How Low-ball Appraisals Are Limiting Housing Recovery
Rachel Koning Beals
Overly conservative appraisal standards are holding back many real estate transactions
There is plenty of blame to go around after a robust housing market swelled to a bubble and then deflated. Fingers point to impractical consumers, overzealous lenders, and yes, the appraisers whose signature on a home's value helps close or kill the deal.
Before the credit crisis, some appraisals seemed to be mere formalities; that attitude helped fuel the boom days. Now, overly conservative appraisal standards -- many unfairly calculated, some observers argue -- may be holding back the housing recovery.
"I've been in the business nine years, and this is the first year where appraisals have made a significant impact on my business," says
A survey by the
Basic economics drive housing prices.
The market is determined by how much supply is available and what amount a potential homebuyer is willing to pay. An appraiser's room-by-room, property line-to-property line walkthrough, plus local pricing calculations known as comparables, put a "value" on a particular home so that a lender determines how big of a loan to provide. That means outside of a few all-cash transactions, the banks that are taking on the risk largely influence buying and selling decisions. In many of today's markets, risk-aversion persists, and it's showing up in the appraisals.
"I do think the appraisers are trying to be fair and objective. Yet when bad judgment and/or poor comparables come into play -- and when fewer homes are being closed, often a really good comp doesn't exist -- an appraiser can definitely be the reason a seller can't sell his home in this market," says Lind Hoffman.
She described three deals this year in which the appraisal came back significantly lower than the sales price, each with a different outcome. One transaction fell apart when the seller wasn't willing to come down in price after a lower-than-expected appraisal; the buyer moved on and the seller removed her condo from the market, renting it out instead. For another listing, the buyer thought a low-ball appraisal was wrong and was preventing him from getting a house that he really wanted, so he moved his loan to a different bank. The seller paid for the new appraisal, which came back
"Appraisals are designed to be irrefutable. It's really a math equation based on square footage, number of bedrooms and bathrooms, age of home, etc.," says Lind Hoffman. "However, an appraiser's opinion plays heavily into that equation, making it an art, not a science."
Often appraisers' and agents' "math" isn't equal.
For instance, in some states, a room needs to have a door, a window, and a closet to qualify as a bedroom. However, if a room is set up as an office with a door, a window, and very clearly enough space for a closet to be built if necessary, agents count that as a bedroom. Appraisers can count these rooms differently.
Over the past 18 months, new rules and regulations have been implemented in an effort to protect the independence of the appraiser. Such regulator efforts are introducing new problems, some market participants say.
Consumer groups, lawmakers, and financial and housing regulators called for action to eliminate sometimes inflated, and even fraudulent, appraisals. The idea was also to eliminate pressure on appraisers to come up with rubber-stamp estimates that matched the contract price and would automatically help advance the approval process.
Just after the housing bust, then-
Some in the real estate industry take issue not with the intent, but with the scope of new regulatory requirements.
Rather than hire appraisers whose work is known to them, banks now outsource their selection to appraisal-management companies, some of which are even units of other banks and financial companies. These appraisal-management companies take a sizable cut of the fee, leaving the appraisers under pressure to work faster, asserts some criticism of the reforms.
"There's mixed reaction in the industry," says
"Many are worried about a Lemons Problem," he said, referencing the vernacular of the economics discipline in describing quality uncertainty, for cars or other big purchases.
For its part, the
Limited examples.By most accounts, the biggest impact on home appraisals currently is the light volume of sales, which limits the number of comparable properties.
She also bristles at the outcome of that appraisal. The property, which she describes as a 4,000-square foot contemporary home built in 2002 near
Banks do not consider multiple appraisals.
Agents have to go back to the same appraiser and make their case, and some banks are willing to accept an adjusted number from the original appraiser. But fighting for an adjusted figure is often a losing battle. The buyer can opt to roll the dice by moving the loan to a different bank with a different appraiser, often costing the seller, and less often, the buyer, an additional
It's a fee that may be worth the effort, considering that a new appraiser can deliver very different results, real estate professionals say.
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Real Estate - How Low-ball Appraisals Are Limiting Housing Recovery
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