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Responding to Low Appraisal Values

As the real estate markets continue to recover from the significant declines following the devastating mortgage market meltdown, real estate agents, brokers, builders, and mortgage lenders are reporting increasing numbers of appraisals with values below the agreed-upon contract prices negotiated between the sellers and buyers.

This seems even more prevalent in rapidly appreciating markets where sellers are receiving multiple offers and the final agreed-upon sales prices are at or even higher than the initial asking price.

An appraisal with a value below a sales price is not automatically deficient.

Situations do exist where agreed-upon sales prices are not always consistent with the market.

Having reviewed thousands of appraisal reports in my nearly 40-year career in this industry, the most common contributors to low-appraised values I have observed are as follows:

  1. Using dated sales and failing to recognize upward market trends and adjust accordingly;
  2. Failing to recognize and adjust for the contributory value of recent improvements/upgrades compared to sales with no updating/upgrading;
  3. Failing to recognize and adjust for locational differences between the subject property and comparable sales.

In rapidly appreciating markets, the failure to recognize and adjust dated sales and place appropriate weight on the most recent closed and pending sales are the greatest contributors to appraised values below the contract prices.

Greg Stephens

Most Probable Value vs. Highest Value

The value opinion reported by real estate appraisers in mortgage financing transactions is typically defined as the most probable value, not the highest value, nor lowest. Unfortunately, in many of these escalating markets, the most recent transaction (which is the subject of the appraisal) is the highest sales price.

Bracketing the Value Conclusion

Some lenders require appraisers to “bracket” the value conclusion by including comparable sales with prices equal to or higher than the appraised value. This is problematic in many rapidly appreciating markets around the country

Comparable Selection by the Appraiser

The Fannie Mae/Freddie Mac appraisal report forms typically used for mortgage financing contain a certification stating the appraiser selected and used comparable sales that are locationally, physically and functionally the most similar to the subject property. So the selection of any alternative sales to be discussed with an appraiser should not be based on a desired price/value, but rather the truly competitive nature of the sale to the property being appraised based upon the above criteria.

Discussing the Appraisal Report with the Appraiser

If the appraisal report contains incorrect or erroneous information or alternate sales are available that meet the above criteria, a lender’s staff who are independent from loan production are able to have a conversation with the appraiser to discuss.

Federal Appraiser Independence guidelines contain the following prohibition: “Seeking to influence an appraiser or otherwise to encourage a targeted value in order to facilitate the making or pricing of the transaction.” Lenders, builders, and realtors should be aware of this when communicating with an appraiser.

Those guidelines also provide the following exeptions—“The requirements of subsection (b) shall not be construed as prohibiting a mortgage lender, mortgage broker, mortgage banker, real estate broker, appraisal management company, employee of an appraisal management company, consumer, or any other peson with an interest in a real estate transaction from asking an appraiser to undertake one or more of the following:

  1. Consider additional, appropriate property information, including the consideration of additional comparable properties to make or support an appraisal;
  2. Provide further detail, substantiation, or explanation for the appraiser’s value conclusion;
  3. Correct errors in the appraisal report.

Again, an appraisal at a value below a contract price is not automatically deficient. But if errors or questionable information are noted, lenders are able to address those concerns with an appraiser so long as the communication is within the appraiser independence guidelines.

About Author: Greg Stephens

Greg Stephens is a recognized subject matter expert in appraisal regulations and standards, whose 35-plus year career in the industry includes owning and managing a five office regional appraisal firm in Northern California for 24 years prior to spending 10 years in financial institution valuation QC and governance managing pre and post-closing review teams, monitoring state and federal appraisal-related legislation and USPAP subject matter expert. Stephens’ professional credentials include Certified General Appraiser, SRA Designation from the Appraisal Institute, AQB Certified USPAP Instructor through The Appraisal Foundation, CDEI certified distance education instructor through the International Distance Education Certification Center. In September 2011, Stephens joined Metro-West Appraisal Co. LLC as Senior Vice President, Appraisal Operations and Compliance and in December 2013 was promoted to Chief Appraiser, SVP Compliance where his responsibilities include corporate policies and procedures, federal and state appraisal regulatory compliance, national staff training and representing Metro-West Appraisal Company at national conferences as guest participant and speaker.
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