While the U.S. real estate market is showing signs of improvement, one of the biggest obstacles standing in the way of furthering recovery is bad appraisals, according to a survey released Thursday by the National Association of Realtors.
While NAR notes that most appraisers are professional and return fair valuations, there is a trend toward appraisals falling behind market conditions. Also, changes in recent years like valuators who aren’t appraising homes in their area and don’t have local knowledge of the market or access to all data, bad comparisons, and excessive lender demands, are all contributors to the problem.
Of the Realtors surveyed in September, 11 percent said a contract had to be cancelled because the appraised value came in below the agreed-upon price by buyer and seller. Another 9 percent said a contract was delayed due to appraisal issues, and 15 percent said their contract had to be renegotiated because the valuation came in low. In addition, the turn-around time by appraisers and lenders is delaying closings.
“Though the real estate recovery is taking place, the combined issues of stringent mortgage lending requirements and appraisal frictions are hampering otherwise qualified buyers from purchasing a home in a timely fashion, and in some cases are preventing them from buying at all,” said NAR chief economist Lawrence Yun.
Another component of the problem is that appraisers are comparing foreclosures, short sales and run-down properties with normal-condition homes. NAR says a normal foreclosure is sold for about 20 percent less than a similar home in good condition. A short sale generally sees about a 15 percent cut. Some appraisers are required to use 8-10 properties as comparable properties, which makes it extremely likely that foreclosed or distressed properties will fall into the comparable sales.
“In the meantime, buyers, sellers and real estate agents need to be aware that there are problems with some real estate appraisals, but also be aware of their rights to communicate with appraisers and lenders about errors or concerns with individual valuations,” said NAR President Moe Veissi, broker-owner of Veissi & Associates Inc., in Miami. “In some cases, a second appraisal may be justified.”