On Friday, Freddie Mac released a bulletin to its lenders and servicers detailing revised practices for property appraisals.  This was in response to new appraisal rules adopted by Fannie Mae and Freddie Mac entitled the Home Valuation Code of Conduct, that went into effect May 1 of this year.  As a result of the HVCC, real estate agents started reporting that many property appraisals were coming in below the contract sales price.   This was due to lenders relying more on appraisal management firms that employed appraisers with little experience in their local markets.  Some appraisers didn't make the proper adjustments when using distressed properties as comparable sales for nondistressed properties.

In the bulletin, Freddie Mac addresses these issues and states that:

"Appraisers must be familiar with the local market in which the property is located, must be competent to appraise the subject property type, and must have access to the data sources needed to develop a credible appraisal"

Furthermore, Freddie Mac attempts to clarify the issue regarding comparable sales:

"Freddie Mac does not have requirements about what comparable sales the appraiser is to use.  For example, we do not require appraisers to use Real Estate Owned (REO), foreclosure or short sales.  However, if the appraiser determines that these are representative of the properties available to typical purchasers for the market in which the property is located, appraisers must consider their use."

Here in Miami, where a significant amount of condo properties are under distress, it is important to work with an appraiser who is very familiar with the local market.  For example, in Miami Beach, you could have two condo units with the exact same specifications located on the same block, with one unit listed for sale and another unit having sold 1 month prior.  In the book of many appraisers, the sold unit would be a perfect comp for someone looking to buy the other unit.  However, in todays market, an appraiser should take into account other factors such as the condition of the unit, the health of the condo association, the amount of distress in the building, and the circumstances surrounding its sale (was it a short sale, REO, etc..), before declaring a unit as a comparable sale.   It is now harder than ever for an appraiser to make a correct property valuation, but I think this bulletin from Freddie Mac is a step in the right direction.

Tags: appraisers, comparable sales, condo properties, Distressed Properties, fannie mae, Miami Beach, property appraisals