Real Estate Analysis and Commentary in Hampton Roads

Providing Credible Appraisals in a Declining Market
February 19th, 2010 8:05 AM

MAKING SENSE OF THE NONSENSE

Providing Credible Appraisals in a Declining Market

Appraisers have been accused of prolonging the nation’s real estate downturn by developing

value opinions that are below proposed sale prices. Specifically, they’ve been criticized for

including foreclosure sales and so-called short sales among the comparable sales used in the

valuation process. But foreclosures and short sales can provide important information for

appraisers, who develop valuations based on market data and market forces. Here are some of

the basics:

Appraisers exercise sound judgment when gathering and analyzing information.

? The appraiser must consider all relevant transactions that have occurred in the market area and

then determine which of those transactions should be used in the analysis to arrive at a credible

value opinion for the subject property.

? The best comparable sales (“comps”) are those that are most similar to the subject property in

terms of location, size, condition and other features that buyers and sellers believe make a

difference to price.

? A property or a property feature (such as a kitchen remodel) might cost X, but that doesn’t mean

it’s worth X or adds X to the value. Especially in distressed markets, cost may be higher than

value.

Appraisers make adjustments based on market research and analysis.

? The appraiser must analyze each comp to ascertain what adjustments are needed.

? After selecting the best comps, the appraiser adjusts for material differences between each comp

and the subject property. Factors that may require such adjustments include atypical buyer/seller

motivations and sales concessions.

Appraisers adhere to basic principles when analyzing distressed sales.

? An appraiser should not ignore foreclosure sales and short sales if consideration of such sales

is necessary to develop a credible value opinion.

? As is always the case in selecting sales to use as comparables, the appraiser must investigate

the circumstances of each transaction … including whether atypical motivations or sales

concessions were involved, or whether the property condition was compromised.

? A short sale or a sale of a property that occurred prior to a foreclosure might have involved

atypical seller motivations (e.g., a highly motivated seller) and so might not be an ideal comp.

? A sale of a bank-owned property might have involved typical motivations, so the fact that it was a

foreclosed property would not render it ineligible as a comp.

? Some foreclosed properties are in inferior condition. An adjustment for condition may be needed.

Appraisers abide by professional standards.

? The Uniform Standard of Professional Appraisal Practice’s (USPAP) Competency Rule says

geographic and market area competency are needed for an appraiser to complete an

assignment.

? An appraiser must have sufficient understanding of the local market conditions – including

supply and demand factors relating to the specific property type – in order to make reasonable

judgments about what factors influence value.

The use of qualified, experienced appraisers – such as those carrying the MAI, SRA or SRPA

designation from the Appraisal Institute – helps ensure the highest quality appraisals.

For further information, see The Appraisal of Real Estate, 13th edition, pages 168-170, 180, 301-302, 329-330 and 333-336.

Additional information can be found on pages 137, 141-142, 147-157, 173-188, 297-314 and 315-343.


Posted in:General
Posted by Woody Fincham, SRA on February 19th, 2010 8:05 AMPost a Comment

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