Florida Realtor August 2013 : Page 16
VALuE VExES The Value of a Goo Priceles are low appraisals hurting your business? we give you the facts on today’s appraisal market. by ricHard westlund N ot long ago, Dennis basile , broker-owner of D. basile Real Estate LLc in Melbourne, ran into a problem with a low appraisal on a $500,000 commercial property. “I ana-lyzed the data and identifed an error,” says Basile, who has 35 years of appraisal experience. “The buyer gave that new information to his lender, and the ap-praiser agreed with my analysis, so we were able to complete the transaction.” With rising home prices in many Florida markets, real estate profes-sionals throughout the state are recog-nizing the importance of an accurate appraisal that refects current market values. “Based on the calls I’ve been getting, we’re seeing a re-emergence of a problem with appraisals’ not sup-porting the purchase price negotiated between buyer and seller,” says vet-eran appraiser Francois (Frank) K. 16 FLoRIDA REALToR August 2013 gregoire of gregoire & gregoire Inc. in St. Petersburg. The problem with appraisals In a late-2012 survey by the National As-sociation of Realtors®, 11 percent of sales professionals said a contract had been can-celled because an appraised value came in below the negotiated price, 9 percent reported a contract had been delayed and 15 percent said a contract had been rene-gotiated to a lower sales price as the result of a low valuation. These were among the problems reported in the survey: • Using lower-priced foreclosures and short sales as comparables to market-priced homes; • Not adjusting values to refect chang-ing market conditions, such as rising prices, the presence of multibidding and low inventory; • Using inexperienced or out-of-town appraisers who were not familiar with local market conditions; • Long turnaround times by both ap-praisers and lenders, delaying closings. Of course, the residential or commer-cial appraiser may also be right since a value below the contract price can be an accurate refection of the local market. But regardless of the result, it’s important for real estate professionals to remember that the appraiser’s ultimate customer is the lender fnancing the purchase—not the buyer or seller. After all, an infated sales price could expose the lender to a potential loss if the buyer were to default on the loan. “As a state-certifed appraiser, I try to stay totally logical and just look at the facts,” says Adam b. Preuss , president of Adam Preuss Appraisal Services Inc. in Se-bastian and chair of the Florida Realtors
The Value Of A Good Appraisal: Priceless!
Are low appraisals hurting your business? We give you the facts on today’s appraisal market.<br /> <br /> Not long ago, Dennis basile, broker-owner of D. basile Real Estate Llc in Melbourne, ran into a problem with a low appraisal on a $500,000 commercial property. “I analyzed the data and identifed an error,” says Basile, who has 35 years of appraisal experience. “The buyer gave that new information to his lender, and the appraiser agreed with my analysis, so we were able to complete the transaction.” <br /> <br /> With rising home prices in many Florida markets, real estate professionals throughout the state are recognizing the importance of an accurate appraisal that refects current market values. “Based on the calls I’ve been getting, we’re seeing a re-emergence of a problem with appraisals’ not supporting the purchase price negotiated between buyer and seller,” says veteran appraiser Francois (Frank) K. Gregoire of gregoire & gregoire Inc. in St. Petersburg.<br /> <br /> The problem with appraisals <br /> <br /> In a late-2012 survey by the National Association of Realtors®, 11 percent of sales professionals said a contract had been cancelled because an appraised value came in below the negotiated price, 9 percent reported a contract had been delayed and 15 percent said a contract had been renegotiated to a lower sales price as the result of a low valuation. These were among the problems reported in the survey:<br /> <br /> • Using lower-priced foreclosures and short sales as comparables to marketpriced homes;<br /> <br /> • Not adjusting values to refect changing market conditions, such as rising prices, the presence of multibidding and low inventory;<br /> <br /> • Using inexperienced or out-of-town appraisers who were not familiar with local market conditions;<br /> <br /> • Long turnaround times by both appraisers and lenders, delaying closings.<br /> <br /> Of course, the residential or commercial appraiser may also be right since a value below the contract price can be an accurate refection of the local market.But regardless of the result, it’s important for real estate professionals to remember that the appraiser’s ultimate customer is the lender fnancing the purchase—not the buyer or seller. After all, an infated sales price could expose the lender to a potential loss if the buyer were to default on the loan.<br /> <br /> “As a state-certifed appraiser, I try to stay totally logical and just look at the facts,” says Adam b. Preuss, president of Adam Preuss Appraisal Services Inc. in Sebastian and chair of the Florida Realtors Appraisal Council. He says that appraisers get no beneft from coming in with a lower value. “If we hit the sales price, we’re seen as the good guys,” he says. “If we are below that price, then we have to do extra work to be sure we’re not missing something, and to substantiate and defend that lower value.” <br /> <br /> An ounce of prevention <br /> <br /> Since appraisers draw their conclusions based on the facts about a property and a local market, real estate professionals can be valued sources of information.“As soon as a property is under contract, start gathering information to support the sales price,” says Gregoire. “Be sure to include information that may not be readily available from other sources, such as other ofers and how quickly the property went under contract.”joni L. herndon, president of Real Property Analysts/gulf coast in Tampa and chair of the Florida Real Estate Appraisal Board, recommends that sales associates meet the appraiser at the property to provide background information and answer questions. “It’s a big misconception to think that the appraiser can’t talk to the real estate agent,” she says. A real estate professional can point out special features of the home or present recent comparable sales, but obviously can’t coerce or pressure the appraiser toward a certain value.<br /> <br /> Herndon adds that the seller and the buyer can also be at the property and talk to the appraiser. “The more the merrier,” she says. “You can ask questions about the appraisal process and what the next steps might be.” <br /> <br /> That proactive approach works, says Gregoire, pointing to his recent appraisal of a home in the Sunset Beach neighborhood of St. Petersburg. “The property had been on the market for just three days before the seller accepted an ofer above the listing price,” he says. “The agent met me at the home and gave me three additional ofers that were also above the listed price. As a result, I had documentation in my fle that showed strong demand, and that gave me more comfort in coming up with a value at the contract price.” <br /> <br /> Challenging an appraisal <br /> <br /> Providing the appraiser with information early in the process is important, because it can be difcult to challenge a completed appraisal. “Once [appraisers have] signed on the dotted line, it can be hard to get them to reconsider the value,” says gina K. Rascati, president of Residential Appraisal Specialists in Wellington.<br /> <br /> First, the appraiser has to admit that there was a possible mistake in determining the value. Then, he or she has to spend more time reviewing the data and reassessing the original fnding.<br /> <br /> Therefore, it’s important to stick to the facts, rather than getting emotional when challenging an appraisal.“Rather than taking a confrontational approach, [an agent] should view it as trying to help the appraiser,” says Gregoire.<br /> <br /> “Remember that you’re not trying to sell the house to the appraiser.” When a value comes in too low, don’t go to the lender and say, “I got a bad appraisal,” adds Basile, noting that a low value doesn’t necessarily mean a bad appraisal. “Instead, start looking at the technical side, and tell the appraiser that you’ve found some information he [perhaps] didn’t consider. Otherwise, you have no basis to change his mind.” <br /> <br /> Gregoire recommends that real estate brokers and agents shift their approach from challenging an appraisal to assisting the appraiser. “A challenge tends to result in defensive moves by the lender, the appraisal management company (AMC) and the appraiser,” he says, adding that challenging the appraiser’s opinions and conclusions will likely result in resistance and could run afoul of appraiser independence rules and regulations.<br /> <br /> Real estate professionals should take the following steps to maximize their chance of success:<br /> <br /> • Contact the lender or AMC with a written request for the appraiser to reconsider his or her opinion.<br /> <br /> • In that request, ask the appraiser to take the following steps:<br /> <br /> 1. Consider additional, appropriate property information, including the consideration of additional comparable properties to make or support an appraisal.For example, the agent may discover relevant features or components of the property that were not reported but could have an efect on value. An agent might also provide additional comparable sales for consideration or demonstrate that there was an omission in the description or analysis of the comparable sales used in the appraisal report.<br /> <br /> 2. Provide further detail, substantiation or explanation for the appraiser’s value conclusion. In this case, the agent is asking for more information, not necessarily a reconsideration.<br /> <br /> 3. Correct errors in the appraisal report.“The most common error made these days is an inaccurate description of market conditions, the relationship of supply to demand and the direction of prices and values,” says Gregoire. An agent could use paired sales, public data sources and trend analysis, along with tools such as Realtors Property Resource (RPR) to demonstrate (with facts and logic) that prices and values are trending in a positive direction, says Gregoire.<br /> <br /> • Avoid making an emotional appeal.<br /> <br /> “Appraisers deal with facts and logic, not emotion,” says Gregoire. “Emotion does not create value. Value is created by demand, scarcity, utility and transferability.” <br /> <br /> Basile adds that the same process applies in reverse when the appraised value on a short sale comes out higher than the contract price. He cited a recent transaction where the seller had listed a residential property at $224,000, but accepted the highest ofer, $205,000. After Basile submitted that ofer, the lender said $265,000 was the right value, based on a broker price opinion (BPO).<br /> <br /> After reviewing the data, Basile saw that the BPO refected an average of four recent sales, including one waterfront property at $425,000 and three others in the low $200,000s. After Basile wrote the lender a fve-page letter explaining why $265,000 did not refect the market value of the short-sale property, the buyer, the seller and the bank fnally agreed on a compromise price.<br /> <br /> A more formal procedure?<br /> <br /> Looking to the future, Gregoire says, discussions are under way on the national level to establish a formal procedure for evaluating an appraisal and requesting a reconsideration of value. “If we could come up with some standards, everyone would beneft,” adds Gregoire, who is a member of NAR’s Real Property Valuation Committee. “A formal process would also help to protect the appraiser’s credibility with the client.” <br /> <br /> Meanwhile, Gregoire advises Florida sales associates and brokers to maintain good relationships with their local appraisers. “Be sure to respond quickly when appraisers call for additional details on a transaction,” he adds.<br /> <br /> The Role of Appraisal management companies<br /> <br /> Many Florida lenders use an appraisal management company (AMC) to coordinate the work of independent appraisers.In that regard, an AMC serves as a bufer, reducing the risk of unethical collusion between the lender and appraiser.<br /> <br /> “AMCs provide a service for out-of-state lenders or those whose lending covers wide geographic areas,” says Frank gregoire.“A lender who makes commercial loans on apartment properties or gas stations, for instance, may need to turn to an AMC to identify the right appraiser for a particular assignment.” However, to make a proft for their services, AMCs must raise the total fee paid by the consumer or reduce the fees paid to individual appraisers, adds gina Rascati. “When you insert a middleman, the fees usually go up, and buyers and sellers may not get better service,” she says.<br /> <br /> Gregoire adds that some AMCs focus on how cheaply and how quickly the appraiser will complete the assignment. “That seems to be a common motivation in assigning appraisals for mortgage loans,” he says. “A short deadline may not allow time for the appraiser to do the necessary market research and analysis, particularly if there has been recent movement in the local market.” <br /> <br /> Last fall, the National Association of Realtors® (NAR) expressed concern that AMCs, as well as lenders, were putting undue pressures on appraisers to complete their assignments in an unacceptably short timeframe or to complete a scope of work that was not justifed by the fee ofered.<br /> <br /> Former NAR President moe Veissi, broker-owner of Veissi & Associates Inc. in Miami, says that some appraisal practices lack common sense. “Our long-standing policy is that all appraisals should be done by licensed or certifed professionals with local expertise, which also is what Fannie Mae and Freddie Mac recommend, but clearly this isn’t practiced universally,” he says.<br /> <br /> As a “hometown lender” in South Florida, claudine claus, president and CEO, home Financing center, Coral Gables, says her company hires appraisers directly, rather than through a management company, and seeks out feedback and recommendations from brokers and agents. “If there’s an issue with value, appraisers are open to conversations with other professionals,” she says. “At the end of the day, you want to deal with a lender and an appraiser who know the local market.”