There is plenty of blame to go around after a robust housing market swelled to a bubble and then deflated. Fingers point to impractical consumers, overzealous lenders, and yes, the appraisers whose signature on a home's value helps close or kill the deal.
Before the credit crisis, some appraisals seemed to be mere formalities; that attitude helped fuel the boom days. Now, overly conservative appraisal standards—many unfairly calculated, some observers argue—may be holding back the housing recovery.
"I've been in the business nine years, and this is the first year where appraisals have made a significant impact on my business," says Susan Lind Hoffman, a real estate agent with Keller Williams Gold Coast in Chicago.
A survey by the National Association of Realtors earlier this year found that 10 to 12 percent of members had a contract canceled last year as a result of a low appraisal; 10 to 13 percent had a contract delayed; and 16 to 20 percent reported that the sales price was negotiated lower after the appraisal. NAR data show that in June of this year, 16 percent of Realtors reported a cancellation, up from 9 percent in the same month a year earlier.
Basic economics drive housing prices. The market is determined by how much supply is available and what amount a potential homebuyer is willing to pay. An appraiser's room-by-room, property line-to-property line walkthrough, plus local pricing calculations known as comparables, put a "value" on a particular home so that a lender determines how big of a loan to provide. That means outside of a few all-cash transactions, the banks that are taking on the risk largely influence buying and selling decisions. In many of today's markets, risk-aversion persists, and it's showing up in the appraisals.
"I do think the appraisers are trying to be fair and objective. Yet when bad judgment and/or poor comparables come into play—and when fewer homes are being closed, often a really good comp doesn't exist—an appraiser can definitely be the reason a seller can't sell his home in this market," says Lind Hoffman.
She described three deals this year in which the appraisal came back significantly lower than the sales price, each with a different outcome. One transaction fell apart when the seller wasn't willing to come down in price after a lower-than-expected appraisal; the buyer moved on and the seller removed her condo from the market, renting it out instead. For another listing, the buyer thought a low-ball appraisal was wrong and was preventing him from getting a house that he really wanted, so he moved his loan to a different bank. The seller paid for the new appraisal, which came back $65,000 higher than the original appraisal, and the deal closed. In yet another example, the seller reduced the sale price significantly to keep the buyer in the deal, although not all the way to the appraiser's number.
"Appraisals are designed to be irrefutable. It's really a math equation based on square footage, number of bedrooms and bathrooms, age of home, etc.," says Lind Hoffman. "However, an appraiser's opinion plays heavily into that equation, making it an art, not a science."
Often appraisers' and agents' "math" isn't equal. For instance, in some states, a room needs to have a door, a window, and a closet to qualify as a bedroom. However, if a room is set up as an office with a door, a window, and very clearly enough space for a closet to be built if necessary, agents count that as a bedroom. Appraisers can count these rooms differently.
Rule change. Over the past 18 months, new rules and regulations have been implemented in an effort to protect the independence of the appraiser. Such regulator efforts are introducing new problems, some market participants say.
Consumer groups, lawmakers, and financial and housing regulators called for action to eliminate sometimes inflated, and even fraudulent, appraisals. The idea was also to eliminate pressure on appraisers to come up with rubber-stamp estimates that matched the contract price and would automatically help advance the approval process.