The Current Glitch in Real Estate Transactions - Appraisals
June 17, 2009
I feel certain that it has always been difficult for appraisers to determine the market value of a property in a volatile market. Whether it is the real estate market of 2004-2007 or the current market, the appraiser who is hired by the lender has an obligation to determine a fair market value for a property. The appraiser's determination of value may be different from the standard definition of "fair market value" which is the price a seller will accept from a willing buyer who is ready, willing and able to purchase. Traditionally, the appraiser will use the comparable value approach and compare the subject property to other similar properties that have sold recently.
Because of the government's belief (probably correctly) that many properties were appraised incorrectly and sometimes fraudulently, the government passed the Home Valuation Code of Conduct. This legislation establishes a new system for assigning appraisers. There is a central office which assigns and dispatches appraisers, sort of on a lotto system. No longer can the lender use the appraisers who have worked for them in the past. The appraiser is now selected by this central clearing house and assigned to appraise the property. The appraiser may or may not be familiar with the location to which he/she is assigned. The belief that this new system will insure that appraisers are not influenced by lenders or by real estate agents.
The other challenge for appraisers is that there may be very few comparable sales and the appraisal will require the appraiser to make adjustments based on time, and amenities. These adjustments can be rather subjective. Appraisals have never been a science, they have been and still are, some one's opinion of value based on data and knowledge of the market place.
There is another way in which appraisals are shaping the prices of homes. Most lenders have instituted what is called a "desk appraisal". This is where an employee reviews the field appraisers' appraisal report and will either accept it or in more cases than seems reasonable, the "desk appraisal" will reduce the appraised value.
I realize that lenders are being super cautious, but this new system has created extra charges and I am not sure that the final appraisal is truly the market value of a particular property. However, the appraiser's value becomes the determinant for the loan a lender will makae on the property.
I feel certain that it has always been difficult for appraisers to determine the market value of a property in a volatile market. Whether it is the real estate market of 2004-2007 or the current market, the appraiser who is hired by the lender has an obligation to determine a fair market value for a property. The appraiser's determination of value may be different from the standard definition of "fair market value" which is the price a seller will accept from a willing buyer who is ready, willing and able to purchase. Traditionally, the appraiser will use the comparable value approach and compare the subject property to other similar properties that have sold recently.
Because of the government's belief (probably correctly) that many properties were appraised incorrectly and sometimes fraudulently, the government passed the Home Valuation Code of Conduct. This legislation establishes a new system for assigning appraisers. There is a central office which assigns and dispatches appraisers, sort of on a lotto system. No longer can the lender use the appraisers who have worked for them in the past. The appraiser is now selected by this central clearing house and assigned to appraise the property. The appraiser may or may not be familiar with the location to which he/she is assigned. The belief that this new system will insure that appraisers are not influenced by lenders or by real estate agents.
The other challenge for appraisers is that there may be very few comparable sales and the appraisal will require the appraiser to make adjustments based on time, and amenities. These adjustments can be rather subjective. Appraisals have never been a science, they have been and still are, some one's opinion of value based on data and knowledge of the market place.
There is another way in which appraisals are shaping the prices of homes. Most lenders have instituted what is called a "desk appraisal". This is where an employee reviews the field appraisers' appraisal report and will either accept it or in more cases than seems reasonable, the "desk appraisal" will reduce the appraised value.
I realize that lenders are being super cautious, but this new system has created extra charges and I am not sure that the final appraisal is truly the market value of a particular property. However, the appraiser's value becomes the determinant for the loan a lender will makae on the property.
posted by shirley harry at 8:28 AM
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