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Appraisals blamed for killing home sales

Real-estate agents, homeowners and industry experts blame lowball appraisals for preventing a housing recovery. Efforts to improve appraisals may only have made things worse.

By MSN Money Partner Aug 16, 2011 2:40PM

This post comes from Marilyn Lewis of MSN Money.


The value of anything is what the market says it is. That's basic economics. Take a home: Its value is what a willing buyer agrees to pay and a willing seller agrees to sell it for.


That's the theory. But in this crazy housing market, some fundamentals no longer hold.


Today, you've got buyers and sellers agreeing on a price only to find that conservative appraisers see the value as much lower. "What's the problem?" you might think. "If the buyer and seller agree, they've got a deal."


If the buyer is paying cash, that's true. But if the buyer needs a bank loan, the bank won't loan more than the appraiser says the home is worth. That means one of three things:

  • The buyer must contribute cash -- in addition to the down payment -- to buy the home.
  • The seller must lower the price.
  • The deal dies.

These days, real-estate agents, homeowners, buyers and economists say lowball appraisals are killing deals and savaging home prices, deepening the recession and making it harder for housing to recover. Post continues after video.


The complaints of lowballing are ironic, since it was only a few years ago that appraisers were blamed for helping create the housing bubble by unrealistically inflating home values.


Back then, banks hired appraisers directly. The problem with that, supposedly, was that some banks pressured appraisers to arrive at higher values for the homes they appraised. Banks presumably wanted higher values in order to lend more money. Appraisers supposedly were loath to bite the hand that fed them. Many see this as a big reason home values became inflated.


The Appraisal Foundation, the standard-setting organization of the industry, places a premium on education, professionalism and ethics. And yet, argues economist Leonard Nakamura, appraisals were biased upward during the boom, making mortgages riskier. Now, a downward bias is creating a mirror problem. Nakamura, an economist with the Philadelphia Fed, wrote a paper last year about the problem of bias in appraisals, "How much is that home really worth?" (.pdf file).


The Wall Street Journal recently picked up the theme in an article that questions the accuracy of appraisals. It touched a nerve, judging from the 276 (and counting) reader responses.


The Journal tells this tale, to illustrate:

Erin Wanner, a sales executive with Stirling Sotheby's International Realty in Orlando, Fla., says one of her deals fell through when an appraisal came in 40% lower than expected. The property, a custom-built lakefront, 7,000-square-foot home on four acres, was appraised by the builder in 2008 at $1.2 million. Ms. Wanner's clients went under contract on the property for $650,000 in a short sale -- one in which the bank agrees to receive less than the amount owed on the mortgage. The appraisal came in at $380,000.
"When I first heard it, I thought it was a joke," Ms. Wanner says. She noticed that a guest house on the property and total lot size -- as well as the number of fireplaces and its heated pool -- weren't included in the valuation, which would have sharply boosted the appraised value. She also thinks the appraiser wasn't familiar enough with the community and may have used comparisons with less affluent houses nearby, such as homes situated on ponds versus lakes.

In an online reader poll, almost 47% of Journal readers who weighed in agreed they'd had experience with a too-low appraisal.


Appraisers, particularly when they're unfamiliar with a locale, can miss important nuances, and value varies greatly from neighborhood to neighborhood.


When the appraiser gets it wrong, agents and bankers can't call the appraiser to complain or tell their side of the story, Wanner complained.


A cure as bad as the disease

To fix problems of inflated appraisals and prevent banker-appraiser collusion, the Federal Reserve Board replaced the Home Valuation Code of Conduct with new requirements that put a wall between banks and appraisers.


But those have created another set of problems:

Rather than hire appraisers whose work is known to them, banks now outsource their selection to appraisal-management companies, which are often 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 and cheaper.

The new system is blamed for creating inaccurate appraisals in some cases. The management companies are accused of sending appraisers over too-wide territories, forcing them to work in areas outside their geographic expertise.


An out-of-town appraiser might, for example, not know about the brownfield half a mile away from homes she used as "comps" -- appraisers use selling prices of comparable homes to help establish value -- to value yours. Or she might be unaware of the strong Neighborhood Watch program that earned your block the city's safest neighborhood award two years in a row, which should add value.


The problem -- for owners, buyers and people trying to refinance -- is compounded by automated valuation models now used by banks. These give computer assessments of value that may ignore important components of value. And there's also controversy over the use of foreclosures as comparables when setting a home's value.


According to The Journal:

The National Association of Realtors said that 16% of realtors surveyed reported a cancellation in June of this year, and chief economist Lawrence Yun blamed the unusually large number on low appraisals. In June of 2010, only 9% of those surveyed reported a cancellation.

"Exceptionally large numbers of signed real estate contracts fell apart last month, failing to reach settlement," writes Kenneth Harney at The Washington Post. Among the reasons: lowball appraisals.


But the Mortgage Bankers Association, the article says, supports conservative appraisals.

And some appraisers say homeowners are just having trouble facing reality. "It's the market. It's not the changes" in the appraisal process, says Charles MacPhee, a partner with Buttler Appraisals LLC.

Correction: This post had incorrectly described The Appraisal Institute as the certifying organization for appraisers. The Appraisal Foundation, not the institute, sets the standards used by states to certify appraisers. Also, the post had said, incorrectly, that the Home Valuation Code of Conduct had been revised. The code actually was replaced by the Federal Reserve Board's Interim Final Rule on Oct. 18, 2010.


More at MSN Money:

Aug 18, 2011 7:47PM
Wow. As an appraiser, I wish I  had the power that the author and some others seem to think I do. I am sure there are crooked or incompetent appraisers, just as there are in any profession. But the majority of appraisers I know are hard working people, who are just as frustrated with what's happening in the market as the next person. Appraisers are required to use a sales comparison approach. This means that we find similar sales to help find a range of value. What happens if most sales in a neighborhood are short sales or bank-owned properties that sold at low prices? How can the home we're appraising then be worth more than those other, similar homes? Estimates of value are primarily based on previous sales! Forgive me for stating the obvious, but we really don't get to make up values, or pull numbers out of a hat. In an up market everybody loves the appraiser. In a down market, not so much.

We appraisers are sinking financially these days too, and the reasons are myriad, i.e., low fees from AMCs, regulatory and client changes, and a lack of work. Did you know an appraiser can be blackballed from being used, without any reason given? Many appraisers have left the market, and others are drowning. If you want to blame something or someone, blame broken systems that allowed subprime loans, homes being used like an ATM machine for re-financing, and plain old-fashioned greed all around.
Aug 17, 2011 6:12PM
Having been an Appraiser for over 40 years, I can tell you a lot of what is wrong with the system.  But your article focused on why Appraiser's are killing deals.  We appraisers are being pressured by the lenders to only use recent sales to prove the value.  Sales that have occurred in the last 60 - 90 days. The problem is that most of the recent sales have been forced sales, not necessarily Foreclosed properties, but homes that have been on the market for so long, that people are forced to accept whatever offer finally comes their way.  The second problem is that people who have jobs that tend to move them ever couple of years, are stuck with more than one home, and are forced to try to make the payments and keep up both homes.  At some point it makes sense to bite the bullet and take whatever they can get, and finance the loss.  Finally, for some reason the Federal Government is missing the opportunity to jump start the economy.  There are homes everywhere that have been sitting vacant for 3 or more years, they are a blight, and tend to become mold factories.  Imagine the people that could be employed if there was a program to disassemble homes by hand, and that whatever materials could be recycled be put into storage facilities, and sold to build new houses.  We would stop the growth and spread of mold, we would open blocks and blocks of neighborhoods, and we would employ several million people, besides raising the value of homes by removing the anchor of cheap homes in every neighborhood.  The final question is how do we do shoddy work?  Is our work shoddy if we do not meet your opinion of value.  Or is it the slapdash work that people mention, or is it that we are paid the same amount for an appraisal that we received in 1979, the last time that there was a rate increase.  We have an extremely limited sets of lender rules that we are expected to meet, One lender has decided that they now want 5 comparable sales that are +/- 50 sq. ft. of the subject.  And less than 1/2 mile away.  Which may happen somewhere, but where I work, if I can find 3 sales that are in the same county and less than +/- 30% of the subject, and this is after several hours of searching. anyway, it's not our fault.
Aug 16, 2011 5:24PM
Lowball appraisals are absolutely not due to "the market". Appraisals are typically not done until an offer on a property has been made. When you have a buyer and seller agree on a price for the home, THAT's the market. When that transaction gets scuttled by a lowball appraisal, THAT's the HVCC leading appraisers to do shoddy, slapdash work. 
Aug 18, 2011 10:45AM

It boils down to two disparate points. The seller is wanting to get a price at or above its previous value. The buyer is shopping PURELY for monthly payment. With the current interest rate it is much easier to get to that payment at a higher purchase  price than from say 2001.  The problem with the author's analogy is that the real deciding factor over price and value is what the financial institution can (or believes he can) recoup in foreclosure. Recent history tells lenders to be more conservative.


Few if any of us (except for the real estate agents whose income is a percentage of the sale price) would disagree that the values a decade ago were terribly inflated. Real estate agents are blaming poor sales on "tight credit" when in fact credit is just as available for a sale at a more historically accurate appraisal (IE more in tune with inflation) with the last decade's housing boom discounted. The problem is sellers cannot or will not sell at that point that erases all or most of the equity they have earned through years of dilligent payment.


Bankers are indeed driving the prices down. They spent over a decade living on fees of one kind or another. The government put a stop to that. In the current environment loans must produce and the sale of foreclosed properties need to indeed cover the amount of the lein. The current selling prices don't provide that.


The bottom line as painful to the sellers as it is, is that the prices still are between 10 & 15% TOO HIGH versus the 20-year inflation cycle.

Aug 31, 2011 12:57AM
People have to keep in mind that in many areas of the country property values are continuing to decline. It would be best to seek advice from an appraiser prior to making an offer so that buyer and seller will not be disappointed.
The key to getting accurate appraisals is to enforce appraisers' independence. They are micro-managed by government agencies and banks through their loan underwriters therefore are not truly independent.
A "controlled" appraiser is not the independent, disinterested third party consumers need for a truly objective appraisal.
Aug 18, 2011 2:01PM
FHB in Hawaii uses a realtor's "market value" instead of an appraiser.  How wrong is that?? Using "market value" based upon prices of homes within a specified area even if the construction, age, condition, etc. are all different!
This practice should be against all moral and ethical standards in addition to being unlawful and unfair!

Aug 19, 2011 12:14AM
Pretty funny.  Banks shooting themselves in the foot and pocketbook again.
Jun 23, 2012 2:15AM
Same thing happened to us.  The appraisal came in at 40K lower than the selling price.   There was a bidding war over our house, even.
The comps the appraiser used were totally bogus.  Not the same square footage, different # beds/baths, much smaller lots, comps from short sales and houses in ghetto areas not like our nice neighborhood.

Banks do not want to lend, it is just that simple.   They don't want appraisals coming in that are accurate because they want an excuse not to lend.

Why in the world would they want to lend when they get free handouts from taxpayers, can borrow money for free and are sitting on a ton of cash already?

Aug 18, 2011 12:15AM

This article is dead on.  I have written to our politicans on this exact issue and they continue to ignore the problem.  I hear and read about this from many people.  We had a contract  for  our house for a fair price considering the market.  The buyers sold their house and the appraisal came in $12K under their buyer's contract.    They lost their sale.   So six real estate transactions were lost over one appraisal that came in 5% low. 


All of these lost transactions was due to one appraisal.  No one person should have that much control over a real estate sale.   It is a dictatorship and the appraisal can not be questioned since nothing will change according to the relators I have talked to.   The process is broken and the real estate market will not recover until the appraisal start being more realistic.

Aug 29, 2011 10:53PM
The current appraisal system is very inaccurate since they include foreclosed homes which skew the price averages way too low in certain cases. In some cases in my neighborhood, the appriasals are the sale price of the home almost 25 years ago! I'm not in Nevada. This wil hinder the home recovery since the buyer and seller may agree on a price but the bank will not support it since the apprisals come in way too low...thus no sale and this is repeated numerous times per day.
Jan 27, 2012 10:11PM
I don't think the appraisers are the problem. I think it is how they appraise that is the problem. If foreclosed homes in the neighborhood were not included in the appraisal,(only homes sold on the fair market ), the value of homes would not continually decline as rapidly as they have and are. The value of a homes that  is less than 4 years old should not be appraised for less than what it cost the developer to build it. The value of a home that is in good shape should at the very least bottom out at what it cost to build it ( not what the banks are selling them for) I live in a newer development that will never be finished because people have been walking away from their homes for 3 years now. Almost 50% of the homes in this neighborhood have been foreclosed and the banks are literally selling them for half price. No one even tries to sell their home anymore - they just walk.  The appraisers have no choice but to low ball the value of every home in this neighborhood  because they base it on the sales which of course are unrealistic.
Jan 20, 2012 3:28PM

Yes, it happened to me! I bought the house for $117,000 on 1993. the house is appraised at $196,000 on 2012 by an appraiser with new roof,two new a/c and new windows and doors. The bank loaned me $ 156,000.00 after checking my employment status till day when they made the deposit in my bank account.

Aug 30, 2011 5:33PM

Most everybody involved, except the buyer, has an interest in inflating the price or "value" of a home. The realtor for the commision (let alone not allowed to disparrage a property). The appraiser, though likely neutral, may point out everything that is wrong with a property, doesn't mean (he) can't still overstate the value. And naturally the seller wants as much as he can get, especially if they were flipping it (oh that's a mess!)

Appraisals killed todays home sales by over-inflating the homes when the market was "smoking crack!"

Oct 27, 2011 7:05PM
Lets dont forget about the construction companies who buy large tracks of land for planned community and have appraisers over value the homes in the community. I seen several of them go out of business who buy  tracks of land with the over price homes they sell. As long as the cash flowing in they have no problem doing what they do keep building more overprice homes one big circle of greed Well the cash quit flowing and they lost their ****. Land went back to the banks the community are only half built now they have the nerve to build cheap houses in the same community and lower the price of the ones allready built. Blame greed and the appraiser and the homebuyers who were suck up in their dream home fantasy to pay to much for a home.
Aug 18, 2011 7:06PM
Any bias can and will effect the appraised value. It just depends on who is paying for the appraisal. The appraiser will tell you this cannot be done. It is not ethicial. Bull S**t. I have had two appraisals done on my property and on the second appraisal at the bottom it provides for a type written comment that appears to be the opposite of what they had said in the first appraisal. These appraisals were done....I cannot say....but believe they will lie to you openly.
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