The Washington Post reported a timely article  Appraisers Blamed for Killing Market Recovery.  Though brief and simple, this article is one of the most real world and correctly reported stories of the year.  In the real world of real estate, appraisers hold the entire business in the palm of their hands.   And as this article suggests, some (not all, of course) can wreck havoc with transactions for a myriad of reasons.   

It boils down to two key roles that appraisers play.   The first key role is when a bank orders an appraisal to evaluate a short sale offer.  At the heart of any short sale transaction, the bank orders a property evaluation to determine if the offer falls within their approval guidelines.   The second key role is when an appraiser is hired to appraise a property for a new buyer who is getting a loan to purchase the home.  A new law has slowed this process to a crawl as loan originators can no longer communicate directly with appraisers.  Now, all appraisals must be ordered through a third party company to create separation between the mortgage originator and the appraiser.  This is certainly not the appraisers fault, nor the mortgage broker’s fault, but it is what it is.

Let’s now take a deeper look into these two key roles and see how appraisers are being blamed for killing short sale deals and subsequently preventing the market from rebounding (since stopping short sale deals from coming to a successful completion is a surefire way to prevent a real estate market recovery…more than 25% of all transactions in America involve a short sale right now.) 

So back to key role #1…when a bank orders an appraisal to evaluate a short sale offer.  Appraisers typically only incorporate closed sales to determine the value of the property.  Although appraisers have the flexibility to include up to 2 active or pending comparables, the foundation of an appraisal is a closed sales comparable.  But what if we are in a declining market where home prices are decreasing month after month, as we are in right now?   It means that the closed sales are HIGHER than the current houses up for sale on the market.  Appraisers can make adjustments for this, but we are seeing where many don’t.  Do you see the massive issue taking shape here?  Some appraisers are valuing the property for far more than what the house will sell for because they are not adjusting for the active houses that are listed on the market for far less than the closed sales prices. 

For example, one of our students is working a Countrywide short sale deal and the amount owed is $1.3M.  The property could possibly bring $1M-$1.1M on a good day in this current market.  Countrywide sent out an appraiser and the appraiser assessed the property at $1.24M.  Why?  Because he used closed sales comparables and didn’t take into account that prices on luxury homes in that area had dropped precipitiously.

How did you overcome this?  As part of our coaching program, we evaluated all the variables and factors of his particular deal and determined for this specific example, to ask Countrywide to  order a BPO (Broker’s Price Opinion).  A BPO incorporates both closed and active sales comparables and is far more accurate in a declining market than an appraisal.  In this case, the BPO came in a $1.1M.  Much more accurate.  So that is the first way appraisals are being blamed for killing short sales.  I have many appraiser friends, so I am not picking on all appraisers.  But this example clearly demonstrates that an issue exists in our industry.

Now onto key role # 2…when the new buyer is ordering an appraisal as part of the process of getting a new loan to purchase the home.  Although this pertains to all home sellers in America, not just me and my students doing short sales, Charles McMillan, 2009 President of the National Association of Realtors just released an email to all NAR members addressing this issue.  Not only are appraisals taking a very long time to complete due to the middle man law that was enacted, but it seems now, real estate agents across the country are having major problems with appraisers UNDER-appraising properties when someone is getting a new loan.  My students are running into the same issue.  It seems some appraisers have become very timid when appraising properties that support a new home purchase and therefore, they come in with a value that is very low.  This hurts the homeowners who are trying to sell because they have to drop their agreed upon sales price in order to sell.  And keep in mind, that the only houses that are selling are the lowest priced deals.  It’s a double whammy!

How to overcome this issue?  The simple way is to meet the appraiser at the property and show him/her the most accurate comps.   But that is not a silver buller because each situation is different and some appraisers will be incredibly offended that you are telling them how to do their job.  Our coaching staff reviews each student’s deal individually to determine how to handle this challenge individually.

As our industry changes, you have to adjust with it.  The way we adjust quickly is that we have hundreds and hundreds of active short sale students doing thousands of deals all at once.  This community of people simultaneously finds and solves short sale problems and then this information is distributed to the community immediately.  It takes a village.