It's hard enough to sustain a living when you are in the real estate industry. Whether you are a builder, a broker, agent, mortgage broker, banker, or whatever, most of us rely on one guy (or gal). Appraisers. As long as the appraisal comes in at or above the purchase price, you are safe. Although you can still get the deal done if it under-appraises, it just requires more money out of pocket for the buyer which 9 out of 10 times is a deal breaker.
Sure, you might say "well if the home doesn't appraise for what my contract price is, I am over-paying, therefore I don't want it anymore." Easier said than understood. The HVCC (Home Valuation Code of Conduct) has been instituted into the appraiser field and it prohibits appraisers to inflate values of homes for irrelevant reasons and factors. The HVCC clearly states that any appraiser who violates the HVCC will be subject to penalties and fines, and will be reviewed by the board for possible suspension or revocation of their license.
That being said, there is an increasingly common complaint of Realtors- that lowball appraisals are killing their home sales. NAR has asked the regulator that oversees Fannie and Freddie to suspend the rules for 18 months, clearly speaking about the HVCC.
Although existing home sales picked up in May, the 2.4% increase could have been substantially maximized if all pending home sales would have closed. Taking into consideration that some homes do not close due to financing contingencies, the appraisal does count as contingencies in most contracts. If 25% of the fallout of pending sales actually closed, the May increase of 2.4% would have been about another percentage point higher. It is clear that many contracts fell through because of faulty evaluations.
Some lenders use appraisers who are unfamiliar with the neighborhood and do not know how to identify the difference between traditional homes and distressed homes. If you cannot reason with distressed housing, you may need to sit on the sidelines for a few years.
An example of what is going on, New Jersey Real Estate Guys put a buyer into contract for a home in Montclair. Montclair homes for sale include some inventory that is distressed. When our buyers lender ordered the appraisal, the report came back 15% lower than our contract price, killing the deal. I was able to get a hold of the appraisal and the appraisal board will be getting a letter from me in the next few days reporting this piece of crap report. Our buyer was in contract for a single family home on a street just off the main road. First, the appraisal used 2 comps that were ON the main road. This is called in appraisal terms "obsolescense". This makes the property INFERIOR to others. Also, these 2 homes were distressed and one was even sold by a bank in REO status. I did some investigation and the homes clearly needed exterior structure work, and definitely was just short of a complete gut job on the inside. The appraiser did not adjust the values accordingly. He got his comp from the MLS and failed to inspect both comparables which he would have noticed that these homes should have been DOWNWARD adjusted by about 20%.
FINALLY, NAHB is calling for new guidelines for appraisals of properties in areas with large numbers of distressed properties, that would include giving appraisers the option of expanding the geographic area or time frame for eligible sales to get a more representative take on home sales in the area.
To my dismay though, there is almost nothing we can do for distressed homes that appraisers cannot get into. Because appraisers can't inspect the interiors of many properties that are used as comps, they may not be aware of maintenance issues or damage that are common with distressed properties. The failure to adjust comparable values of foreclosed homes often results in the undervaluation of newer homes.
Federal lawmakers are looking to adjust the guidelines. So in a nutshell, appraisers are paid to do the work whatever value they come up with. The threats by the HVCC and guidelines provide incentives for the appraiser to be overly conservative and deliver a lowball appraisal that NAR and NAHB are complaining about. But lenders don't make money if deals don't happen. Clearly, there needs to be a major adjustment. Montclair homes for sale or any of our other markets are going to suffer unless this is nipped in the butt.
