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CMA vs. Bank Appraisal

April 27, 2015 by Bostedo Appraisal Services - the Pittsburgh Appraisers

Much has changed in the Real Estate Industry since the financial crisis of 2008 & 2009. In this blog however, we will only discuss what has transpired with regard to how Banks want an appraisal prepared. This blog post will only go into some brief techniques that the Banks require within appraisal reports and I will stay away from any reasoning as to why. However, it is partly because of these requirements that values in many areas are not rising as quickly as some may want or think they should.

I will start by saying that, as an appraiser, I got my start in the real estate industry as a sales person. Prior to appraisers needing to be certified, in Pennsylvania, if you wanted to be an appraiser you needed to obtain a Real Estate Broker’s License. So yes, I do have a Broker’s License which I obtained in early 1990 and still have it to this day, even though I haven’t used it since 1988 when I began my transfer into the appraisal field.

I remember a saying long ago which I am sure is still used today. When an agent lists the property high we will ‘challenge the market’. Well, those days are all but gone for the time being according to the Banks. It is not that appreciation is all but dead, more that, due to the stringent lending practices for the Bank to lend money on a property, they want an appraisal done in a certain fashion. This means, that if the appraisal is done a certain way, it is more likely for, ‘the planets to align’, and the borrower to get a loan. Sorry, I had too even though I said I would play nice.

So now let’s move on to what they, (the Banks), are looking for. FNMA regulations and just good appraisal practice dictate the use of a minimum of 3 comparable properties. Until the financial crisis, that was pretty much all you got on an appraisal. Now however, generally, you are looking at 4-5 comparable sales and a minimum of 2 listings. The use of less comparables made it much easier to, ‘cherry pick’, the sales needed to, ‘make the deal work’. Today however, using not only more sales but also including listings is just the tip of the proverbial lending iceberg. Using more sales and including listings which by the way, I was not an advocate of at the time, does tend to bring the value more into line. So today, I feel it’s not a bad thing and does tend to make sense.

As I said, using more sales & including listings is just the tip of the iceberg. The lender wants listings as an indication of ‘rising or falling’ markets. This now leads me to the largest factor that is a lender must, and is the single most directional force for values. Although there are many others, this is the only topic we will cover here. This word might as well be a four-letter word to appraisers, ‘bracketing’. Remember my reference to, ‘challenge the market’? Well, guess what, bracketing squelches that! Lenders today want the entire sales grid in the appraisal report to be bracketed. A few key examples of bracketing are; comparable sales sold prices & listings current prices, lot size, room counts, bathroom counts, square feet, condition, quality, age, and location. This means that throughout the report you need a sale more, less, or the same as the subject. So when picking comparables, the appraiser can be handcuffed with what he/she can use making the task at hand much more difficult, especially in many markets where this is downright close to impossible because of the lack of data available.

So imagine a real estate agent going on a listing appointment to a home where the homeowner has totally rehabbed their home within the last 3 years. The homeowner says we put all this into our home; the agent goes over a prepared CMA, (Competitive Market Analysis) and lists the property. The property then in a short amount of time has multiple offers above list price. Easy sale right? Obviously, the market has talked and said the property is worth it right? Wrong! Far from it and this is why. ‘Bracketing’! When the appraiser is at the home they will notice and realize, the homeowner has done a fantastic job, and everything looks very nice. However, when putting the report together, all of a sudden due to Bank rules, (bracketing), things do not look so grand. In the same neighborhood are properties selling for 20-30k less than the subject including a flip. A sale is located in another neighborhood that will help with the ‘bracketing’, it is larger & newer. However, that is one thing about how bracketing works, when you have a superior property, you will be making negative adjustment to the comparable, effectively lowering the value due to that particular line item. Inversely, when you have an inferior property, you will be making a positive adjustment to the comparable, effectively raising the value due to that particular line item.

Obviously bracketing is not the only thing the Banks want done in appraisals. The comparables need to be within a certain distance, the comparables should look similar to the subject and the 1004mc shows neighborhood trends. Then there are the listings used which will have a mandatory SP/LP negative adjustment right off the bat, meaning the listing comparables have already lost value before any other adjustments are made. Then there is CU, ‘Collateral Underwriter’ comes into play along with additional underwriting review all done by usually non-appraisers who mostly just go down a check list. If something is not in line, well, you guessed it. All of these checks, and double checks are just some of the processes in place today within our Banking system to, ‘justify value’. There are a few States that have laws that anyone on the lending side who reviews, looks at, or touches an appraisal report needs to be a certified appraiser meaning, a higher and more knowledgeable appraisal background. Pennsylvania regretfully is not one of them.

So today for the Real Estate Industry, and especially Real Estate Agents, it is more critical than ever, to get it right when pricing a property for a potential client. We here at Bostedo Appraisal Services have seen a rise in pre-listing and pre-purchase appraisals over the last couple of years. Our pre-listing and pre-purchase appraisal services consist of an appraisal that is completed in the same fashion as a lender would want. By doing this, this ensures the client will have the best knowledge going forward when it comes to pricing the property correctly, and it will be according to what a lender will actually lend on. Also, many more cash buyer’s want to verify that they are not overpaying for a property, and their purchase price will be according to what a lender would actually lend on and they will not end up, upside down, in the transaction.

The complexities have only grown in the lending industry and I don’t see a reversal any time soon, if at all. Just remember, a property very well may be worth something completely different, but because of lending guidelines, if the data currently is not present, the justifiable value will only be what the current data shows. If you find yourself looking for some help in trying to pinpoint a value that a Lender will recognize as credit worthy on the selling side, or want to make sure you will not be paying too much, by all means, please give us a call or stop by our testimonials & reviews page to see what others are saying about Bostedo Appraisal services. For more information about pre-listing or pre-purchase appraisals, you can see our Pre-Listing Appraisal page and our Pre-Purchase Appraisal page for more information or watch our YouTube video on the subject http://youtu.be/-qLDWXPR80I

We would like to thank you for stopping by, and if you have any questions or would like a free consultation, feel free to give us a call at, 412.831.1500. Again, thank you for stopping by.

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