- The Washington Times - Friday, August 28, 2009

Q.We read with great interest your column a couple of weeks ago about needing skilled appraisers. It was exactly like our recent experience. We have been in our home for 25 years and put it on the market.

The house is completely renovated and in great shape. During the first weekend, we received two full-price offers. We accepted the offer from the folks who had already been approved for a mortgage subject to an appraisal.

When the appraiser inspected the property, he spent almost an hour taking measurements and photographs. We didn’t think there would be any problem. Needless to say, we were shocked when we heard a week later from the agent that the appraisal came in at $190,000, which was $35,000 under the contract price of $225,000.

We obtained a copy of the appraisal report and found out that five comparables were used. Four of the comparables were foreclosures and short sales and the fifth was an estate sale. The buyers, after hearing about the report, wanted to proceed with the purchase at the appraised value. We refused, canceled the contract and took the house off the market.

It seems to me that the appraiser inaccurately valued our home because every comparable he used was a distressed sale. Do you have any suggestions as to how we should proceed?

A. I’ve received many e-mails similar to yours over the last couple of months. It’s pretty clear that the new federal rules governing residential appraisals is dampening, or even killing, any real estate recovery.

In a nutshell, the new law, dubbed the Home Value Code of Conduct (HVCC), prohibits mortgage lenders and brokers from ordering appraisals. All appraisals must be ordered through an independent portal system in order to avoid any pressure the lender may put upon an appraiser to reach a particular value.

While there have surely been some instances where an appraiser may have been pressured, I just don’t believe such behavior had any major contribution to the mortgage meltdown. Appraisal reports use public data and comparable sales to determine a reasonable value of a property. The value must be supported by this data. Underwriters are trained to scrutinize the reports and determine whether the appraiser made value adjustments that were unreasonable.

The HVCC is, in my opinion, making appraisers undervalue properties, which is killing deals. Appraisers who are unfamiliar with a particular area are creating these reports. Moreover, the HVCC has made appraisers uneasy and defensive, causing them to be overly conservative.

I spoke with an appraiser I have known for years about the use of distressed sales as comparables. Indeed, it seems to me that using five comparables that were all sold through a foreclosure, short sale or estate sale would be unfair. Here’s what my appraiser said:

Using foreclosures and short sales as comparables is not preferred, but they cannot be ignored if there are no other comparables available. If there are no legitimate sales available, the distressed sales should be used. The appraiser would make a value adjustment if he thinks that the price of the distressed sale did not reflect an accurate value.

It might be a good idea to find out if there were any other legitimate sales in your neighborhood that your appraiser overlooked. Also, you should check to see if the appraiser made any value adjustments for the comparables used.

It seems to me that the best indication of value is what a buyer is willing to pay. Since you had two separate parties willing to buy your house for $225,000, the appraiser should have questioned his numbers when he concluded the house is only worth $190,000.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail at henrysavage@pmcmortgage.com.

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