An local Florida article this week is appropriate nationally, and it speaks to faulty appraisals as a deterrent to a faster housing recovery. An example home seller in California put her townhouse on the market. There were not occupied comparable properties for sale nor any recent sales. The only comps were for foreclosure and distressed properties. Those properties, especially one with a very similar floor plan, all needed repairs and other extensive work. Her townhouse was in excellent condition with a lot of custom upgrades.
A buyer offered a purchase contract at a $317,000 purchase price. The appraisal came in at $310,000, and had only distressed comparables. Criticism of current appraisal practices focuses on this problem as one of not properly adjusting for the condition differences between foreclosure and non-distressed properties. It’s amplified when in many areas, especially California, bidding wars are popping up again, driving up prices.
The new rules for appraisals that were set up post-crash no longer allow lenders to choose appraisers, instead requiring that they get assigned an appraiser from a pool or through an appraisal management company. In many cases, critics state that appraisers are not familiar with the area and are under-valuing properties due to their lack of area experience and poor comparables.
In a September survey, one out of three Realtors stated that they had problems related to home appraisals in the previous three months. Eleven percent of them said that a contract was canceled due to a low appraisal, while 9 percent said that a contract was delayed. 15% stated that a contract had to be renegotiated as a result of an appraisal lower than the offering price.
It’s a mix of complaints, with appraisers and appraisal management companies also voicing complaints. Appraisers cite problems with appraisal management company practices and payments. They say that assignments are not proper and that payments are too low. The appraisal management companies contend that their role is misunderstood.
For investors who must finance a purchase with a mortgage, they should have done their own valuation process as well. Balance their income expectations with any difference between the purchase price, the appraised value, and their ability to negotiate that difference with the seller.