Suitable Comparable Sales
It has gradually become more difficult for all of us in the industry to identify suitable comparable sales close enough to the current market valuations. Moreover, some changes to the appraisal process have also resulted in recent difficulties, especially with the use of out-of-area appraisers who lack local expertise.
Many of the problems are due to government banking regulations that require using independent appraisal management companies instead of direct assignment of appraisers as had been the norm for many decades.
Appraisal Challenges Are More Common Than You’d Think
To make matters worse, some conservative mortgage lenders have periodically challenged the appraiser’s evaluation. To illustrate the magnitude of these issues, we personally have experienced significant appraisal challenges in 11 of our own 34 transactions this year. In reviewing those files carefully, we have noted that in most cases the appraiser was not sufficiently familiar with our area or local market conditions.
Some appraisers include short sales in their comparable property section and do not take into consideration that a typical short sale may be easily discounted by 10% to 18% from the actual current value.
Also, appraisers often will not take into consideration instances of multiple offers where other buyers are also willing to pay significantly more than the appraiser’s opinion of current value.
Appraisers have some problems due to the new standards imposed by banking regulations. Three comparable home sales used to be required for most appraisals. Today some appraisers must come up with 6 or more comparable sales, which almost forces them to use inappropriate properties as comparables.
Another challenge they have to deal with is that the current standards specify a size and distance range for the comparable property to meet, which frequently is not feasible.
Help Your Appraiser Expedite
In most cases, I have found that carefully preparing a comprehensive and detailed package to assist the appraiser can be most helpful. We are usually able to identify enough homes that have sold which will meet the distance and price range criteria to enable the appraisal to support the contract price.
Of course, this requires our being able to effectively communicate with the appraiser personally. For example, earlier this year we had a local transaction where the initial appraisal came in 11% below the contract price. There were several reasons why the buyer was paying a fair price, including several upgrades and a larger yard than the nearby comparable sales used by the appraisal.
After lengthy explanations and sharing of details of that specific area, the appraiser eventually was able to justify the contract price using our current information that met appraisal standards.
The Bottom Line
It is important for sellers and buyers to know that if a real estate appraisal problem comes up, they do have a right to contact the lender about their concerns and they may request a second appraisal be ordered as soon as possible. With the guidance of an experienced local expert agent, many of these issues and challenges will be easier to resolve when they do arise.