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Pending home sales, refinancing often at the mercy of questionable valuations

ALBUQUERQUE, N.M. — As a home appraiser in these tough economic times, Bonsal Henry sometimes feels as if she has a bull’s-eye painted on her back. Henry, the owner of Residential Appraisals Inc., often is the bearer of the unhappy news that a home’s appraised value is less than the negotiated price agreed upon by both seller and buyer.

A low appraisal can unravel a pending home sale, say real estate agents who have found sales gone sour when the appraisal came in lower than expected. Not only can a low appraisal impede homeowners from selling their home, but it can also negatively impact the refinancing of a mortgage. Just a few low appraisals within a single neighborhood can create a discouraging domino effect of lowering property values within the entire area, said Peter Parnegg, co-owner and co-founder of Albuquerque’s Coldwell Banker Legacy.

When a sale collapses because of a low appraisal – and lenders are not in the business of writing mortgages greater than the appraised home value – it raises the ire among buyers, sellers and real estate agents, many who consider themselves more familiar with the local housing market than a random appraiser selected “next up” on a company’s rotational assignment list.

Conservative, low appraisals have become common, says Parnegg, who contends that they have created a situation that artificially suppresses home values and puts a damper on the housing industry’s recovery.

“By definition, a market is created between a buyer and a seller,” said Parnegg, who served as president of the Greater Albuquerque Association of Realtors in 2011. “A market value is what a willing buyer will pay and a willing seller will accept. The big problem now is that the appraisals create the market value, not the market itself,” he said. “Now, there’s so much anxiety in the mortgage market that underwriters are overly scrutinizing appraisals, and appraisers are very nervous about an underwriter rejecting an appraisal, so they end up being very conservative.

“This is a giant challenge and a pet peeve of mine,” he added.

The National Association of Realtors reports that 9 percent of real estate agents reported delayed sales contracts because of low appraisals, while 13 percent said a contract was renegotiated to a lower price because an appraisal came in below the agreed-upon price. The statistics were not available for the Albuquerque metro area, said Parnegg.

Nationally, many members of NAR vent their wrath at appraisers, while also pointing their fingers at a 2009 law – the HVCC or Home Valuation Code of Conduct – that was intended to require appraisers to work independently and without undue influence from mortgage brokers, lenders and real estate agents. In the eyes of many real estate agents, the pendulum, however, has swung too far in the opposite direction and leads to inaccurate valuations instead.

Realtors, for example, now have far less leeway in providing their opinion of a home’s value, said Channing Kelly, a qualifying broker with Ida Kelly Realtors. Sales agents traditionally help to establish a home’s value by tracking the sale prices of comparable, nearby homes that have recently sold, but the HVCC has shortened the time frame for comparisons to homes that have sold in the previous three months.

“There are many neighborhoods in Albuquerque where no homes have sold in the previous three months,” said Parnegg.

Realtors are also directed to use comparable sales within a half-mile distance of the home for sale, another impossibility at times. Short sales, fixer-uppers and vandalized homes all get figured into the mix, pulling down the values of the well-kept homes in the neighborhood as well.

“Buyers and sellers perceive the issue of low appraisals to be a self-fulfilling and repeating process,” said Kelly.

Homes sold by cash transactions do not require an appraisal, and often sell quicker and at a higher price. It’s an option few can afford, however. Some buyers make up the difference between an appraised value and a negotiated value with cash.

“If someone is willing to pay more than the appraisal, it’s because they really want this house,” said Henry. “It’s not a reflection of the market.”

Parnegg says the law fails to address conflicts of interest, as intended, but instead has layered the system with regulations.

“In this, the biggest buyers’ market of the last 20 or 30 years, no buyer that I’m aware of is overpaying for a house,” said Parnegg.

He says he has worked with savvy buyers who have looked at 30-some houses and negotiated a price accepted by the seller only to see the sale fall apart when the appraisal came in $10,000 or $20,000 lower than the agreed-upon price.

Home valuations can be low for a variety of reasons, says Kelly, not the least of which is the fact that the market is depressed and homes tend to sell for less in a depressed market.

Adds Henry, “We’re not being forced to be conservative, but our appraisal has to reflect the market. If the market is down, our appraisals are down.”

And some appraisers are particularly skittish because they’ve been sued by lenders for appraisals made five years ago or even longer, said Henry. She says she has seen it happen in the local market, although hasn’t experienced it herself.

One way to get a leg up on a tough market, said Henry, is for the seller to choose an experienced appraiser with good research and analytic skills. Sellers should keep good records and documentation of improvements made to the house; taking photos when the walls are torn open to the studs to reveal new electrical and plumbing systems.

Then, the sales agents should make sure that the appraiser has this information on hand as he determines the home’s value. Such documentation can lead to a higher appraisal, she said.

“Show us what (the seller) has done and we’ll take it into account,” she added.