Appraiser Workshops reader Elisabeth Hahn forwarded a very good NY Times article to me on real estate appraisals and appraisers.  As we know, given the mortgage losses recently, there has been much press about the appraisal process.

The article has some very good parallels to personal property appraising, such as appraisers dont set the market, they report and analyze the market, that we are supposed to be unbiased, the report and valuation is not always used or interpreted correctly and clients dont always understand how or why value adjustments are made.

As I read the NY Times article  I did note one major difference, we typically dont have an agent trying to either influence the process directly or indirectly with the appraiser or with the client.

The NY Times reports

Appraisals are generally ordered by banks so they can verify the value of collateral before granting a mortgage. Before the housing crash, when home values seemed only to rise, appraisals were almost an afterthought. But now, with banks far more cautious about lending, a low appraisal can torpedo a deal.

The problem is so widespread that this week the National Association of Realtors blamed faulty appraisals for holding back the housing recovery, saying its members had reported that more than a third of all deals were canceled, delayed or renegotiated to a lower price because of a low appraisal. Several real estate agents said they were starting to include appraisal contingencies in their contracts, spelling out how much a buyer would be willing to pay in cash if the appraisal fell short.

Appraisers use previous sales of comparable houses to help value a home. If prices are just starting to climb, and sales take two or three months to close, there can be a lag before the change in prices is observed.

The Realtors report said appraisers were improperly using foreclosures and neglected properties as comparable homes, failing to account for market conditions like scarce inventory and bidding wars, and working in areas where they lack local expertise. The report faulted banks for using inexperienced appraisers, and for creating unrealistic requirements, like six comparable sales instead of three, at a time of few sales.

“It’s holding sellers off the market,” said Jed Smith, the managing director of quantitative research for the Realtors group. “Sales volume could probably be an additional 10 to 15 percent higher if we had normal lending practices and if we had normal appraisal practices.” That in turn, he said, would create more jobs.

Appraisers and real estate brokers agreed that a ban, imposed since the housing crash, on loan originators’ handpicking appraisers had led to the use of appraisal management companies that take a healthy cut of the consumer’s fee and hire inexperienced, low-cost appraisers.

But appraisers took issue with the complaints and pointed out that unlike real estate agents, they have no bias or incentive to help complete a deal.

“Appraisers don’t set the market, they reflect what’s happening in the market,” said Ken Chitester, a spokesman for the Appraisal Institute, a professional association. “So don’t shoot the messenger. Blaming the appraiser for a bad housing market is like blaming the weatherman because you don’t like the weather.”

Source: The NY Times