Loan to values and documentation requirements
aren’t the only things that have changed as a
result of the credit crunch and liquidity crisis.
Appraisal standards as dictated by the end
lenders and agencies, Fannie Mae and Freddie
Mac, have also tightened up tremendously. The
differences and changes in the appraisal world
are important for all of us to know. These
requirements can help to establish what you list a
house for or what offer you decide to make since
financing is always going to be dependent upon
the appraisal.
Appraisers utilize comparable properties sold
within close proximity to the subject property in
establishing value. Comparables are defined as
those properties that are “like” the subject
property in size, layout, functionality and
upgrades. By finding properties that are slightly
better than and slightly less than the subject
property, the subject property’s value is
established somewhere within the middle. This
method is called “bracketing”. The trick to
bracketing is finding the comparables. They
must be within a certain range better and worse,
larger and smaller, etc., and within the shortest
distance. Price per square foot is not a normal
consideration for an appraiser. They will not
consider a house that is dramatically larger or
dramatically smaller to be a true comparable, and
therefore, will dismiss a sale accordingly.
The biggest change for the appraisers these days
is their ability to choose comparables. In times
past, appraisers had the ability to dismiss sales
that were considered to be “distressed” sales
when choosing the comps for the appraisals.
Since distressed sales were the exception, they
were not a true indication of the market value in
a neighborhood. Some appraisers would also
exclude those comparables that may not support
the “target value” whether that is a sales price or
a required value for a refinance. Because of the
stability of the real estate market for so long,
these practices never seemed to be a big deal
until now.
With unprecedented foreclosures and short sales,
banks have found the appraised value in the
difficult real estate market today to be of utmost
importance. Upon review and audit of appraisals,
particularly those with lower down payments,
available comparable data is being scrutinized to
ensure those chosen are the best available
regardless of circumstances surrounding the sale.
Although standard appraisal practices allow
comparable sales to be within 6 months and up
to 1 year old and typically within 1-3 miles
away, lenders are now requiring at least 2 comps
to have been sold within the last 90 days.
Lenders are also looking for pending sales and
listed properties to further verify and support the
established value. When this criteria can not be
met, the appraisals are subject to heavy scrutiny
and may be required to have some sort of second
review done or even a 2nd appraisal to be
completed to further verify the value.
So, when comp-ing a house out, keep this criteria
in mind – sales within the last 90 days that meet
bracketing requirements of bigger-smaller, better
and less within the closest proximity. The
appraiser will have to, so better to be aware of
the current appraisal practices and make your
sellers aware of how that neighbor who cheap-
sold their house can have a dramatically negative
affect to the value of all the homes in the
neighborhood. And just because an appraiser
will do an appraisal at a certain value does not
guarantee the appraisal will be acceptable under
current underwriter scrutiny.
Article Provided by Courtney Walker, Nova Home Loans (520) 750-8888
April 21, 2008 Newsletter
# posted by
Anna-Lise Troup @ 10:05 AM
