I received an interesting call today from a broker that was trying to understand an appraisal and why the value was not at the "high end of adjusted comps". It got me to thinking of how much our world has changed and with the separation of appraiser's from the rest of the industry "for our own good" how can our industry partners understand why we do what we do?????
In the past, often reading an appraisal seemed pretty straight forward. Look at the comps and the value - 3 comps closed in the past 12 months - stable or increasing values - yep looks good.
Then came the new reality with declining values, AVM's, new underwriting rules and new rules and forms for appraisers.
Appraisers were always to analyze the market and explain if it was seeing an oversuppy, in balance or undersupply - were values going up, down or stable - how long was it taking to sell homes HOWEVER now this data has to be in the reports with more detail and statistics than ever before and the underwriters have new tools that give them number of their own but without the detail and neighborhood specific knowledge of an appraiser that knows the area.
Reading a report is more complex, just as writing one is.
-Say we have a home that sold 8 months ago for $510k, was on the market for the same amount of time or a bit longer than is typical in the area.
-The new owners have done a few minor things, replaced missing lighting, some paint however it was due to preference not the condition of the home when it sold as it was in good condition.
-Now they want to refi. Sales in the area are all over the board, ranging from the high $300's to $600k with a large range of quality, views and site sizes in an area of custom and semi-custom homes.
-For homes in the size range of the subject ( no more than 20% variance) and age in the subject's neighborhood there are 23 homes on the market and there were 17 sales in the past 6 months, giving us an inventory of 8.1 month supply.
-MLS statistics show the market has been declining 1/2% to 3/4% per month in the past 6 months.
Given all these factors is it logical the owners would expect the value to have increased on their home? For the lender to expect the value to have increased? Do we only look at the "recent" sales which are all over the board and new underwriting guidelines which tie the appraisers hands to use 2 that are no more than 90 days old and one that is no more than 6 months along with 2 pending or listings which are adjusted for the typical ratios of SP % LP.
Not only does the appraiser analyze the market data for closed sales but also what did the home sale for? With no significant changes to the home and it had been on the market a bit longer than typical which would say they did not "get it below market" when they purchased it, it would follow that taking the typical declining % found in the market to the sales price should give an indication of value now. Some work was done on the home and lawn added to the back yard but no other landscaping. This would logically say the home may not have declined the full amount the typical market is seeing but would you expect to see it increase?
Sometimes it's hard to step back and see what's there and not just what we would like to see.
No longer can you take an appraisal and look at the comps and value and come to an "easy conclusion". Appraiser's cant - Underwriters dont -- helping the rest of our industry partners understand the new reality when we are "not suppose to talk to them" is a real challenge.
Underwriters often call the appraiser and ask "why didnt you use this comp? it's more recent and it's close to the subject" even when the report is well supported and all the "fact" support one another. I'v had this call only to find out the "comp" the underwriter is asking about was not a sell at all, but a foreclosure that showed up in their data as a sale in error, sometimes the "sale" has other factors uncovered in the appraisal process that made it unsuitable, but still the questions are asked and must be researched and answered.
Oh, What a complex world we are in. This too will change - change is the one sure thing.
In the meantime, ask with an open mind when you have questions on the report you just received. Look at the property from an underwriters perspective or like it is your own money your lending. Is this what truely makes sense and is supported? or am I just hoping the few high sales in the area are "the best comps" even when they are not the most recent and most similar to the subject?
We are all looking forward to this market showing stronger signs of turning back around. Many of our areas show signs of stabilizing. Area's that had seen 18 - 24 month supply of homes on the market often now have less than 6 months supply of available listings. Marketing times have declined in many areas and homes are seeing multiple offers. Wouldn't it be great to see this in the news? Consumers have been getting a constant diet of negative - over hyped and inaccurate statistics and still we are seeing some positive things in the markets. This is America - the land of hope.
Here's to you and a better understanding of our real estate partners.