Mortgage funding has been extremely tight since the housing crisis, with lenders requiring top-notch credit and stellar down payments. And while strict credit standards do remain an obstacle for many borrowers, the National Association of Realtors says that a new problem is also putting the kibosh on plenty of loans – inaccurate home appraisals.
After potential buyers have their offer accepted, they must wait for an independent appraiser to go through and value the house. Because there are so many distressed properties on the market though, the NAR says that some appraisers are using these foreclosures and short sales as comparables to other traditional sales. This tends to bring down the value of the traditional sale homes and the banks deny mortgage financing.
A September NAR survey found that 11 percent of Realtors saw a home purchase contract cancelled because an appraisal came in lower than the offered price. Another 9 percent saw a contract delayed for this reason and 15 percent said they had contracts revised to lower sales price because of low appraisals.
Part of the problem is that foreclosed properties should not be worth the same as traditional sales. Foreclosed homes are not usually well-cared for and are being priced low to move them quickly. Traditional sale homes in good condition typically sell for an average of 20 percent higher than foreclosed ones, according to NAR data.
The NAR believes that some appraisers are not being properly trained. Another issue is lenders hiring out-of-area realtors with little knowledge of the local market. There may also be pressure on some appraisers by their management companies or by lenders to meet ‘unrealistic requirements’ that lead to lower appraisals.
“Our long-standing policy is that all appraisals should be done by licensed or certified professionals with local expertise, which also is what Fannie Mae and Freddie Mac recommend,” said NAR President Moe Veissi in an article, “but clearly this isn’t practiced universally.”
As the number of distressed homes on the market dwindles, the NAR hopes the appraisal issues will also fade away. Last year, distressed properties made up one-third of all sales, and in the past few months they have been averaging only about 25 percent. The NAR predicts that by 2013, foreclosures and short sales will only make up about 10 to 15 percent of the market.