Faulty appraisals contributed to real estate crash

Unrealistic commercial property valuations were at the heart of the recent economic crisis, and a recent study cited by the New York Times points the blame to appraisers rather than overly eager real estate tycoons. The study, authored by KC Conway, an executive managing director at Colliers International, and Brian Olasov, a managing director at law firm McKenna Long & Aldridge, looked at securitized real estate bonds in which proeprties were foreclosed upon.

Of the 2,076 U.S. properties considered, 64 percent were appraised to be worth more than their sales price, by a total of $1.4 billion, while 35.5 percent were appraised at less than the eventual sales price by a total of $661 million. In 121 instances the appraised value was at least double the sale price and in 132 cases the appraisal was less than 70 percent of the transaction price.

Poor appraisals affect all corners of the industry, including the decision to buy or sell a property and lenders’ willingness to work out a favorable deal. In one example, a faulty appraisal in Brooklyn led to an inflated sales price of a development site. When the buyer realized the error, he stopped paying off the debt and forced the lender to take control of a property it didn’t want.

Some appraisers blamed the inaccuracies on the changing use of appraisers. Whereas, in the past, lenders would take care in choosing a qualified appraiser, today they often choose the least expensive one. But Bill Garber, a director of the Appraisal Institute called the study into question, pointing out that actual sales prices doesn’t neccessarily reflect the acccuracy of an appraisal. Each case needs to be considered in isolation, he said.

Regardless, the wild fluctuations between appraisals and sales prices, demonstrates the need for real estate buyers, sellers and lenders to consider factors beyond just that single number, the Times said. [NYT]