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Foreclosures weigh on home appraisals

Real estate appraiser Katherine Scheri runs water into a bathtub as she conducts an appraisal at a hillside home in the unincorporated area of East Los Angeles. Appraisers determine the value of a property by looking at recent sales of comparable homes. (AP Photo by Reed Saxon)

Real estate appraiser Katherine Scheri runs water into a bathtub as she conducts an appraisal at a hillside home in the unincorporated area of East Los Angeles. Appraisers determine the value of a property by looking at recent sales of comparable homes. (AP Photo by Reed Saxon)

By Alex Veiga
AP Real Estate Writer

Los Angeles (AP) — It wasn’t the first time that Katherine Scheri ruined a real estate agent’s day with a low property appraisal.

Scheri, a real estate appraiser, had sized up a three-bedroom, two-bath house in Santa Ana, Calif., for $30,000 less than what the buyers offered to pay — a typical deal-killer for a seller.

The agent urged the lender to force Scheri to consider several other properties that could back up the original $310,000 sale price. Then he tried old-fashioned guilt, telling Scheri her appraisal was going to ruin the buyers’ shot at the American Dream.

“That’s what he laid on me,” Scheri recalled. “And I said, ‘Don’t you care they could be potentially spending $30,000 too much for a house?’ ”

Across the country, agents and homebuilders are complaining too many appraisals are coming in low, scuttling deals.

According to the National Association of Realtors, nearly one in four of its members has reported clients losing a sale because of botched appraisals.

According to the National Association of Home Builders, meanwhile, low appraisals were sinking a quarter of all new home sales and it’s not fair to compare distressed properties to brand-new homes.

And that gets to the heart of the problem.

Roughly 40 percent of all home sales last year were foreclosures or short sales, meaning the property sold for less than the mortgage. In some markets, such as Las Vegas and Phoenix, they’ve hit more than 50 percent.

Appraisers determine the value of a property by looking at recent sales of comparable homes. They take an apples-to-apples approach, excluding or making adjustments for certain features, such as a swimming pool or finished basement. And generally, a foreclosure isn’t used as a comparison for a standard sale.

But in some areas, appraisers such as Scheri contend they are only sizing up homes according to the reality of the market, though they concede it is becoming increasingly harder pinpoint what a home is worth.

Home prices in many large metro areas, including Los Angeles and San Diego, hit bottom last year and are recovering, recent data showed. Yet there are many neighborhoods across the country where foreclosures and other financially distressed sales are still rising.

“It used to be a very infrequent thing that you did an appraisal and the value wasn’t supported,” said Scheri, who is based in San Diego. “Now, it’s more common than not.”

So, if a homeowner is trying to sell a home in a neighborhood where foreclosures and short sales are predominant, an appraiser could determine the home is actually worth less than what some buyers may be willing to pay.

Part of the problem, critics contend, is that many real estate appraisers are now hired under new industry rules. Designed to limit conflicts of interest that can bias an appraisal, the rules bar mortgage brokers from ordering appraisals themselves, forcing them to do so through a mortgage lender.

Lenders may order appraisals through in-house staff or appraisers hired by outside firms known as appraisal-management companies. But neither may talk to the appraisers about the value of the property they’re evaluating.

The result, however, can mean that low-cost appraisers are hired from outside the area and don’t have the local knowledge to find homes that can be a better benchmark for regular homes.

The Joint Center for Housing Studies examined home sales over 20 years in Massachusetts and found that a foreclosure within less than 100 yards of a home lowers the price of that home by 1 percent.

So it appears that in neighborhoods with high foreclosure rates, values for all homes are being pulled lower than in areas where there are few or none.

That means you can live in one area of Las Vegas and values can be down twice as much as they are in another neighborhood just a few miles away.

When it comes to appraisals, that leaves a lot of room for interpretation.

2 comments

  1. The problem is far worse than this in Las Vegas. It is all too common for appraisers to use currently listed short sales and bank-owned properties as comparables in addition to actual sales. This is a terrible injustice and a practice that should not be tolerated, especially since many of the “available” listing prices are substantially below what they will eventually sell for after the multitude of multiple offers are negotiated.

    HVCC is simply NOT working! We all need a hiatus from this until it’s fixed!

  2. Something I am seeing more frequently in Los Angeles is that values are starting to bounce back a bit. Up until last summer I feel that many appraisers were not well equipped to deal with the crisis. As a result they did what they thought was the common sense thing to do…move values closer to the fire sale prices achieved through short sales and foreclosures.

    Today, after all the talk, I am starting to see slight bumps in values. More experience appraisers are starting to get a better feel for what is going on out there and how to value within the “bigger picture.”

    While values are still depressed and will remain for a LONG time, appraisers seem to be doing a better job recently.

    Jesse Torres
    President and CEO
    Pan American Bank
    Los Angeles, CA

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