Appraisers Not to Blame for Distressed Market
Don’t Shoot the Messenger: Appraisers Not to Blame for Real Estate Woes / Distressed Market
Many in the real estate industry have tried to blame the market’s distressed condition on appraisers, saying that appraisers are at fault for producing opinions of value that don’t match a home’s contract or sales price, delaying a recovery in the housing market. But appraisers don’t set the market; they reflect what’s happening in the market.
It’s important to keep in mind that appraisals completed for mortgage transactions are not provided to confirm a sales price; they are used to assist lenders in making lending decisions. It’s troubling that some homebuyers and sellers (not to mention some real estate agents, home builders and others) assume that an appraisal is somehow “wrong” if it doesn’t match the listing or contract price. This is simply not the case. There’s no reason to assume the contract price is the “correct” price simply because it is higher than the appraisal.
In fact, adding closing costs or other incentives to the contract price; charging more than reasonable for improvements to the home; or charging unsupportable amounts for lot or location premiums are common tactics used by developers to manipulate the sales price.
Those who accuse appraisers also should remember that the appraiser’s client for appraisals completed for mortgage transactions typically is the lender – not the buyer or seller.
Keep in mind, too, that appraisers are particularly valuable because they are an objective and unbiased source of real estate information. The appraiser is a third-party, independent consultant who is hired by the lender to provide verifiable research and expert analysis.
MMany in the real estate industry have accused appraisers of prolonging the real estate market’s distressed condition by using distressed sales as comparable sales. But qualified, competent appraisers are capable of using their experience and education to determine when – and how – to use distressed sales as comparable sales. They know what adjustments to make, if any, when using distressed sales as comparables.
To help appraisers, the Appraisal Institute recently updated its “Guide Notes to the Standards of Professional Appraisal Practice of the Appraisal Institute.” “Guide Note 11: Comparable Selection in a Distressed Market” specifically addresses this issue, providing important direction for appraisers. It notes, for example, “After selecting the best comps, the appraiser adjusts for material differences between each comp and the subject property. The appraiser must analyze each comp to ascertain what adjustments are needed. Factors that may require adjustment include atypical buyer/seller motivations and sales concessions.”
Especially in a distressed market, competent and qualified appraisers – such as designated members of the Appraisal Institute – should be hired for difficult assignments. Buyers and sellers both benefit from inclusion of a qualified, most competent appraiser available.
- Special Briefing on Appraiser Racial Bias - January 19, 2021
- Racial Bias by Appraisers Is Uncommon & Not Systemic - January 6, 2021
- FHFA RFI on Hybrids, Waivers, AVMS, Racism - January 4, 2021