Real Estate Thoughts

Was Your Real Estate Appraisal Fair?

Your appraisal was performed with the definition of “Market Value” being a basis of the analysis / report. Each report written by a licensed appraiser, most likely has this term defined within the report. Without this specific guidance of the definition of “Market Value” one reader would most likely presume a definition that could be different than the next reader as to what “Market Value” means to them. Therefore, it is critical for each reader to understand what definition the appraiser used for their analysis presented within the report. The various methods used within an analysis of obtaining the reconciliation of an estimated “Market Value” were based upon the definition used by the appraiser.

Within the current market conditions there are a variety of transactions defined within a neighborhood that have been sold under various terms of sale. Some are known as “arms-length”, private – non public, foreclosure, “short sale”, estate sale, sheriff sale, relocation, to name a few. Some of these transactions have been sold under terms of duress by a homeowner, lien holder, estate trustee or governmental agency to name a few examples. Many of these types of transactions such as foreclosures have an adverse perception of a variance in market value that can be directly associated with the terms of the sale. With this type of transaction the lender(s) that foreclosed upon a property have a different basis applied upon their offering price of a property. Their variance may include aspects such as loan balance, condition of property, expenses incurred during foreclosure process and the desire to sell the property within a limited number of days, such as less than 30 days. This variance of value typically creates a lower offering value when compared to transactions being offered for sale by a typical homeowner with no significant need of duress. Here lies the issue, the variance in perceived market value associated with these terms are sometimes ignored and determined to be typical of the market. However, they are still under duress even if they are common in the competing market.

Due to the current market conditions some of the neighborhoods have a larger influence of financially duress transactions than others. A larger number of duress transactions located within a neighborhood will have a greater impact upon the overall perception of market value due to the need to compete with so many financially duress properties. However, the properties offered for sale under duress will typically have a lower value than the properties being offered by a typical seller under no duress.

If you have an appraisal report that was performed under the intention of securing a mortgage for a federally financed transaction, such as; Fannie Mae, Freddie Mac, FHA, VA, USDA, etc than you most likely have an appraisal based upon the comparison of transactions not involving any form of duress. Industry and lender guidelines will impose some requirements for the submission of some transactions with specific attributes which may require the appraiser to present some transactions that were sold under duress, such as a neighboring property that sold in the prior 90 days. However, the submission of such transactions should be addressed within the report and most likely will not be the basis of the estimated market value.

There are four states with pending legislation regarding the restrictions of utilizing financially duress transactions within an appraisal report. Missouri is one of those states that have a pending Bill to address this topic of appropriate selection of comparables within an appraisal analysis. Missouri House Bill No. 292 of the 96^th General Assembly, introduced by Representative Vicki Schneider, would include a statement that reads “when a property in the subject area has been foreclosed, an appraiser shall not utilize the foreclosure price as a comparable property when developing an appraisal”. It is my opinion that the Missouri Bill is too specific towards one type of a financially duress transaction and implies any type of an appraisal under any definition of market value can not use any foreclosed property. By prohibiting the use of any transaction from being part of an analysis restricts the true perception of values for that analysis. There are multiple and legitimate uses of being able to present distress transactions within an analysis and as a basis for some types of definitions of “Market Value” it is critical. Although the intention of the Bill is clear and worthy of discussion, it has been written to specific and it unintentionally creates a multiple number of concerns for other legitimate types of analysis used within our industry. This Bill should not proceed any further in the approval process as it reads. It closed the public hearing on this bill on 3/17/2011, with a proposed effective date of 8/28/2011. The Bill has great intentions; however it is unintentionally creating a multiple number of problems when performing appraisals under definition of “Market Value”, known as “Liquidation Value’ and “Disposition Value”. Vicki can be contacted by e-mal at Vicki.Schneider@house.mo.gov

This topic of appropriate comparables being used within an appraisal report is already addressed within the appraisal industry with a governing document known as, USPAP, “Uniform Standards of Professional Appraisal Practice”. USPAP guides appraisers as to the disclosure and use of data within an appraisal analysis / report. The Bill, as proposed, concentrates upon only one type of financially distressed transactions and clearly states that foreclosed transactions shall not be used when developing an appraisal. This Bill is a reaction to an adverse issue within the downward spiraling affect upon perceived values within a residential neighborhood. If the Bill would pass as it reads, the industry would have multiple difficulties fulfilling other definitions of “Market Value”. The Missouri Bill does illustrate that this misunderstood topic of “Market Value” is getting peoples attention and that some emphasis is needed towards definitions within the appraisal process.

Although a “Summary Appraisal” is the most common format of residential appraisals being used for mortgage transactions, they commonly include a lot of information in which the casual reader does not identify or apply emphasis upon. One of those areas is the basis of the appraisal report. It is the definition of “Market Value”.

Appraisal Institute recently published an article of interest regarding the use of financially distressed transactions being used in the analysis of residential appraisals.

http://www.appraisalinstitute.org/ano/newsletter/DisplayNwsLtrArticle.aspx?volume=12&numbr=5/6&id=13720

A predominate use of preprinted formats for summary appraisals are based upon Fannie Mae Forms 1004, 1073, 1025, 1075 & 2055. Each of these reports has a definition of market value printed within the scope of work descriptions of the addendums. Within the definition of “Market Value” from which the majority of the summary appraisals that are used, they include a sentence as such:

“The most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming that neither is under undue stimulus.”

The key to the confusion among the general public is the term of "Undue Stimulus" being defined. Pick any dictionary and you will develop a clear picture as to the heading of this term as it relates to financially distressed transactions. The Appraisal Institute publishes the definitions of “Disposition Value” and “Liquidation Value”, which alters the replacement of this term “assuming that neither is under undue stimulus” to read: “The seller is under compulsion to sell” or “The seller is under extreme compulsion to sell”, which is the complete opposite of the sentence within the preprinted definition of “Market Value” as posted within the pre-printed Fannie Mae Forms 1004, 1073, 1025, 1075 & 2055, etc.

“The most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming that neither is under undue stimulus.”

The preprinted forms also outline a simple and generic Scope of Work, which includes a statement that reads: “Modifications, additions, or deletions to the intended use, intended user, definition of market value, or assumptions and limiting conditions are not permitted.”

This leads to a path of rationalization that if you have a report completed upon a standard, Fannie Mae Form 1004, 1025, 1073, 1075 & 2055, etc than your report should be based upon a typical “Arms Length” (transaction is between unrelated parties under no duress) transaction with the definition of “Market Value” as stated below and not based upon foreclosed or other transactions involving duress:

DEFINITION OF “MARKET VALUE”

(Most common definition noted in obtaining a federal insured mortgage from Fannie Mae, Freddie Mac, FHA, VA & USDA)

“The most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming that neither is under undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he or she considers his or her own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions* granted by anyone associated with the sale.

*Adjustments to the comparables must be made for special or creative financing or sales concessions. No adjustments are necessary for those costs which are normally paid by sellers as a result of tradition or law in a market area; these costs are readily identifiable since the seller pays these costs in virtually all sales transactions. Special or creative financing adjustments can be made to the comparable property by comparisons to financing terms offered by a third party institutional lender that is not already involved in the property or transaction. Any adjustment should not be calculated on a mechanical dollar for dollar cost of the financing or concession but the dollar amount of any adjustment should approximate the market’s reaction to the financing or concessions based on the appraiser’s judgment.

In summary, if the comparables used within your, sale or refinance, appraisal report were sold under any form of duress and the appraiser based the estimated market value upon these comparables, than you may have a rational reason to request a reconsideration of value by the appraiser. On the other hand if you have an estimated market value which was based upon transactions involving no undue stress and were purchased by a typical buyer and sold by a typical seller, than you may have a fair appraisal of your subject.

John Wayne Glasener

Approved Appraisal, Inc.