In today’s market there are serious concerns in the homebuilding and real estate industry about valuations and appraisals. Many groups, from the federal government to major industry associations like the NAHB, are taking a closer look at the appraisal system and the critical role it plays in real estate, housing and economic recovery.
Ten years after Title XI set out to craft rules about appraiser qualifications and independence, the Government Accountability Office (GAO) has found there are still flaws when it comes to appraisal quality and oversight. In its recent report, the GAO states that its Appraisal Subcommittee, tasked with monitoring state compliance with Title XI, has failed to clearly define compliance standards for states and has not been monitoring states closely enough. Even with a ramp-up in monitoring, there are concerns that the subcommittee would lack the clout to enforce regulations.
According to NAHB Chairman Bob Nielsen in Nation’s Building News, “The current system is not working. We must resolve a flawed appraisal process that produces inaccurate assessment of home values because this fosters price instability, puts more families in danger of default or foreclosure, and undermines the housing and economic recoveries.”
The LotNetwork.com Team is specifically concerned by how current market conditions may make simply obtaining an accurate appraisal a challenge:
- The increase in short sales, distressed sales and foreclosures in conjunction with a relatively low volume of “normal” market sales between third parties creates unreliable comparable sales that often seriously skew valuations downward and impact the ability of parties to get an accurate or fair appraisal.
- The lack of adequate comparable sales for appraisals has an obvious impact on valuations for existing and new homes, and the negative effects extend to residential lots and land when their valuation is largely based on the anticipated value of new homes that can be built.
- Having an appraisal erroneously dissolve the perceived value of a real estate asset hurts the industry, the housing market and the economy.
A member of our LotNetwork.com Team has personally seen a residential development property drop in appraised value by more than 75% over a year – in a stable local real estate market – just because a different appraiser was used, who was less familiar with the market, and because distressed sales were used as comparables. Everyone involved, including the lender, knows the appraisal is inaccurate.
What are appraisers and the industry to do?
Perhaps efforts should be made by the industry and regulators to dictate a different methodology for conducting appraisals in markets with few valid market comparables or third-party sales. These are unprecedented times in the industry and we all need to adjust to the challenges. Because appraisals play such a key role in the housing industry and the broader real estate and economic recovery, the appraisal process needs to adjust as well.
The NAHB has been working to improve the appraisal system and has collected resources to help those in the homebuilding industry.