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One in five real estate contracts cancelled due to appraisal issues

Low appraisals hurting real estate sector

Low appraisals continue to be the concrete block tied around the ankles of a sinking real estate market that is already unstable due to epic unemployment, tight credit, decreasing values, rising foreclosures and the like. Because lenders must cap their loans at the value set by appraisers while sellers and buyer’s disagree on how to make up the difference with an original deal price, cancellations happen.

According to the National Association of Realtors (NAR), 16 percent of Realtors reported cancelled contracts in July, due mostly in part “by declined mortgage applications or failures in loan underwriting from appraised values coming in below the negotiated price.”

Nine percent reported contract delays because of low appraisals, and 13 percent reported that a contract we renegotiated to a lower price because the appraisal cam in below the original price, NAR said, making over one in five real estate contracts cancelled in July because of appraisal issues.

It’s hard to talk about any recovery

“It’s hard to talk about any recovery of the housing market and home prices until the appraisal issue is squared away, and that is a broad issue,” said Guy Cecala, publisher of Inside Mortgage Finance told Reuters.

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Some point to the housing bubble inflation as the fault of high estimates of property values by appraisers, but recent reforms has curbed this and the industry is now seeing what some project to be artificially low appraisals.

“The industry, both from a lending perspective and appraising perspective, has gotten as outrageously conservative now as they were outrageously aggressive a few years ago,” said Rick Sharga, senior vice president of data firm RealtyTrac.

Appraisal Management Companies popping up

Third party appraisal management companies have popped up all over America to play middleman since Realtors were banned from selecting appraisers for Fannie Mae or Freddie Mac approved loans (90% of all U.S. loans). Regardless of accuracy, being too liberal or too conservative, the management companies get paid and are offering smaller and smaller commissions to overworked appraisers who ultimately bear the liability of the appraisal in the new “sue everyone” era.

Appraiser Mike Evans, former president of the American Society of Appraisers told Reuters, “Some guy blows in from 300 miles away and grabs three comps that may not be in the right area, and leaves.”

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Tara Steele is the News Director at The American Genius, covering entrepreneur, real estate, technology news and everything in between. If you'd like to reach Tara with a question, comment, press release or hot news tip, simply click the link below.

79 Comments

79 Comments

  1. Greg Lyles

    August 29, 2011 at 6:54 am

    Doesn't this beg the question, why don't agents require sellers to get a pre-listing appraisal?

    It would do several things for the seller; first, give them a chance to see how their house might appraise and which comps are being used. If there are problems with the comps or adjustments, those can be addressed before the property is likely to go under contract.

    Second, it enables the seller to identify a market offer and respond accordingly. We've all been in situations where the first offer was the best but the seller turned it down. Then, after subsequent price reductions, the seller ends up under contract at a lower price than the original offer.

    Third, and most important, is that it provides the necessary ammo for challenging a low lenders appraisal. The lender won't give your CMA a second thought, but a recent appraisal from a well-respected appraiser will get their attention. I recently used this tactic to save my client $40,000 on the sale of his home. The lender's appraisal came in that amount under the contract price. Many agents would have simply told the seller to reduce their price – or watch as the sale implodes. In our case, the lender was willing to use the appraisal we provided. The savings to my client more than paid my commission on the sale.

    • j. Hart

      August 29, 2011 at 8:31 am

      That would only work if your lender was to portfolio the loan, and not sell to Fnma or Freddie

  2. Juliano Bogotti

    August 29, 2011 at 8:47 am

    "…..failures in loan underwriting from appraised values coming in below the negotiated price.”

    Really……..

    When is NAR going to get it that an appraisal IS NOT the number needed in a file in order to get a deal go through???????…..and when they are also going to realize that the real estate market HAS NOT reached bottom????????

    Here is a small sample from the my market area…..
    Can you hear me now??????

    LISTING UPDATES
    8/8/11 Removed from market
    8/5/11 Removed from market
    8/2/11 Price change from $570,000 to $495,000
    8/1/11 Temporarily removed from market
    7/27/11 Price change from $520,000 to $475,000
    7/17/11 Price change from $3,495,000 to $2,900,000
    7/15/11 Price change from $5,295,000 to $4,900,000
    7/15/11 Price change from $1,600,000 to $1,400,000
    7/15/11 Price change from $1,600,000 to $1,400,000
    7/15/11 Price change from $2,100,000 to $1,550,000
    7/13/11 Price change from $550,000 to $369,000
    7/11/11 Listing temporarily removed from market
    7/9/11 Listing removed from market
    7/13/11 Price change from $550,000 to $369,000
    7/2/11 Price change from $2,495,000 to $2,295,000
    7/1/11 Price change from $1,450,000 to $1,348,000
    6/29/11 Price change from $749,000 to $699,000
    6/25/11 Price change from $2,200,000 to $1,895,000
    6/25/11 Price change from $275,000 to $215,000
    6/25/11 Price change from $275,000 to $215,000
    6/15/11 Price change from $1,600,000 to $1,200,000
    6/15/11 Price change from $1,600,000 to $1,200,000

    • Lani Rosales

      August 29, 2011 at 9:47 am

      In fairness, NAR didn't decide these cancellation numbers, it was from a national member survey.

  3. Brent

    August 29, 2011 at 10:50 am

    Juliano I agree with you 100%,, NAR does not mention that the seller can lower the price and or god forbid a Realtor take a cut in the Holy 6% commission ….

    I know i have lost thousands and thousands of dollars over the years at the closing table..to make a deal work..

    Until NAR backs mortgages they need shut their mouths!!! and let market take care of itself..

    here is lesson for the day boys and girls

    The Market price and or Price a house is worth is what a buyer is willing to pay!! Not what Jimmy the Realtor said it was worth

  4. Cheri Jessup

    August 29, 2011 at 1:57 pm

    Appraisals are always an "issue" regardless of market conditions. I've been selling homes for 25 years – 20 years ago I learned a valuable lesson: ALWAYS meet the appraiser at the property. Always provide a packet – recent comps, floor plan, MLS print out of the subject property with your photos and written notations on the properties that were distressed sales (no appliances, damages, etc.) and finally include a cover letter with a brief description of the property upgrades, comments about the neighborhood and the HOA contact info if necessary. Yes. It takes some extra work, but a busy appraiser and especially an out-of-area appraiser will appreciate your efforts and what's a little extra work to insure your escrow closes?

    • Evan

      September 2, 2011 at 10:20 pm

      Isn't this what realtors get paid big commissions to do?

  5. Rabbit

    August 29, 2011 at 6:18 pm

    Yep, now that agents can't use their pet appraiser, honest independent appraisals are reflecting more realistic values. Read: "The Truth About Real Estate Appraisal" by Stephen G. Bishop

  6. Les Behonest

    August 29, 2011 at 6:43 pm

    Appraisals will continue to come in low. The Banks are paying $350-600 per appraisal to the Appraisal Management Companies. The AMC is then paying $175-275 of the amount collected to the appraiser. Appraisers are pizzed off! They have taken a major cut in pay and were told that it's their fault that the housing bubble inflated.

    They are making approximately 12-18 per hour after expenses. They have decided to take matters into their own hands and deliver an appraisal that is low in value.

    How do they do this? They just pick the first 3 comparables they can find and ship the appraisal. An appraiser is not motivated to find the best and highest comparables. HVCC turned them into low paid photographers, so they decided to return the favor by shipping low grade appraisals.

    Appraisals are a leading indicator of where the housing market is going. They provide listings, pendings and closings. If the value just comes in 3-4% less than the sellers expect and the sale closes, (seller takes the lower value)housing could easily drop another 18-25% by mid 2012.

    The appraiser can't make a living anymore, but they sure can stick it to everyone until they goes broke.

    I'm not an appraiser. I work far an AMC and deal with appraisers daily. I'm the one that schedules the appraisals and let's them know how low the fee will be. I don't like it, but it pays me more than an appraisal position would.

  7. Missy Caulk

    August 31, 2011 at 6:59 am

    I have had it happen numerous times, or we come to an agreement that we now write in contracts, "sale price to meet appraised value".
    The problem in two fold in Ann Arbor:
    1) Listing agents listing homes with no recent comps, or none at all.
    2) Appraisers coming from different areas, where they don't really know the market, and only look at raw data. This happens when they use a school district that is different from the one the home is located in.

    Ex…appraiser in Grand Rapids appraises a condo in Canton, MI (hundreds of miles away)
    Ex…rural property in a top school district being compared to a small school district, not so highly rated.

  8. Michael Bolton

    September 1, 2011 at 3:39 pm

    Buyers and sellers (the market) determine value…period. Appraisers give their opinion of value based on the market, and have to follow standards: USPAP, Fannie Mae/Freddie Mac guidelines, HUD (FHA) guidelines, investor guidelines, originating lenders guidelines, and then certify that their appraisal meets all of those guidelines. If you’re not happy with the process, then pay cash. I’m certainly no fan of big banks, AMC’s, or the GSE’s for that matter; but if you want to borrow someone else’s money, then you have to play by their rules…period.

    One of these days a good reporter will actually do some leg work when reporting on why appraised values are perceived to be coming in low. Some great questions to be answered are: what’s the distance from the listed property to the listing agent’s office, same for the selling agent if they’re different. Maybe they’re out of the area, and they miss priced the property, or they recommended that their buyer purchase the property because they didn’t know any different due to being located so far from the area.

    Having been in the real estate business for 23 years, (first and a Realtor, and currently an appraiser), I can tell you that there is a lot more going on than low appraisals. It’s just that appraisers are on the lung rung of the ladder, and can be easily thrown under the proverbial bus. We don’t have a mouthpiece like Lawrence Yun, NAR’s chief economist, who by the way couldn’t predict his way out of a wet paper bag, stating that appraisers are the fault of 16% of sales falling through.

    Until you get these questions answered, promulgating that appraisers are responsible for 16% of the sales falling through is bordering on irresponsible and incendiary.

    Michael Bolton
    provalue.com

    • Mike

      March 11, 2012 at 1:24 pm

      How many people have 100% cash to buy a home? If these were the only home buyers of the future then home prices would have to come down another 80-90% to create the ‘market’ as you define it. ‘borrow someone elses money’? Fannie and Freddie were created as extensions of the government to help people buy homes. And the money they are borrowing is greased by the taxpayer. As for ‘Rules’: I doubt anyone here is arguing that the rules are unfair or wrong. They are arguing that the necessary latitude in the rules is currently being abused by appraisers. And I would vote that the appraisers are doing this in a very self serving manner. They collectively don’t want to be blamed for over appraising again. And as such, should be blamed for killing the right deals that would create jobs and bring the market back where it should be.
      I have had appraisers kill 14 transactions of mine in the last 2 years (I was the buyer or the mortgagor in those cases). Many of those appraisers had a handful of comps to use and chose pitiful comps that did not come close in quality to the house being appraised. Many of the comps I have stepped foot in and know that with absolute certainty. In one case the appraiser compd to a house I own. And completely missed the mark on it. They basically found the cheapest comps they could. The truth is that there are always opportunities to adjust comps to allow, say an REO, stripped of all its lighting and appliances, maybe with roof leaks and plumbing problems, likely with the A/C systems stolen, with holes in the walls and the carpet removed (oh wait – the listing did not say that), to be adjusted upwards. But the appraisers are not doing that. The tacit assumption today seems to be that an REO is a perfect specimen of a home.
      I would wager that the appraiser kill rate is much higher than 16% when considering all the failed refinances. And I would say that the appraiser is 100% at fault if they have not communicated with the listing agent in trying to understand the pricing strategy or with the owner in the case of a refinance. The truth is that the standards you speak of will always allow the latitude to appraise low in the interest of minimizing the risk to the appraiser. Two identical houses with the same square footage and in the same neighborhood can command dramatically different prices. And, unless the appraiser does their homework, it may be difficult, after the fact, to figure out why they are worth different amounts.
      I agree with you when you say that the market determines value. So if a buyer wants to pay $300k of their hard earned money for a house and it is reasonable; then why is not the strongest indicator of value? Why should an appraiser then be able to come in and insert their definition of value and kill the deal. If it is based on the market then the appraisers job should only be to verify – and to pay attention to what the buyer and seller are saying about the valuation. Maybe, just maybe, they have looked at a large number of homes and have a pretty good feel of the market and just maybe they know alittle more about it than the appraiser. I guess what you meant to say is that the appraiser dictates value not the market. Because that is exactly what happens! You are missing the point made by so many people here. The appraisers are bent to comp to the lowest comps even if it kills a deal and even when the lowest comps were REO. They are doing this as a collective CYA move. Guess what – that REO has alot going against it and that should be added back into value when comparing to a straight MLS person to person sale. Apparently you would like to see this cycle play out over and over again until prices are so cheap that all future home buyers can pay cash out of their checking account: 1) Seller tries to sell home and has a contract for its sale 2) appraiser comps home to highly inferior listings: REO, short sales, etc.. 3) Seller either walks or drop the price; thus creating an even lower comparable to force home values down even more 4) Next house on block – go back to 1 and start the cycle again.

  9. Sheila Rasak

    September 2, 2011 at 2:28 pm

    Once again we're attempting to make some sense of a senseless place in time. I've recently had one transaction appraise lower giving the buyer (I represented the seller) a $10,000 reduction on a short sale only to see a perfect comp a few months later (in a declining neighborhood) go at a higher price with an FHA lender…go figure.

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