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National economic reports indicate that property values have increased over the past year, and the forecast shows the trend will continue. If this is true, why are there multiple above-list price offers with appraisals not supporting full sales price? While I agree that some appraisals are legitimately supported at lower than sales price values, I also find that many are not.

Cause and Effects
Why are so many appraisals coming in low? Based on my research and experience I see the following reasons:

Market Conditions
Artificially low valuations are most often due to the lack of understanding of current market conditions and market extraction methods. The most accepted and utilized approach to value, the “Sales Comparison Approach to Value,” bases the appraiser’s value support on past comparable sales data. The weakness here is that utilizing past comparable sales do not allow for current supported values, unless you consider a positive adjustment in today’s market due to appreciation caused by low supply and high demand. The support for a market condition adjustment is the most underutilized yet one of the most necessary adjustments in today’s market.

Bad Mentor, Bad Habits
When a real estate appraiser first enters the profession, that person is required to work under and learn from a supervising appraiser, to receive the necessary hours required to earn their license and work on their own. The new trainee, more often than not, becomes a reflection of their mentor, taking on the good traits as well as the bad ones. The limitations of the mentor, their experience and training, now affect the quality of the newly-minted appraiser.

Lack of Market Experience
Consider how often market values increase, decrease or go through a stabilization period. The housing prices reached a peak nationally in early 2006, and started their decline in 2006-2007.  The S&P/Case Schiller home price indices reported a national increase of 7.3 percent in the fourth quarter of 2012. The increase in value can be much higher from neighborhood to neighborhood throughout the U.S. I’ve personally extracted market condition adjustments in my local areas of 12 percent for 2012. So if the market has been either declining or stabilized for the past five to six years, this likely implies that very new appraisers have had no actual experience of applying support for increasing market conditions. More seasoned appraisers have not practiced or applied appropriate techniques in a while, in some cases. Ironically, this also occurred as prices began to decline after years of doing nothing but increasing. To keep up to speed, an appraiser would have to have been proactive in seeking knowledge and practicing various approaches without being compensated. Many do, many do not.

Under Pressure
Appraisers have taken a huge hit financially and are being stretched by unreasonable turn time demands and low fees. (Read Survey Results: How Reasonable Are Appraisal Turn Times? at WorkingRE.com, Library, Volume 32).  Many are not receiving fees commensurate with the time required to prepare a quality appraisal. For example, today’s market offers an extremely limited supply of recent comparable sales data. As a result, appraisers must apply approaches to value which are complex and require extraction methods that haven’t been practiced in years. Appraisers are being asked to accomplish more for less pay, and if they don’t accept the fee and turnaround time, someone else will.

Again, just because a valuation comes in lower than the sales price doesn’t mean the appraiser provided an inadequately supported valuation. As I describe above, there are many causes of a “low-ball” appraisal. Ultimately, it is the appraiser’s responsibility to be ahead of market trends and to completely understand that the approaches to value are neither the same as the past nor the same in every market area. 

Negative Effects
When the agent prepares the offer to purchase the property for the buyer, the default verbiage of the purchase contract states that the buyer’s purchase at full offered sales price is contingent upon the appraisal supporting the sales price (page 2, letter I, of the Residential Purchase Agreement). However, removing this contingency is a prime negotiating tool in today’s market, in order for financing to compete with all cash offers. At face value, the removal of the appraisal contingency is very appealing to sellers, especially when many appraisals aren’t supporting the sales price. Cash offers require no appraisal. However, removal of the appraisal contingency creates risk for the buyer unless they are very knowledgeable in appraisal methodology.