I have heard there is a bill in the works that would place a hold on HVCC which seems to be causing more harm than good. Might be good to support this bill.

www.whiteinkstudio.com

JUL

I just went through this on a refi for my own house in Northern California. I couldn't believe it. The appraisel came in WAY lower than any comps and we were almost denied the refi... I was shocked and I am sure it is effecting deals in our area.

JUL

I've seen it in S. Texas.

JUL

I find it odd so many are ignoring the premise of fair market value. A property sold under duress is not a comparable sale to a home not sold under duress. REOs, short sales, estate sales, foreclosures, etc are all sold under duress and therefore are not, by definition, sold at fair market value.

Anything sold under duress is sold at a lower than fair market value price. Since I am not in distress and have the option of continuing to live in my residence, I will not sell at that price. Further, if the banks and appraisers are using duress sales as value, then they shouldn't care how much the "down payment" is. Traditionally distress sales sell at 80% of fair market value. Therefore the bank needed to have the buyer put 20% down to ensure that if the property had to be sold under distress, they oculd still recoup their losses. If the value placed on the property is already a distress value, then the only thing that matters is that the loan amount is lower than the distress value.

There's another post on AR about whether it's a Buyers, Sellers, or Lender's market. When it comes to value lenders are using CYA (Cover Your Assets) value, and that's not going to change until we get through the "shadow inventory" of homes that have been foreclosed upon but not yet hit the market.

It's ironic that lenders are cutting values on the new appraisals, which is impacting their unsold inventory of homes on the market or yet to hit the market. Seems like a might big waste of our bailout money.

When determining fair market value, foreclosures and short sales are considered because they ARE the market. If the subject property has to be put up for sale, it will be competing with foreclosures and short sales. This speaks to the theory of substitution, which is the basis for appraisal practice. If two properties are alike in every way, buyers will choose the lower priced product, whether it is a foreclosure, short sale, or arms-length transaction.

I think a lot of mortgage brokers have been pressuring appraisers to come in at value for too long. Now that they have seen what real market value appraisals look like, and have no control over it, they are shocked.

Are there some low ball appraisals out there? Sure. Are there some appraisers who are turninge in substandard work for AMCs because they are being paid 1/2 their usual rate? Sure. But, most appraisers are committed to doing a fair job based on market conditions right now. And, the fact that each appraisal gets reviewed by 10 different review appraisers, underwriters, and everyone else who is involved.

I've had appraisals I did 4 months ago come back and have the value cut, because, guess what? The value is lower now! I try to anticipate the movement of the market, but in some cases, it's moving too fast to predict, so I have to do the best I can.

Instead of pointings fingers, I think we should all try to work together. It's the only way we will be able to climb out of the hole we find ourselves in.

Kris Chase
Chase Appraisal Service
San Jose, CA

JUL

Fair market value presumes a typical buyer and typical seller typically motivated and under no compulsion. Foreclosures sell at a discount to fair market value because the seller is under compulsion and the buyer is taking additional risk. Using foreclosures to determine fair market value results in an endless circular mathematical calculations: The fair market value based on foreclsoures is X; buyer demands a 20% discount from FMV because its is a foreclosure (new value .8x); New FMV based on foreclosure is .8x; buyer demands a 20% discount from FMV because the property is a forclosure (new value .64x); and so on. Further, if willing sellers are willing to sell for x, why on earth would a buyer buy from a compelled seller at X -- knowing the compelled seller is on the ropes the buyer of course demands a discount.

The truth is, just as in many other sectors of the economy, there are multiple separate and distinct markets. A house is a house is a house regardless of the form of the transaction, the identity of the buyer and the seller as much as a shirt is a shirt is a shirt regardless of being sold at a thrift store, KMart or Saks. Premiums and discounts can be calculated based on economic data available from alternative markets in order to compare sales across individual markets.

I strongly dispute the concept that normal sales compete directly with foreclosure sales. They interact and have lateral effects, but they are not direct competition. Under your premise two identical houses, one a foreclosure and one not would sell for the same price. As a buyer, are you willing to take a quit claim deed instead of a warranty deed, move into a place that hasn't been lived in for months, without disclosures, as-is (regardless of apparant condition, you never know what may pop up), work with an entity instead of a person; or are you going to buy the property with the all of the guarantees in a transaction that is typical, stream-lined, and familiar. Incidental costs of purchasing also tend to be higher in foreclosures.

Look to the definition of FMV -- regardless of personal perception of the doom and gloom of the market, foreclosure sales do not meet the definition of FMV. My proposal is to scrap the entire FMV definition and process anyways. Who cares what the FMV is? Nobody. The bank should be primarily concerned about whether they will recover sufficient funds to repay the loan. They SHOULD be looking at distress sale values as an indication of recoverability. However, they then need to be realistic about how much security they really need. (When considering distress value, an 80% loan to value is not necessary unless you anticipate continued decreasing markets).

Honestly, I feel a little sorry for real estate appraisers. I deal with real estate appraisers all the time. There's typically less at stake with them and therefore the time, consideration and effort put behind the appraisal seems to suffer. Business valuators, on the other hand, are much more prepared, knowledgable, and difficult to discredit. I really think most real estate appraisers are generally well-educated, but how can you expect someone to do a quality job for $300-$400. Compare that to the significant charges for commercial real estate appraisals or BVs.

Real Estate Economics, Vol. 37, Issue 1, pp.43-67 notes the historical foreclosure discount at 20%, but argues the discount is likely over stated by approximatley one-third due to deteriorated conditions found in foreclosure properties. This still leaves a discount for 13% JUST BECAUSE OF THE TYPE OF TRANSACTION. Is someone more likely to buy a foreclosure than a regular sale - not at the same price and based on the research, not unless the price differential is greater than 13%. What about when there are no more foreclosures left in a market because they've been absorbed. Then even if the buyers and sellers move back to normal price are the appraisers going to continue to insist that regular sales only sell at foreclosure prices since the last comparables were foreclosures. When best buy runs out of the 10% off dent and ding TV, do I have the right to insist they sell me an in-box tv at the same discount? Of course not.

The bottom line is to know what type of value you are trying to reach and then use the appropriate assumptions and comparables for that type of sale.

JUL

It is real refreshing to hear mortgage brokers and other market participants complain because appraisers are now left to do their jobs without outside pressure to hit the numbers. Reality has finally arrive and lending institutions can now be assured that if a borrower defaults their money can be recouped. There was a time when every appraisal came in at the contract price. Now they come in at what they are worth whether it is above,at or under the contract price.

The HVCC has its faults but its implimentation will go a long way in keeping appraisals real.

gregory bascombe

realty valuation services

brooklyn ny 11225

AUG

Hi Jules,

It's happening here in Arizona as well, and we are hearing about this more and more often. We have the highest decline in the nation, and appraisals are still coming in too low. Of course as the appraser posted, they can adgust but it must fit into the FNM guidlines.

I also agree with the fact that when we were in an accelerated market (going up , up, up!) it was amazing how all apraisals came in at the asking price or the offer price! I have never overlooked that even as it was happening and in my favor.

Thanks for the ost Jules!

Roxy Perry

US Preferred Realty

Mesa, Arizona

AUG

Jules,

Not too much response from sellers, so here is one to round out the various points of view expressed. As an investor with holdings in a depressed area of L.A. County, I have had two recent homes listed, with the following outcomes:

1. Asking price: $198,000 (much less than the 1800 sf home could be built for.) Offer: within 10 days, full asking price, by a buyer approved for up to $210,000. (Interior of house is new in almost every element.) Appraisal: $110,000! So, I paid for a second appraisal (after spending $4500 more to finish a previously permitted garage conversion to add 400 sf) New appraisal: $167,000. Appraisal after underwriter finished: $153,000. I was forced to sell at that price, taking a $35,000 loss instead of a $10,000 profit. (Forced because I had to have the cash or face financial disaster myself)

2. Asking price: 149,900, for a 2100 sf house that could not be built for an amount even close to that. Offer: within 3 weeks for $145,000. Final contract: $147,000. Appraisal: $148,000. Underwriter decides only $140,000. Okay, so I'll suck it up. Lender decides they don't like underwriter's decision, and asks for new appraisal. Result: $112,000. Aha! says the bank--finally an appraisal we like! I can't sell it for that, and I won't.

In none of these cases do I blame the appraisers. I really don't know how they even keep up with what is expected of them--I think they have lots of kudos coming. In both of my cases, it is the lender that is overriding the appraiser, so the banks (again!) are truly deciding for all of us what FMV will be. This is the exactly the same game, except that now they are artificially depressing values instead of artificially inflating them! How will comps ever improve if sellers and buyers aren't allowed to agree on a mutually acceptable price? My house that would have sold for $198,000 sells for 25% less than that because the bank refuses to allow the sale. So the next conscientious appraiser for the next sale in the neighborhood comes through and sees that this home (not luxurious, but in "like-new" condition) sold for only $153,000, so there is a comp for $153,000 dictated (that word is chosen carefully) by the banks, instead of a comp for $198,000. Now the banks can hide behind this lower comp as "proof" that the homes in the neighborhood aren't "worth" that much. (Keep in mind that neither home could be built for the purchase contract price, let alone for the banks' acceptable valuations.)

Houses are not "inflated" when the "whole" (the finished, livable house) is valued significantly less than the sum of its parts. At the very minimum, it is reasonable for a house (basic amenities--no big luxuries or upgrades) to be valued at what it would cost to duplicate it at today's prices for materials and labor. Anything less than that can hardly be called inflated. Imagine my dismay when the elements of a basic kitchen were worth more 60% MORE sitting on the shelf at Home Depot than they were when they were put together and installed in a home! The elements of the kitchen (cabinets, appliances, electrical, plumbing, fixtures, countertops (no fancy granite or corian) and flooring (vinyl only!), along with the labor to install and the permits) came to $15,000. Now that it is in the house, it is worth only about $9,000 (120 sf @$76/sf) according to the bank.

So what does that mean? COMPS (AND THEREFORE APPRAISALS) WILL ONLY START GOING UP WHEN THE BANKS DECIDE TO LET THEM.

If I had several million dollars at my disposal that I could use as mad money, I'd go to one of these neighborhoods, pay FAIR amounts in cash for every available home, watch the comps turn around almost immediately, and see what excuses the banks could make this time for the next buyer that needs a loan.

Banks don't care if their low appraisals lead to further short sales and foreclosures--that won't cost them a thing, because you and I have bailed them out. They aren't suffering any losses. Just those of who are trying to create or purchase livable homes are, and we know how much that matters.

I'd appreciate any feedback from your readers!

Lori Prater,

Habitat Properties, Golden Age Ventures

SEP

I'd like to know your opinions of this mess. I'm just a seller, not a realtor. I bought the house new in 2001 for $235,000. Upgraded with granite corian, stainless, whole nine yards.

Listed the house for $260,000 sold for $248,000. Appraisal came in at $220,000.

Here's the rub. Landsafe appraisals did the work in Ohio. The guy put the initial purchase price at $130,000. I don't know where he came up with this number. All of the comps were at least 15 years old, and most more than 20 years old. My house is just 8 years old. This has caused me to lose the sale, and of course the new home we planned on purchasing. I am planning on contacting a lawyer because of the obvious mistake.

Any thoughts?

SEP

Eric,

I'm not an attorney so I can't tell you whether or not you have grounds for a lawsuit. An appraisal is an opinion of value at a given point in time. The value is based on the sales price of the most recent comparable homes, so the error he made in what you paid for the house likely didn't affect his estimate of value.

There have been a lot of problems locally with Landsafe appraisals, but here's an irony for you. A friend of mine was selling a home and his appraisal came in lower than his estimate because the appraiser said he couldn't use comparables that were more than 10 years newer than his home.

I hope things work out for you.

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