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Could Appraisals Be In for a Change?

by Houston Agent

The Appraisal Institute has released two different takes on the appraisal situation in as many weeks.

The Appraisal Institute (AI) ruffled many feathers last week by taking a “Don’t Shoot the Messenger” stance in regards to recent controversies in home valuations, but recent reports suggest that the institute may be amending its stance on how its members operate.

Appraisals are among the more controversial elements of real estate for housing professionals, and not just for Realtors. In addition to the increased number of contract failures – 33 percent of NAR members reported such occurrences in December – builders, as well, have heaped scorn on the appraisal method, with one out of three reporting a lost sales contract in the last six months because of low appraisals.

Distressed properties, and the low values they carry with them, are the prime reason for underwhelming appraisals, as appraisers may utilize the cheaply-priced properties as “comparables” when surveying a home’s value. In its previous statement, the AI’s President, Sara W. Stephens, had called such criticism “nonsense,” attributing homeowner and builder frustrations more to an fantastical view on home values than flaws with the appraisal method.

“The fact is that appraisers are undertaking the same thorough research and thoughtful analysis that they always have in order to continue producing reliable, credible opinions of value,” Stephens said. “Appraisers don’t set the real estate market; they reflect what’s happening in the market. Think of the appraiser as a mirror, reflecting the market. Obviously, the market is depressed – home prices have fallen far below the values of a few years ago. Many homes simply aren’t worth what their owners think they are.”

A National Mortgage News story from yesterday, though, offers a different take on appraisals from the same institute. Now, the AI has released a new set of guidelines that advise its nearly 23,000 members on how to handle distressed sales when assessing a property’s value.

Quoting the new guidelines, the story stated, “According to AI’s Guide Note 11, ‘Comparable Selection in a Declining Market,’ while appraisers ‘cannot categorically discount foreclosures and short sales as potential comps,’ they don’t necessarily have to use them, either.”

The guideline continues, “Due to differences between their conditions of sale and the conditions outlined in the market value definition,” distressed sales “might not be usable.”

Overall, the AI advises appraisers to use their “experience and education,” as National Mortgage News puts it, when assessing a property and making decisions on how to use distressed sales, reminding them to utilize neighboring geographical regions if current sales are not immediately available.

Of course, these are just advisory measures; the AI is not compelling its members to use or ignore distressed sales, so the true impact of these guidelines is unknown.

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