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Lenders demand freshest comps to support appraisals
November 8, 2008 - WASHINGTON — How fresh are your "comps" — the
comparable sales of properties used as benchmarks in home real estate
appraisals? Buyers and sellers rarely had to be concerned about such a question,
or even understand it, when values were on the upswing.
But in soft and declining markets, lenders recently have begun making comps a
big deal. Some sellers are being forced to renegotiate lower prices with buyers,
even after they've got a signed contract.
Rather than accepting sales of similar properties that closed as much as six to 12
months ago, lenders and mortgage investors are demanding that appraisers
include only the freshest comps, ideally those closed within the previous 90 days,
to support their valuations.
They're also pushing for more extensive data on local listings, pending sales and
listing-price to selling-price ratios before they agree to fund a mortgage at the
requested amount.
As a result, growing numbers of sales transactions are being complicated, even
knocked off track, as buyers demand that sellers lower agreed-upon contract
prices to reflect the lower loan amounts offered by lenders.
"Appraisals have become a real hassle," said Steve Stamets, a loan officer with 20
years' experience at Nationwide Home Mortgage Inc. in Rockville, Md. "Some
sellers are taking a beating," he said, citing a recent transaction where the
appraisal came in thousands of dollars below the signed contract price. Had the
seller not agreed to eat the difference — take a lower price than the buyer had
agreed to in the contract — "the whole deal could have fallen through," Stamets
said.
Major lenders and investors such as Fannie Mae and Freddie Mac "may have
gotten rid of their 'declining markets' policies," Stamets said, "but now everybody
is beating down on the appraisal" by demanding 90-day comps or fresher.
In Richmond, Va., appraiser Perry "Pat" Turner of P.E. Turner & Co. says his
firm has seen "numerous" cases where using newly mandated 90-day or more
recent comps, as opposed to those six months or older, has contributed to
valuations lower than the price on the sales contract.
"In 95 percent of those cases," he said, "the (listing and selling) agents have
gotten together and renegotiated the contract" rather than lose the deal.
In Woodland Hills, Calif., appraiser Kerry Leiman, owner of Leiman Appraisal,
defends the tougher standards as producing valuations that are much more finely
tuned to short-term changes in local price movements — down or up.
"Shorter is far better," Leiman said, even if sometimes there are not enough
comparable closed sales transactions that fit the lender's tighter time
requirements. In those instances, he said, appraisers are able to look to current
listings, and use "time adjustments" based on local market pricing trend data to
come up with appropriate estimates.
Turner said that when enough 90-day comparables are not available, he can
sometimes persuade realty agents to disclose, in confidence, the prices on pending
sales, which otherwise are not reported or listed until closing. Pushed by lenders
for the freshest possible data on properties, Turner also can tap into the local
multiple listing service and statistically derive adjustment indexes for small
geographic areas based on the percentage difference between original asking
prices and selling prices.
That, in turn, allows him to adjust, downward or upward, estimated prices for
current listings that are comparable to the property he's appraising but hasn't
sold yet. If the listing is for $400,000 and the index suggests that houses in the
area are selling for an average 4 percent below the original list or asking price,
the appraiser can estimate the probable value of the unsold comparable house at
$16,000 less, or $384,000.
Tim McCarthy, an appraiser in Tinley Park, Ill., agrees that requirements for
fresher comps generally improve valuation accuracy for lenders' purposes, but are
not foolproof. To the extent that appraisers have to focus on listing-price to
selling-price and time-on-market indexes, they may miss some of the games that
sellers and agents can play, he said.
For example, a seller with a current listing "at an unreasonable price" that hasn't
sold for months, said McCarthy, might pull the house off the market, then come
back with it as a "new" listing with the same excessive price. As long as the
listing date is at least three months from the date the house was pulled off the
market, the listing will be counted as new under Illinois realty rules, and the high
asking price may get factored into new appraisals.
In that case, McCarthy said, the whole push for freshness in data "just totally
misses the mark."