Not long ago they were the punching bags of American real estate, accused of rank incompetence, wrecking home sales and failing to pick up on signs of the housing turnaround.
That was then. Today appraisers are suddenly getting much more favorable reviews.
But wait a minute: Have appraisals actually improved in accuracy in any measurable way over the past several years? Nobody really knows. There are no nationally published statistical audits that gauge appraisal accuracy. However, one major industry group regularly surveys its members’ sentiments on appraisals, and lately things have been looking up.
When the National Association of Realtors conducted polls sampling its million-plus members in the spring and summer of 2010, more than 40 percent of respondents reported having problems with appraisals.
Within the realty field, criticism of appraisers was rampant and scathing. Appraisers allegedly too often:• Used rock-bottom priced foreclosures and short sales as “comparables” for valuing houses where there was no financial distress. Those low appraisals blew up perfectly good sales or forced angry sellers to renegotiate prices with buyers.
• Traveled long distances beyond their areas of geographic competence, and inevitably were out of touch with local conditions.
• Paid scant attention to evidence that local home prices were on the increase, such as pending contracts, numbers of properties that sold for above list or that experienced multiple bids.
Worst of all, critics charged, poorly trained appraisers who had flooded into the industry during the boom years now were getting the bulk of the valuation assignments from appraisal management companies — primarily because they would work for cut-rate fees.
In the latest monthly survey, NAR pollsters found that just 24 percent of members reported having significant issues with appraisal results. Granted, that’s still nearly a quarter of all agents in the sample. But it’s down significantly from where it was a few years ago.
What to make of this? Have there been changes in the appraisal industry itself that might explain the better reviews out of former critics? Appraisers I interviewed in different parts of the country agree on one key fact: The dramatic decrease in foreclosures and short sales during the past 18 months has cut the number of houses with depressed prices that appraisers can choose — or justify — as comparables for any given sale.
In places such as Las Vegas, Phoenix and California’s Central Valley, where distressed properties once accounted for large percentages of all sales in the wake of the housing bust, today they are far fewer. Gary Crabtree, an appraiser in Bakersfield, Calif., says such sales now “only comprise about an 11 percent share” of transactions. As a result, “there are plenty of arm’s-length” sales for appraisers to use as “comps.”
Pat Turner, an appraiser in the Richmond, Virginia, area, said the sheer number of appraisers has plunged in recent years “and a lot of the less-competent, poorly trained [appraisers] have left” the business in the wake of the recession. One industry group, the Appraisal Institute, estimated the number of appraisers is declining by 3 percent a year. The steady shrinkage of the industry, Turner believes, could be contributing to perceptions that appraisals are more accurate today.
Gary Kassan, a Los Angeles-area realty agent with Pinnacle Estate Properties, disagrees. “My personal belief is not so much that the incompetent appraisers are gone,” he said in an email, “but rather that they have better comps to work with.” With prices on the rise, “they have more latitude and are more comfortable stretching the comps to bring the appraisal in at sales price.”
Whoa. Stretching the comps, eh? Appraisers insist that’s not the way it works — they’ve got to justify every conclusion in their valuation reports and are subject to reviews by lenders and underwriters.
But Jayne Allen, an appraiser in Charlottesville, Virginia, says realty agents’ views on what constitutes a “good” valuation and what’s a deal-killer are keyed to whether the appraisal supports the contract price.
“At this point,” she said, “I do not believe that … appraisers [are] providing ‘better' valuations.” Rather it’s that more appraisals are validating the number on the contract, thanks in large part to the sharp decline in distressed sales sitting on the market as potential comparables.
Bottom line for you as a seller or buyer: Though there are no guarantees that an appraiser will confirm the price on your sales contract, the odds are better this spring that your deal won’t fall apart because the appraiser came in with a low-ball valuation tied to distressed comps.
Kenneth Harney is executive director of the National Real Estate Development Center.