Appraisals Are Lower-More Lender Scrutiny

Appraisals Are Reflecting Lower Values
in the Market-And Being Scrutinized More
Closely

Over the past year, property values have stopped their upward
trend, stabilized in some areas, and have experienced a drop
in values in other areas.

It's the appraiser's assignment to ascertain a fair market value
for the subject property. They need to draw upon available data
from closed escrows and current homes listed for sale to help
them reach their conclusions.

The governing idea at work is that if a willing buyer has the
choice to buy any of the properties available and make a comp-
arison as to features and amenities, how much will they pay
for the subject property.

When the appraiser receives their assignment, they need to
perform an inspection of the property. In fact, the final valuation
they give is based on the property condition as of the date of
inspection.

When a client meets the appraiser at the property, they are
often surprised at how little time the appraiser spends at the
home. An experienced appraiser can take the measurements,
make note of the amenities, features and upgrades in the
home and finalize the room count very quickly.

The biggest part of the appraiser's job is to find homes that
have closed escrow or that are currently on the market that
are in close proximity to the subject property and that are
the most similar to the home to be appraised.

The appraiser will then do an analysis of those homes that
they have selected as being the best comparable sales or
"comps", and make dollar adjustments to make the comp
more like the subject property. For example, if the comp
has a superior view to the subject, the appraiser will subtract
their estimate of the value of the difference of that view from
the comp's value.

After making these kind of comparisons on a long list of
features of the homes, the appraiser arrives at an adjusted
value of the comp. They will perform this type of analysis on
3-6 closed sales and current listings to arrived at a reconciled
value of the subject property. It is not an arithmetic average,
but rather a reasoned sense of the value of the subject property
from the conclusions drawn from the analysis of the comparable
properties.

In today's market the closed sales, which may be up to about
6 months old, probably would lead to higher valuations. But,
the appraiser has to consider properties that are currently
listed for sale, and these comps are tending to lead to lower
property valuations.

Even after we arrange for an independent appraiser to perform
the appraisal, the lender is very interested in making sure that
the best possible data has been used to determine value, and
that the dollar adjustments made to come to the final conclusion
are reasonable and valid.

In the event the borrower doesn't make the payments as required,
the lender's final security for making sure that they can recover
the amount of the loan is their ability to force the sale of the
property. If the property value has been inflated, and the lender
does not perform due diligence to make sure that the valuation
is solid, they risk over-lending on a property and not being able
to protect their interests.

Because there has been a reaction from the lenders to tighten
their approval process and not be as lenient as they were 6-12
months ago, we are seeing that there is much more scrutiny
from the lenders in reviewing the appraisals.

It's important to understand that while these new guideline
changes are taking place, and appraisals are getting a closer
look, that the loan request now has more quality control checks
than it did in the past.

At times, this can create last-minute difficulties if a serious
difference of opinion develops between the appraiser and the
person reviewing their work. It may result in delays while the
differences are worked out, or a lesser loan amount being
approved, or the inability to work with that lender on that
property at that time.

I always try to ascertain the underwriting patterns of the lenders
with whom I place loan requests, and if there are changes
occurring that will affect my client. I always do my best to help
the client have a reasonable sense of what to expect on their
transaction.