“Appraiser Guidance Regarding Distressed Valuations”
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.
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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