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Lenders push for fresher 'comps' in home valuations

November 12th, 2008 8:37 AM by Lehel Szucs

Lenders push for fresher 'comps' in home valuations

Sales may be knocked off track as appraisals come in lower than contract prices.
By Kenneth R. Harney
November 9, 2008
Reporting from Washington -- How fresh are your "comps" -- the comparable sales of properties used as benchmarks in home real estate appraisals? Buyers and sellers rarely had to be concerned about such a question -- or even understand it -- when values were on the upswing.

But in soft and declining markets, lenders recently have begun making comps a big deal. Some sellers are being forced to renegotiate lower prices with buyers, even after they've got a signed contract.

Rather than accepting sales of similar properties that closed as much as six to 12 months ago, lenders and mortgage investors are demanding that appraisers include only the freshest comps, ideally those closed within the previous 90 days, to support their valuations.

They're also pushing for more extensive data on local listings, pending sales and listing-price to selling-price ratios before they agree to fund a mortgage at the requested amount.

As a result, growing numbers of sales transactions are being complicated -- even knocked off track -- as buyers demand that sellers lower agreed-upon contract prices to reflect the lower loan amounts offered by lenders.

"Appraisals have become a real hassle," said Steve Stamets, a loan officer with 20 years' experience at Nationwide Home Mortgage Inc. in Rockville, Md. "Some sellers are taking a beating," he said, citing a recent transaction where the appraisal came in thousands of dollars below the signed contract price. Had the seller not agreed to take a lower price than the buyer had agreed to in the contract, "the whole deal could have fallen through," Stamets said.

Major lenders and investors such as Fannie Mae and Freddie Mac "may have gotten rid of their 'declining markets' policies," Stamets said, "but now everybody is beating down on the appraisal" by demanding 90-day comps or fresher.

In Richmond, Va., appraiser Perry "Pat" Turner of P.E. Turner & Co. says his firm has seen numerous cases where using newly mandated 90-day or more recent comps has contributed to valuations lower than the price on the sales contract. "In 95% of those cases the agents have gotten together and renegotiated the contract" rather than lose the deal, Turner said.

In Woodland Hills, appraiser Kerry Leiman, owner of Leiman Appraisal, defends the tougher standards as producing valuations that are much more finely tuned to short-term changes in local price movements -- down or up.

"Shorter is far better," Leiman said, even if sometimes there aren't enough comparable closed sales transactions that fit the lender's tighter time requirements. In those instances, he said, appraisers are able to look to current listings and use "time adjustments," based on local market pricing trend data, to come up with appropriate estimates.

Turner said that when enough 90-day comparable sales weren't available, he could sometimes persuade realty agents to disclose -- in confidence -- the prices on pending sales. Pushed by lenders for the freshest possible data on properties, Turner also can tap into the local multiple listing service and statistically derive adjustment indexes for small geographic areas based on the percentage difference between asking and selling prices.

That, in turn, allows him to adjust -- downward or upward -- estimated prices for current listings that are comparable to the property he's appraising. If the listing is for $400,000 and the index suggests that houses in the area are selling for an average 4% below the original asking price, the appraiser can estimate the probable value of the unsold comparable house at $16,000 less, or $384,000.

Tim McCarthy, an appraiser in Tinley Park, Ill., agrees that requirements for fresher comps generally improve valuation accuracy for lenders' purposes, but they aren't foolproof. To the extent that appraisers have to focus on listing-price to selling-price and time-on-market indexes, they may miss some of the games that sellers and agents play, he said.

For example, a seller with a listing "at an unreasonable price" that hasn't sold for months might pull the house off the market, then come back with it as a "new" listing with the same excessive price, McCarthy said.

In that case, McCarthy said, the whole push for freshness in data "just totally misses the mark."

Ken Harney's column is syndicated by the Washington Post Writers Group.

We'd like to hear your thoughts on this. 
What do you think of this change in valuations?
Posted in:General
Posted by Lehel Szucs on November 12th, 2008 8:37 AM



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