In a hot housing market, gap between purchase price and appraiser condition ratings causes headaches

Historical data may be less apparent as market accelerates

Last week, HousingWire reported surging mortgage volume and record low interest rates are putting excess pressure on appraisal turn times. This week, appraisal experts said those same variables are having a profound impact on an age-old conflict of appraisal reports versus what the market believes the home is worth.

In an accelerated environment with homes being bought and sold at a rapid pace and market data being pulled ahead of time, historical data can struggle to catch up and create broad differentials between an agreed-upon price and the value, said Mark Johnson, president of LRES Corporation.

According to Johnson, when markets accelerate quickly, the credit risk gap widens between the agreed-upon purchase price and what the data reflects and advises loan production teams to explore avenues to understand this delta.

“Most AMCs offer a process called a Reconsideration of Value Request, or ROV, that when properly presented, encourages the appraiser to review the work based on additional appropriate data submitted. To consider an ROV, appraisers are most often willing to review and consider comps that are more recent, more proximate and more similar,” Johnson said.

Some experts mentioned that the increase in bidding wars may also disproportionately reflect the values of like homes in a neighborhood. With homebuilding back up after a short pause at the beginning of the pandemic, experts said the housing stock will vary in ratings as more people leave their homes rather than age in them.

All appraisal experts were in agreement that a lack of communication is a breaking point for the expectations of what the home is worth in collateral. Joni Pilgrim, CEO of Nationwide Appraisal Network, said 99% of the time, there are zero details about the subject property prior to the appraisal, transforming the appraiser into the messenger in those cases and running the risk of an extended appraisal turn time.

“If you’re on top of a mountain and have a 170-degree view of the valley, that’s a million-dollar lot all day long, and the appraiser should be able to pick up on that usually when they’re being asked to do the assignment. However, the lender should know that out of the gate, because once you enter into this property – being a mansion-level property or one with a solar powered system or there’s something unique about it, that needs to be communicated to get a proper rating,” said Woody Fincham, founder and president of Accurity Fincham and Associates.

In terms of the ratings themselves on reports, a C5 rating can have a detrimental effect on the property value and become a risky proposition to hold collateral on. However, if sellers are willing to take the time to do repairs, the appraisal can be conditioned and brought back up.

“If it’s truly a C5 property, it’s going to be difficult for someone to sell the property without selling it at a significant discount. So a buyer buying that property is going to go ‘you know what, I will buy it, but because I know I’ve got to replace a couple of major systems I’m going to buy it with some type of equity involved with it so I can feel like I’m getting a good deal out of it,” Fincham said.

In March, the FHFA eased its standards for property appraisals to help keep families and employees safe throughout the pandemic. However, Pilgrim said the industry’s expectations are still not within the realm of these new flexibilities.

“There’s still an expectation to get everything done quick, and we are hearing ‘we need it now.’ Everybody wants to rush, but it’s just not possible when the appraisers are operating at capacity,” Pilgrim said. “As an AMC we are squarely in the middle of the challenge for both sides. We empathize with the lenders who are trying to meet deadlines for the borrower and we also advise the appraisers because a lot of them are working seven days a week and doing everything that they can to keep up with the surging demand.”

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