Ken Harney – Demanding the freshest comps

How fresh are your “comps” — the comparable sales of properties used as benchmarks in home real estate appraisals? Buyers and sellers rarely had to be concerned about such a question — or even understand it — when values were on the upswing.

But in soft and declining markets, lenders recently have begun making comps a big deal. Some sellers are being forced to renegotiate lower prices with buyers, even after they have a signed contract.

Rather than accepting sales of similar properties that closed as many as six to 12 months ago, lenders and mortgage investors are demanding that appraisers include only the freshest comps, ideally those closed within the previous 90 days, to support their valuations.

They’re also pushing for more extensive data on local listings, pending sales, and listing-price-to-selling-price ratios before they agree to fund a mortgage at the requested amount.

As a result, growing numbers of sales transactions are being complicated — even knocked off track — as buyers demand that sellers lower agreed-upon contract prices to reflect the lower loan amounts offered by lenders.

“Appraisals have become a real hassle,” said Steve Stamets, a loan officer with 20 years’ experience at Nationwide Home Mortgage in Rockville, Md. “Some sellers are taking a beating,” he said, citing a recent transaction where the appraisal came in thousands of dollars below the signed contract price. Had the seller not agreed to eat the difference — take a lower price than the buyer had agreed to in the contract — “the whole deal could have fallen through,” said Stamets.

Major lenders and investors such as Fannie Mae and Freddie Mac “may have gotten rid of their ‘declining markets’ policies,” said Stamets, “but now everybody is beating down on the appraisal” by demanding 90-day comps or fresher.

In Richmond, Va., appraiser Perry “Pat” Turner of P.E. Turner & Co. says his firm has seen “numerous” cases where using newly mandated 90-day or more-recent comps — as opposed to those six months or older — has contributed to valuations lower than the price on the sales contract.

“In 95 percent of those cases,” he said, “the [listing and selling] agents have gotten together and renegotiated the contract” rather than lose the deal. In Woodland Hills, Calif., appraiser Kerry Leiman, owner of Leiman Appraisal, defends the tougher standards as producing valuations that are much more finely tuned to short-term changes in local price movements — down or up.

“Shorter is far better,” Leiman said, even if sometimes there are not enough comparable closed sales transactions that fit the lender’s tighter time requirements. In those instances, he said, appraisers are able to look to current listings and use “time adjustments” based on local market pricing trend data to come up with appropriate estimates.

Turner said that when enough 90-day comparables are not available, he can sometimes persuade realty agents to disclose — in confidence — the prices on pending sales, which otherwise are not reported or listed until closing. Pushed by lenders for the freshest possible data on properties, Turner also can tap into the local multiple listing service and statistically derive adjustment indexes for small geographic areas based on the percentage difference between original asking prices and selling prices.

That, in turn, allows him to adjust — downward or upward — estimated prices for current listings that are comparable to the property he’s appraising but haven’t sold yet. If the listing is for $400,000 and the index suggests that houses in the area are selling for an average 4 percent below the original list or asking price, the appraiser can estimate the probable value of the unsold comparable house at $16,000 less, or $384,000.

Tim McCarthy, an appraiser in Tinley Park, Ill., agrees that requirements for fresher comps generally improve valuation accuracy for lenders’ purposes, but are not foolproof. To the extent that appraisers have to focus on listing-price to selling-price and time-on-market indexes, they may miss some of the games that sellers and agents can play, he said.

For example, a seller with a current listing “at an unreasonable price” that hasn’t sold for months, said McCarthy, might pull the house off the market, then come back with it as a “new” listing with the same excessive price. As long as the listing date is at least three months from the date the house was pulled off the market, the listing will be counted as new under Illinois realty rules, and the high asking price may get factored into new appraisals.

In that case, McCarthy said, the whole push for freshness in data “just totally misses the mark.”

Ken Harney is a real estate columnist with the Washington Post.