In a survey by the National Association of Realtors (NAR) in September, 65% of realtors reported they had no contract problems relating to home appraisals over the past three months; 11% said a contract was canceled because an appraised value came in below the price negotiated between the buyer and seller; 9% reported a contract was delayed; and 15% said a contract was renegotiated to a lower sales price as a result of a low valuation.
Lawrence Yun, NAR chief economist, said these findings are notable given that homes in many areas are selling for less than replacement construction costs. “Though the real estate recovery is taking place, the combined issues of stringent mortgage lending requirements and appraisal frictions are hampering otherwise qualified buyers from purchasing a home in a timely fashion, and in some cases are preventing them from buying at all,” he said.
Major problems reported by realtors surveyed included:
• Some appraisers are using foreclosures, short sales and run-down properties as comparable homes, and are not making adjustments for market conditions or the condition of the property.
• Appraised values that do not reflect market conditions such as rising prices, the presence of multi-bidding and low inventory.
• Appraised values are very inconsistent and fluctuate widely.
• Out-of-town appraisers, who are not familiar with the area or local market conditions, are being used.
• Turnaround time by both appraisers and banks is slow, which delays closings.
• Appraisers who don’t make distinctions between distressed and non-distressed properties.
In addition to these problems, some appraisers are required to provide as many as eight to 10 comparable sales, which almost guarantee the use of distressed properties as comps, the NAR said. Previously, three comparable homes were the norm for most appraisals. In many cases there simply aren’t enough apples-to-apples comps to comply with the excessive demands by lenders, so discounted distressed homes are sometimes used in valuating traditional homes in good condition without appropriate adjustments.
Fortunately, the NAR said, the level of distressed sales is trending down -- they accounted for about one-third of all sales in 2011, but have averaged roughly a quarter of sales in recent months. By 2013 the NAR expects the distressed market share to decline to about 10% to 15%. As distressed inventory is cleared from the market over the next two years, it should help to correct ongoing problems.
“In the meantime, buyers, sellers and real estate agents need to be aware that there are problems with some real estate appraisals, but also be aware of their rights to communicate with appraisers and lenders about errors or concerns with individual valuations,” said NAR president Moe Veissi, broker-owner of Veissi & Associates in Miami. “In some cases, a second appraisal may be justified.”