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APPRAISER GUIDANCE REGARDING DISTRESSED VALUATIONS

By
Mortgage and Lending with Mortgage Consultant, Right Trac Financial Group, Inc. NMLS # 2709 NMLS # 6869

“Appraiser Guidance Regarding Distressed Valuations”

Appraisal Updates

The appraiser world feels that they are being wrongly blamed for any decline in real estate values. We see 100 appraisals a month and can certainly speak from real life experiences. When there is an appraisal issue and we look closely at the values, the comparables that are used are very often the root of the problems.

what is the correct value of a house?

I know that most appraisers to a really good job, they don’t go out of their way to come up with the lowest possible value. However, AI speaks to the issue about using comparables that are distressed sales, which should absolutely not be used.

 

Appraisal Institute Issues Guidance to Appraisers on Distressed Valuations

Answering complaints that appraisers are using uncomparable 'comparables' on which to base their valuations, the Appraisal Institute has published new guidance to help valuation professionals know when -- and how -- to use distressed sales in appraising real estate.

Such knowledge is particularly crucial in the current market where distressed sales are common, creating complex valuation challenges, says AI, the nation's largest professional organization of real estate appraisers.

Builders, and brokers maintain that appraisers often rely on distressed sales to bolster their valuations even though those properties are often rundown – and sometimes even vandalized.

According to AI's Guide Note 11, “Comparable Selection in a Declining Market,” while appraisers “cannot categorically discount foreclosures and short sales as potential comps,” they don't necessarily have to use them, either.

“Due to differences between their conditions of sale and the conditions outlined in the market value definition,” the guidance emphasizes, distressed sales “might not be usable.”

Mortgage bankers and loan brokers have been complaining about lowball appraisals scuttling deals for several years, pointing to valuations in the distressed market.

The AI Note calls on appraisers to use their experience and education in deciding whether to use distressed sales and make whatever adjustments are necessary. But it also reminds them that when there are no current sales in the market area to analyze as comps, they are free to expand their geographic search area and/or use less recent sales.

The guidance points out that foreclosures and short sales usually do not meet the conditions outlined in the basic definition of market value. While they may or may not involve a motivated seller, it says, they often are sold without a typical marketing effort and are sometimes stigmatized or in inferior condition.

If that's the case, the Note says, the comps “might” need to be adjusted if they are used by the appraiser in making his valuation

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Joe Petrowsky, NMLS #6869

Right Trac Financial Group, Inc. NMLS #2709

110 Main St.

Manchester, Ct. 06042

Office: 860 647-7701 x116

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Cell: 860 836-9294

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Comments (19)

Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

Aaahhhh yes.  Adjustments.  Therein lies the problems.  As someone that formerly held an appraising license, I can tell you ... that is where common sense is needed most and is seen the least.  Sometimes what I see just boggles my mind ... nevermind the choices of comparable properties.  I understand all the ills and controversies surrounding appraisers right now.  But if they have chose to stay in the industry and perform appraisals at this time ... they need to take the time to do them correctly and use the best information available to them.  And that might mean undertaking adjustments and reasoning things out.  Excellent ... Excellent .. and very timely article, Joe ...  Keep 'em coming ...

Gene

Jan 26, 2012 02:13 AM
Lisa Von Domek
Lisa Von Domek Team - Dallas, TX
....Experience Isn't Expensive.... It's Priceless!

Good morning Joe,

I can't tell you the number of discussions had over this very problem.  Appraisers have a difficult job, no argument; however, as with all professions there are varying degrees of expertise...

Jan 26, 2012 02:50 AM
Lou Ludwig
Ludwig & Associates - Boca Raton, FL
Designations Earned CRB, CRS, CIPS, GRI, SRES, TRC

Joe

Outstanding post and it deserves the gold star.

Good luck and success.

Lou Ludwig

Jan 26, 2012 03:17 AM
Raymond Denton
Homesmart / Evergreen Realty - Irvine, CA
Irvine Realtor®

>>when there are no current sales in the market area to analyze as comps, they are free to expand their geographic search area and/or use less recent sales.


Is that true for FHA appraisals, too, Joe?  Or just Conforming?  Right now my FHA appraisals require one comparable within half a mile, preferably two comparables, and they have to be within the past 4 months.  The subject property was rural, and couldn't adhere to those parameters.

Jan 26, 2012 07:56 AM
Joe Petrowsky
Mortgage Consultant, Right Trac Financial Group, Inc. NMLS # 2709 - Manchester, CT
Your Mortgage Consultant for Life

Raymond,

Both appraisal types work the same. Yes, the lenders want to comps to be close, but if there aren't any, they can expan the radius.

Jan 26, 2012 08:25 AM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Joe, I agree most Appraisers try to do a good job, but there are some that just seem to go out of their way to under appraise properties.  They do it within the guidelines, but when it comes down to using a comp that they can overlook or not over look, they choose to not overlook and drag down the value.  That is NOT the majority of the Appraisers, but there are enough of them that do, and create needless problems.

Jan 26, 2012 11:58 AM
Scott Godzyk
Godzyk Real Estate Services - Manchester, NH
One of the Manchester NH's area Leading Agents

Joe appraising has been a nightmare since the new regulations have been passed. Although well meaning rules to keep the loan officer and apopraiser apart, too many 3rd party vendors are using out of town or inexperienced appraisers who are making a mess in our area. There are still the seasoned appraisers who always do a fantastic job with similar comps. But the others have been frustarting at best. The rules need some tweaking for sure to reward the good appraisers and keep those bad ones from making a mess and ruining peoples lives with appraisals full of comps that are not very comparable.

Jan 26, 2012 12:51 PM
Tatyana Makarov
Century 21 All Points Realty - South Windsor, CT
Your Greater Hartford Area Realtor

Nice post, Joe, thank you for sharing. And issues with Appraisers happens ways too many times nowadays.

Tatyana

Jan 26, 2012 01:20 PM
Leslie Ebersole
Swanepoel T3 Group - Saint Charles, IL
I help brokers build businesses they love.

I have no idea where you are coming from on this post. We fought tooth and nail in NAR with the appraisers to appropriately recognize "distressed" properties. Anything that a consumer has to choose from is part of the market. Creating separate categories is a terrible idea.

Many bank-owned properties have been inspected, repaired and brought up to market standards. Many short sales are in better condition than a traditional sale.

Well-educated Realtors, loan officers, underwriters and appraisers will all have to participate in bring our market to a place where we can make good decisions about a property's value.

Jan 26, 2012 02:11 PM
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

Unfortunately, I think there is a lot of confusion in the appraisal community. Many come into an area and reallyhave no knowledge about the builder etc.

Jan 26, 2012 02:11 PM
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

Joe - This is an area that needs guidance as it seems sometimes they're used and sometimes not.  Here, they are such a large part of the market in some areas, that they are hard to ignore.

Jan 26, 2012 02:22 PM
Evelyn Kennedy
Alain Pinel Realtors - Alameda, CA
Alameda, Real Estate, Alameda, CA

Joe:

I didn't;t know that appraisers are not to use distressed properties in their com parables if the subject property is not a distressed sale.  That is good to hear.

Jan 26, 2012 05:59 PM
Gabe Sanders
Real Estate of Florida specializing in Martin County Residential Homes, Condos and Land Sales - Stuart, FL
Stuart Florida Real Estate

This is great information to use, especially if you want to contest an appraisal.  Do you have a link to the original document?

Jan 26, 2012 10:32 PM
Joe Petrowsky
Mortgage Consultant, Right Trac Financial Group, Inc. NMLS # 2709 - Manchester, CT
Your Mortgage Consultant for Life

Thank you all for all the comments. Certainly, from all the comments, this is an important issue to most of us, one we deal with everyday. Keep aware going forward.

Jan 27, 2012 12:38 AM
AJ Karas
AJ Karas Auctioneers, LLC - Denver, CO
AJ Karas Auctioneers

Great post Joe. There can be such a disparity between appraisal value, true market value
and the value perceived by the sellers. As a broker and real estate auctioneer, I have found
that sometimes the seller has an inflated perception of the actual value of their home
either because of what it was worth prior to the recession or because of home improvements
or upgrades. However, the other side of the coin is an appraisal that uses distressed homes
as comps - a big no no.

The competitive bidding in auctions tend to bring to light the true market value of a property.
When bidders show up at auction knowing they must compete to buy the same property, the
seller can be assured that they have done their due diligence
with regard to the actual property value.

Jan 27, 2012 03:59 AM
Anonymous
Bob Perry

I agree with Leslie Ebersole above, it shocks me the appraisers agree with you and a Realtor points out the truth. This post looks like the first step in giving in to lender/realtor pressure. What are you defining as a distressed sale? By definition, anybody that has to sell in a down market has a distressed sale. If lender owned properties are a significant part of the market they usually take the lead in setting the market, and ignoring them is unethical. It's our job to analyze the market, not try to make the market.

Jan 27, 2012 09:24 AM
#17
Joe Petrowsky
Mortgage Consultant, Right Trac Financial Group, Inc. NMLS # 2709 - Manchester, CT
Your Mortgage Consultant for Life

Bob & Leslie,

Thank you for your comments. I talking about creating a market or value that doesn't exist. In most cases I don't have an issue with using a short sale, that is sold a fair market value, not even a bank owned property that is sold at fair market value.

The problem, when properties in disrepair, that are purchased below market, that are purchased to flip or by private individuals that must renovate to make them liveable, that is the problem. When the appraiser doesn't take the time to investigate the comparable, this is a problem. Using this type of comp, should never be used.

Jan 27, 2012 10:50 PM
Jon Sigler
Coldwell Banker Realty - South Windsor, CT
Sigler Sold Another! 860-306-8029

When AMC's seek out the low cost provider no one wins except the AMC.  Skill, knowledge and experience in a local markets and in establishing truly comparable properties are not found when you seek the person who will do the work the cheapest.  Professionals don't discount. 

Jan 29, 2012 02:16 AM