But after receiving appraisals they feel are too high, some lenders have taken to performing desk reviews – appraisals done from a computer. While qualified real estate appraisers are able to perform accurate desk reviews if need be, lenders’ desk review values can be wildly inaccurate. Since there is no on-site inspection, they don’t reflect the condition of a house, they don’t add value for remodels, they’re often lacking information even on room additions, and so forth. Nevertheless, lenders are using desk reviews as justification to reduce appraised values, and sales continue to fall apart.

Fannie Mae has announced that effective September 1, 2010, lenders will no longer be allowed to reduce appraised valuations. Instead, they will be required to contact the appraiser to resolve discrepancies between the appraiser’s value and the desk review value. If the disagreement can’t be resolved on that level, the lender will be required to order a second appraisal.

By: Present Value

Additional reading:

Uniform Residential Appraisal Report

From a Lender’s Perspective

But the spill is also affecting the real estate appraisal market, particularly in Florida. Two of Florida’s property appraisers have asked state lawmakers to allow them to reduce the value of coastal real estate to reflect damage from BP’s oil spill and force BP to make up for lost tax revenue.

Appraisers are elected in Florida, and it’s their job to provide the fairest property values possible to constituents. Chris Jones, one of the elected appraisers, said, “What do I tell the owner of a $1 million house is the value if he can no longer walk on the beach? We want to hold our own citizens harmless and don’t want to put the burden on other taxpayers.” Florida Governor Charlie Crist has been asked to call a special session of the Legislature to authorize governments affected by the spill to revalue property for the current tax year, something that has been done after hurricanes and tornadoes in the past.

The appraisers are seeking permission to reflect damage to property values from the spill in tax bills property owners will receive in November. Under state law, they can’t alter the value assigned to property on January 1 in the middle of the year.

By: Present Value

Be Sure to Use a Reputable Appraiser

Appraisal Review

The Perils of Appraising

The appraiser continued, “It’s important to note that I said ‘some’ in both cases. You can’t say every mortgage company engaged in comp checks any more than you can say every appraiser agreed to the practice. It’s just those few who ruined it for everyone.”

As stated in the previous blog, assigning blame for the crisis does nothing to alleviate it, but it is important to view it from both sides.

By: Present Value

Additional Reading:

Pointing Fingers

HVCC: The Comp Check Killer

Comp Check: The Code Red of Real Estate Appraisal

While everyone is entitled to their opinion, the article cites no specific instances of the alleged fiduciary irresponsibility, nor does it provide any supplementary information to back up the allegations. Without proof, you might as well blame the mortgage crisis on flamingos or leprechauns.

More importantly, blanket statements like this can do a tremendous amount of harm. Taken at face value, it makes all real estate appraisers sound unscrupulous and untrustworthy. And attempting to assign blame does nothing to help the country out of the crisis either.

If anything, the article does underscore the importance of seeking out and using a reputable, licensed, certified real estate appraisal firm. But it does little else.

By: Present Value

Additional Reading:

The Appraiser’s Role

About Present Value

Why Get a Real Estate Appraisal

Industry experts, however, still appear to be concerned about issues surrounding real estate appraisals and the unintended consequences of the implementation of the Home Valuation Code of Conduct (HVCC). As we have discussed in other blog posts, the perceived problem is that appraisers, working for appraisal management companies, are often working outside areas with which they are familiar and may not have access to information about specific markets. Realtors argue that as a result of valuations that sometimes are too low, sales have been delayed and even cancelled.

This Banker & Tradesman article provides some interesting suggestions by realty agents of ways to work with the HVCC changes, including providing appraisers with detailed property comparison information and background materials to help appraisers achieve the most accurate appraisals.

As always, Present Value LLC is both an appraiser and an appraisal management company, which means that it can play the role of the third party required by the HVCC changes and save you the step of having to seek out a separate appraisal management company.

By: Present Value

The income approach generally is used to estimate the value of income-producing properties, including office buildings, hotels, warehouses, apartment buildings, and shopping centers. It is a method of appraising real estate based on the property’s anticipated future income.

The income approach, which is often viewed as the most reliable of the three approaches, is used when reliable financial data is available for recent sales of similar income properties in a given marketplace. The expected annual income of a property is divided by the capitalization rate to determine the market value of a property.

• The capitalization rate is calculated by a property’s net operating income and sales price for the sale of similar properties in a given area or marketplace. If sales of similar income properties in the area can be determined, one can establish a market capitalization rate by averaging the capitalization rate values of area sales.

• To determine the expected annual income of a property, an appraiser first estimates the annual potential gross income for a property, which includes how much rent each unit could generate in the market. The estimates of potential rental rates are generally derived from the current marketplace. The effective gross income for a property is generated by reducing the annual potential gross income by a vacancy allowance amount, which is determined by current market rental conditions for the type of property being analyzed. Additional income is added to the income estimates, including parking fees, laundry fees, and other profit-generating variables. Operating expenses are deducted from the effective gross income to determine the annual net operating income for the property.

It is important to note that when there is insufficient financial data for similar properties in a given market, appraisers may use all three appraisal approaches that we covered over the last three blog posts.

By: Present Value

The Seattle Times published an article that followed one appraiser’s experience of the industry before and after the HVCC changes designed to keep brokers and appraisers from working too closely together went into effect. For this particular appraiser, appraising is a family business and he describes not only his worries for the industry as a whole, but his personal pain as he watches the HVCC changes’ negative effects on the industry he loves.

The article in The Seattle Times briefly mentions the effect of the HVCC changes on consumers, but another article published in the Chicago Tribune goes into a more in-depth exploration of consumers’ worries. This article discusses a man’s experience selling his home in Massachusetts. He had a successful sale, but found that the HVCC rules designed to protect him made the experience more stressful than it had to be.

To read the article in The Seattle Times, click here. The Chicago Tribune’s article can be found here.

By: Present Value  

During the housing boom, appraisers were occasionally under pressure to overlook property defects, which, in turn, contributed to increasing home prices. Ethical appraisers who refused to overlook defects were in danger of losing work and asked for greater enforcement of laws designed to regulate appraising. The HVCC changes were intended to decrease home appraisal conflicts of interest by putting the entire appraisal process in the hands of those most at risk of losing money – the lenders. But the changes designed to solve one problem seem to have created a whole host of other problems. Some real estate agents argue that the changes block home sales and are asking for the changes to be suspended until 2011. Some appraisers feel that the changes, which were meant to help ethical appraisers, actually hurt them by driving business to inexperienced appraisers.

The changes are fairly new and it remains to be seen how they will affect the industry in the long run. To read the full article and learn about the opinions of those affected by the changes, click here. To read a previous post about how these changes affect Present Value, click here.

By: Present Value 

“The new guidelines bar mortgage brokers from ordering appraisals themselves, forcing them to do so through a mortgage lender. Lenders may order appraisals through in-house staff or appraisers hired by outside firms known as appraisal-management companies. But neither may talk to the appraisers about the value of the property they’re evaluating.”

Players in the real estate market, including realtors, homebuilders, mortgage brokers, and some appraisers, argue that the rules have created a number of problems, including the undervaluation of properties and delays in sales closings.

The changes state that rather than going to an appraiser directly, lenders must order a real estate appraisal through a third party, such as an appraisal management company. The new HVCC appraisal rules were put in place to prevent conflict of interests that led appraisers to inflate the value of a property, which have been partially seen as responsible for the current crisis in the real estate market. As part of a settlement between New York Attorney General Andrew Cuomo and Fannie Mae and Freddie Mac, the policy was intended to eliminate the pressure appraisers might be under by lenders and brokers to overinflate property valuations to increase profits.

Organizations like The National Association of Mortgage Brokers and The Appraisal Institute have come out against all or portions of the new regulations.

You can find Present Value’s other blog posts on HVCC here.

By: Present Value

The new edition is expected to be available in October. However, ASB has issued a Summary of Action that will enable appraisers to become familiar with the changes that are part of the 2010-2011 edition. The changes will take effect on January 1, 2010.

The majority of revisions were made to the ETHICS RULE, the COMPETENCY RULE and STANDARD 3: Appraisal Review, Development and Reporting.

Two of the most significant changes are as follows:

• “A requirement was added to the Conduct section of the ETHICS RULE, stating that, prior to accepting an assignment (and if discovered at any time during the assignment), an appraiser must disclose to the client and in the report certification any services regarding the subject property performed by the appraiser within the prior three years, as an appraiser or in any other capacity.”

• “The appraiser’s obligation to allow a client access to his or her workfile when providing a Restricted Use Appraisal Report was removed.”

Present Value is a certified appraisal company and provides USPAP-compliant appraisal reports.

By: Present Value