Keep the Good, Toss the Bad?

QUESTION:

Wouldn't the real estate market improve if appraisals did not include short sales and foreclosures?

ANSWER:

The marketplace would not improve at all. Instead appraisals would be unavailable and lending would stop.

Legislation in several states has been proposed that would require appraisers to ignore short sales and foreclosures when valuing properties. In Maryland, for example, proposed legislation says that “in appraising a residential property, the licensed real estate appraiser or certified real estate appraiser shall use comparable sales only for an arms–length transaction in which the buyer and seller are not related in any way and are not entering into the transaction under duress or unusual circumstances, such as a foreclosure sale or short sale.”

Were such legislation to pass several things would happen. First, no appraisals would be made. Second, without appraisals no mortgages would be originated. Third, without appraisals or financing few homes would be sold and values would sink further.

Why would there be no appraisals?

“If these bills were enacted into law,” says the Appraisal Institute, “appraisers would be put in the difficult position of having to choose which law to violate. Appraisers are required to adhere to comply with the Uniform Standards of Professional Appraisal Practice in federally related transactions. The standard mandates that appraisers ‘must analyze such comparables sales as are available.’ Further, the standard cannot be voided by a state or local government.

“Not following USPAP could subject the appraiser to having action taken against their license. Therefore, appraisers would have to make the decision to commit a USPAP violation – which in the case of federally related transactions would be a violation of state law – or to violate the law prohibiting the consideration of distressed sales as comparables.”

Lenders could not make loans even if foreclosure-free appraisals were somehow available because they would be financing property on the basis of an inflated valuation – a sure road to more risk and losses.