RELS Valuation's Quality Assurance Department sent out a notification to its appraisers today, and the letter promply hit some of the larger appraisal forums. According to their memo:
Over the past year or so Valuation Support Services (VSS) has become aware of numerous "problem" markets and we have concluded that VSS must develop guidelines to address "Declining Markets" and markets with an "Over Supply" of housing inventory. While both of these topics can be discussed independently, it is believed that the discussion is best approached by jointly discussing the topics.
Their memo discusses these major topics:
- Industry Tools and Data to Monitor Current Market Conditions
- Sales Concessions
- Extended Marketing Times
- Comparable Sales Price Range and Number of Listings
To begin, there is no standard definition of a declining market. In general, base on the tracking of home prices in a certain geographic location (state, Metropolitan Statistical Area, ZIP code, etc.), a declining market is one in which home prices are currently declining. VSS has adopted the following definition of "Over Supply" for real estate markets.
Over Supply: the situation where there is more inventory than there are available buyers when considering prevailing prices and market conditions.
Note that this definition addresses the prices within the market. If prices are stable, an inventory can build to the point where there is an insufficient quantity of buyers willing to purchase the homes. When this situation arises, prices will frequently begin to decline.
Industry Tools and Data to Monitor Current Market Conditions
According to Fannie Mae (FNMA) (which can be found at Internet site: www.efanniemae.
"It is expected that the appraiser will utilize generally accepted appraisal standards and our appraisal report forms which require the appraiser to research, analyze, and report on the factors in the neighborhood that may affect the market value or marketability of the properties in the market area."
FNMA goes on to state the appraiser is "ultimately responsible for leveraging industry tools and data to monitor the market conditions to ensure that the appraisal reflects an accurate indication of value."
FNMA provides several possible sources for information to aid in the process to address market values and/or supply/demand. These data sources include:
- OFHEO (Office of Federal Housing Oversight) index (www.OFHEO.gov),
- NAR (National Association of Realtors) (www.realtor.
org) statistics on changes in median prices and - S&P/Case Shiller Index (http://www2.standardandpoors.com).
There are others available, but perhaps not on a national basis. It is the appraiser's responsibility to utilize those data sources that are deemed to be appropriate and to utilize the information to develop an informed value conclusion. The value conclusion would need to consider the current market and the potential of an over supply of dwellings being available and the possibility of value decreases.
Sales Concessions
Owing to the concerns on a national basis over declining markets and an over supply of listings, the following considerations must be noted and should be addressed in every appraisal report.
First and foremost, it is essential that the appraiser consider and utilize the most recent and similar sales data possible. The appraiser must consider any and all sales concessions and adjust as necessary for sales concessions. If an adjustment is not warranted the appraiser must address the reasoning behind the lack of adjustment and provide any support available.
The following is a client specific requirement:
- For an existing property sale, the appraiser must provide the listing price and the days on market (DOM) as part of the sales price analysis.
- For sales of new houses (new construction or never been occupied), all appraisal reports must provide the BASE PRICE for new construction, the PRICE OF ALL OPTIONS (as a single entry and separate from the base price), the LOT PREMIUM (as a single entry and separate from the base price), the dollar amount of all BUILDER CONCESSIONS and the dollar amount of all BUILDER CREDITS (again as separate entries). Concessions and credits have become a huge concern due to the creativity of these entries.
For example, concessions or credits may take the form of "X months" of principal and interest payments paid by the seller, "X months" of PMI or HOA fees paid by the seller, cars included in the purchase price, furnishings being included in the purchase price, trips included in the purchase price, etc.
It is very important to research and uncover these. Many of these credits and concessions have become commonplace in the current economy, but all credits must be deducted from the sales price. These credit and concessions are not considered to be typical and normal to the market and would not exist if the current residential real estate economy was not in its present state.
Extended Marketing Times
In addition, the appraiser must consider if the neighborhood marketing times are in excess of 6 months. The appraiser should consider whether this is indicative of an over supply of inventory and whether this is impacting prices. If prices are being impacted, the appraiser must address this in the report and also make any adjustment as appropriate to reflect the impact this is having. The appraiser must consider these issues in the analysis and reflect these issues in the final indication of value.
Please note it is the responsibility of the appraiser to address and support what impact the marketing time is having on values. The appraiser must also address and support what impact the supply and demand is having on values.
Lastly, the appraiser must address and support what impact the property value stability or change is having on value and explain how this impacts on the value. Supporting the impact on value may take the form of additional commentary specifically addressing the topics noted. This may also be accomplished by providing pending sales and/or listings to support the conclusions reached.
Mortgage lenders have the ability to lend on properties in declining markets or where an over supply exits. However, this may impact loan to value ratios. Therefore, lenders are carefully reviewing appraisal reports in areas of suspected declining values. Providing commentary and support prior to being asked by the client saves everyone concerned stress and time lost.
Comparable Sales Price Range and Number of Listings
Please be aware that clients are reviewing not only the neighborhood section of the report, but also the two questions just above the sales grid in the appraisal reports. This issue is important and will be addressed in the following paragraph.
At the top of each report page with comparables 1-3 there are two questions. The questions ask for the number of listings and sales of properties that are comparable to the subject. The form asks for the price range as well. It is very important to only include dwellings that are comparable to the subject and are located in the subject neighborhood. If there are none, the report should indicate both that there are none and the price range to indicate that the research was completed.
Secondly, the appraisal report should not include properties that are not comparable as this information is included in the neighborhood section, on page one of the report form. Keep in mind that the client is using this information to help answer the question regarding the supply and demand for the subject type of property and neighborhood.
To conclude, it is essential that appraisal reports address the supply and demand of housing stock in the subject neighborhood, and to accurately report which directions prices are going. If there is an oversupply of homes, it is imperative that the appraiser checks the "over supply" box as opposed to the "in balance" box on the front page of the appraisal report.
Likewise, if values are declining, it is imperative that the appraiser checks the "declining" box as opposed to the "stable" box on the front page of the appraisal report. The appraisal report should not only provide commentary addressing these issues but also provide support for the conclusions regarding these topics. Given the market concerns, it is highly advisable that appraisal reports include pending and/or listing transactions to support the final opinion of value.
Thanks to RELS Valuation's Quality Assurance Department
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