Isn't it funny how things change and at the same time...stay the same? Historically, many real estate appraisers, especially those working for banks or mortgage brokers, have felt pressured to inflate the values of the properties they are evaluating. Most appraisers have lamented over this situation. Some have left the industry and many have attempted to work within the system. Many appraisers felt that if they wanted to keep food on the table they had to learn to "be aggressive" when determining an opinion of value. Sadly, as we know, many appraisals performed over the last few years were indeed inflated. Appraisers, sometimes unknowingly, have aided and abetted shady mortgage brokers and real estate agents into pumping up real estate values to unbelievable levels. This has left home prices in some regions of the US beyond the reach of most middle class families. The situation has also contributed to the raging foreclosure problem we find ourselves facing.
Enter the REO (acronym for Real Estate Owned, meaning a bank or foreclosure property) and short sale appraiser. REO and short sale assignments often come from appraisal management companies. They frequently call for more detail than the typical residential appraisal. There may be a request for an REO addendum, Cost to Cure Analysis, repair estimates, As-Repaired values and so on. The dwellings in question may have substantial deferred maintenance due to the distressed homeowner's lack of funds to property take care of the property. All in all, a more complex assignment than some and frequently at a reduced fee!
Imagine the surprise experienced by an appraiser the first time he or she appraises a short sale or REO property and he or she is told by the listing agent that the appraisal "needs to come in low". Imagine the appraiser being told every single flaw, real or imagined, with the property in question. (Something that is virtually NEVER done when the appraisal is for purchase financing or re-financing purposes!) Understandably listing agents do not want to have to try to sell an over-priced turkey (homes priced above market value are often referred to this way). At times though, the agent feels that the property he or she is representing should have the lowest list price in the area. This is not always appropriate. Fortunately, the agent is not the client in most cases and has no power to pressure the appraiser for value. Sadly though, an inexperienced appraiser may unknowingly submit an appraisal where the opinion of value is lower than market value due to incompetence and upon the recommendation of the listing agent. There are also situations where appraisers are coerced to "lowball" the appraisal with promises of more work from the agent if the appraisal comes in where "it needs to".
It is unclear how widespread this problem is. Generally, lenders trust appraisers and price the homes based upon these deflated appraisals. This may result in the sale of homes at less than market value, thereby driving down property values artificially. The market value of homes today is affected by many factors, particularly the stricter lending guidelines that are in place. Appraisal deflation should concern anyone that owns a home. Just as appraisal inflation has helped cause many problems in the housing market, appraisal deflation is contributing to a huge loss of equity in many parts of the US.
Comments(13)