Realtors worry that lower property valuations will stifle any recovery

WEST PALM BEACH, Fla. – July 21, 2009 – Realtor Robert Garrison thought he had put together solid deals for two homes in Palm Beach County. Then the appraisals arrived.

One property, west of Lake Worth, had a contract for $257,000. The appraisal came in at $180,000. The other home, in Loxahatchee, found a buyer willing to pay $250,000. The appraiser’s estimate: $215,000.

The buyer of the Loxahatchee home decided to pay cash, but the other deal is languishing, Garrison said.

“To be selling at $257,000 and get a $180,000 appraisal is insanity,” said Garrison, an agent at Keller Williams Realty. “It’s killing the market.” Garrison’s gripe isn’t just sour grapes from a Realtor who lost a commission in a difficult economy. Realtors, mortgage brokers and home builders across the country say lowball appraisals threaten to stall the housing recovery before it starts.

In separate surveys this month by the National Association of Realtors, the National Association of Home Builders and John Burns Real Estate Consulting, real estate professionals cited appraisals as a major obstacle. In the NAR survey, 37 percent of Realtors said they had lost deals because of appraisals.

Because mortgage amounts are based on appraisers’ estimates, appraisals are a crucial cog in the machinery of the housing market, but the cog seems to have ground to a halt in recent months.

After suffering huge losses from plummeting property values, lenders are leaning on appraisers to be more cautious. And appraisers’ jobs have grown more difficult amid wild swings in prices and sales volumes.

To some extent, deal-killing appraisals are the natural fallout of a wrenching real estate bust. Prices plunged, and appraised values followed.

Adding to the pain, “distressed” deals – foreclosures and short sales – make up a huge chunk of transactions, and those bargain-basement prices create a point of comparison for appraisers valuing houses whose sellers are not underwater.

“The inappropriate use of foreclosed and distressed sales as comparables is driving down the values of everything,” said Jay Carlson, a home builder in Punta Gorda and president of the Florida Home Builders Association.

Appraisers took a heaping helping of blame for the housing bubble. Some say they’ve responded by becoming too careful.

“All this pressure is being put on the appraisers,” Garrison said. “They’re so scared, they’re so gun-shy, that they’re finding the lowest comps they can.”

It seems every Realtor has a horror story.

Dave Petruzzelli of Petruzzelli Real Estate in Boca Raton recently helped a friend dispute a lowball appraisal on a 3,000-square-foot house in Boca Raton. The homeowner needed the appraisal to refinance his mortgage.

The first estimate came in at $230,000. After Petruzzelli wrote a five-page letter, the appraiser tried again and came up with a much higher figure: $650,000.

“It was absolutely ridiculous,” he said of the huge swing in value.

It’s not just low appraisals frustrating Realtors, mortgage brokers and builders. They’re also outraged by new rules that have upended the way appraisals were conducted for years.

Beginning May 1, all home loans bought by Fannie Mae and Freddie Mac, the mortgage giants that account for more than half of all loans, must follow the Home Valuation Code of Conduct. The new rules forbid mortgage brokers from ordering appraisals.

Instead, lenders must order appraisals. The appraiser can be an employee of the lender, but more commonly the appraiser is hired by a third party known as an appraisal management company.

The rules discourage appraisers from talking to Realtors and mortgage brokers about their price estimates. The new guidelines, negotiated last year by New York Attorney General Andrew Cuomo, aim to end the cozy relationships among appraisers, Realtors and mortgage brokers that encouraged inflated values.

The new rules have created a litany of side effects, Realtors and mortgage brokers say. For starters, appraisal management companies sometimes take hefty fees that discourage experienced appraisers from working for them.

“I don’t think the appraiser is intentionally trying to kill the deal,” said Alan Sperling of Mortgage & Investment Consultants in Boca Raton. “But the appraisers are going out and doing a haphazard job because they’re not getting paid very much.” Wellington appraiser Gina Rascati said she does not work with appraisal management companies because they take as much as half of the appraisal fee. On a typical appraisal that costs the borrower $350 to $400, the appraiser might keep only $175 to $200.

“I don’t know how appraisers are able to do appraisals at that price,” Rascati said. “The only way they can is to do it so fast and cut so many corners. The appraisal management companies want the cheapest appraisal they can get.” What’s more, appraisal management companies often assign properties to appraisers who don’t know the local market.

Vince Laviano, owner of Better Homes and Gardens Real Estate in Palm City, said the new rules mean appraisers from Broward and Indian River counties come to Martin County to appraise homes.

“It’s pretty bad when you’ve got an appraiser calling a listing broker and saying, ‘Where is that property? How do I get there?’” Laviano said. “Anybody can do an appraisal, but you’ve got to know the market to really understand the trends.” With the Home Valuation Code of Conduct sparking so much discontent, NAR, NAHB and the Appraisal Institute have put a full-court press on Congress, aiming to change or delay the rules.

Cuomo argues that the rules are necessary and that critics are looking for someone to blame for a cratering housing market.

“With home prices falling and foreclosures rising, this complaint is simply wrong and risks returning us to a corrupt system filled with conflicts of interest that promoted artificially inflated values,” Cuomo spokeswoman Emily Browne told The Associated Press.

Copyright © 2009 The Palm Beach Post, Fla., Jeff Ostrowski. Distributed by McClatchy-Tribune Information Services.