The unique challenges of appraising property in a down market

A declining market is a tricky time for real estate appraisers. On the one hand, the appraisal becomes more important than ever, as buyers and sellers want to make sure the asking price remains fair during a time when the market can change rapidly. On the other hand, trying to get it right at a time when the market is declining comes with a unique set of challenges. Simply put, conducting accurate appraisals is much more difficult to do in today's declining market for a number of reasons. A down market means there are fewer transactions, which means there are fewer comparables to use as data for determining market value. Also, there are more foreclosures, short sales and other distressed property sales taking place, which can inaccurately skew a market in some cases. Finally, although it is not directly related to the appraisal process, the new Home Valuation Code of Conduct, or HVCC, is adding a level of stress and uncertainty as to how and when appraisers will get their assignments in the future. Many appraisers are having to come up with new strategies for conducting accurate appraisals. Because an appraisal is simply a professional opinion of the fair market value of a property at a given time, trying to come up with the right valuation at a time when the market is constantly changing (in this case, declining) is like trying to hit a moving target. What this means is that appraisers are doing much more to be able to conduct accurate appraisals. To come up with enough comparable properties, appraisers often have to scour records going back as many as five years, rather than just a few months to a year, because there simply are not enough transactions to provide the data. Then to arrive at an accurate number, the appraiser must carefully factor in the degree and rate at which the market has declined since the comparable sale took place. Appraisers are also looking outside of neighborhoods to similar areas to come up with comparable sales. In this instance it is important for appraisers to be intimately familiar with the areas where they are conducting appraisals. Sometimes this involves talking more with the real estate brokers who are handling transactions to try to understand the true nature of the properties. Numerous factors - everything from the traffic at open houses to how many offers were made to whether there were counter-offers - now become important information for appraisers trying to hit the right mark in a very nuanced market. Luxury properties and distressed properties - the properties at either end of the spectrum - also present challenges. Luxury properties are rare and unique cases even during boom times, so during a slow market there are even fewer comparable sales to use. For foreclosed and distressed properties, a very close look at conditions is needed to determine accurate market value. The new Home Valuation Code of Conduct has also been presenting challenges to the entire mortgage lending industry, not just the appraisal industry. The code was meant to put a firewall between the lending industry and appraisers who are evaluating properties, so as to eliminate undue pressure and conflict. But the introduction of the new rules is also having other ramifications for the industry: a less refined system of picking appraisers, a so-called "commoditization" of the appraisal industry. All are new challenges that appraisers face as the industry itself is changing. Few are willing to guess how long the declining real estate market will continue and whether these new challenges will get resolved or grow more intense, but it seems fair to say there is still some time yet to go before healthier days return. In the meantime, real estate appraisers must employ some new strategies and a lot more legwork to get it right during a tricky market. Sam Heskel is executive vice president and founder of HMS Associates, Brooklyn, N.Y.