New rules intended to reduce fraud and restrict pressure on appraisers are causing problems for buyers and sellers in Atlanta’s real estate market.
The Home Valuation Code of Conduct, established in response to the mortgage crisis, was designed to eliminate the inflated appraisals that were blamed in part for the collapse of the real estate market.
The unintended consequence of that the rule is undermining sales because appraisals are coming in too low and sometimes deals fall through, said David Ellis, chief executive officer of the Greater Atlanta Home Builders Association.
The new rules bar lenders, builders, and real estate agents from talking with the appraiser about the property. That’s particularly problematic when appraisers from out-of-state are not familiar with the neighborhood and the market, Ellis added.
“Often real estate professionals and bankers can have input that is constructive in determining the value of the property. Many of the appraisers don’t have all the special knowledge about the community so the appraisal comes in low,”
For instance, a Realtor may have a contract on a home for $200,000 but the appraiser values the home at $185,000. In the past, the builder or real estate agent could tell the appraiser that an amenity package for the community was in the works or that the house the appraiser used as a comparable sold at a low price because it needed a lot of repairs.
“Now the appraisers are out on an island. They don’t have all the information they need to make a fair valuation,” Ellis said.
Some appraisers are using distressed properties, many of which are in poor condition, as comparables for brand new homes without accounting for major difference in condition and quality, the National Association of Home Builders reports.
In a survey of more than 500 builders by the NAHB, 25% reported that they are losing sales because the appraisal is coming in below the contract sales price.
The Greater Atlanta Home Builders Association hasn’t conducted a survey, but based on anecdotal information, Ellis estimates that 25% of new home sales are affected by the new rules in this market too.
“Builders tell me that the appraisals are coming in under the sales price and the buyer can’t get financing. Then the bank and the builder have to make a choice about the deal,” he said.
The new rules have a broad effect because they affect the assessment of the value of homes, even when someone is not trying to sell it, Ellis pointed out.
“When the appraiser assesses the house next door at a figure that is lower than the market, it sends the message that all houses in the neighborhood should be worth less,” he said.
Congress can help resolve this issue by urging the Federal Housing Administration and Fannie Mae and Freddie Mac to adopt and enforce guidance that instructs appraisers on the proper procedures for the use of distressed and/or foreclosed properties as comparables, added NAHB chairman Joe Robson, a home builder from Tulsa, K.
“What we want is a fair and equitable process where all parties have input and the appraisal reflects a fair value,” Ellis said.
© Atlanta Real Estate Forum 2009