A few years back, you might recall we commented on our blog about the HVCC (Home Valuation Code of Conduct) - a new set of rules governing appraisals that went into effect in mid-2009. Well-intentioned, the HVCC wreaked havoc on appraisals when applied in real life out in the field. Within little more than a year, governing bodies were working to scrap the HVCC with policies that actually worked. 
Last Wednesday we attended a 2-1/2 hour course on lending changes, of which appraisals were a major component. The Appraisal Indpendence Standards were developed to replace the HVCC, with the goal of extending protections to home buyers and lenders.
The new guidelines dictate that appraisers must:
- Understand the value-influencing characteristics in the neighborhood, such as boundary changes and other factors affecting marketability
- Perform a neighborhood analysis to identify value influences, such as architectural styles, land use and site size
- Consider the influence of market forces, including economic, governmental and environmental
In the midst of the discussion on market forces, the speaker discussed vacant properties, foreclosures and short sales, and their impact on neighboring properties, particularly traditional sales. He was very clear that REAL MARKET DATA must be used in appraisals, with zero personal opinion, and that comparable sales from the same neighborhood must be used whenever possible.
Local comps make perfect sense. That said, a natural concern here is foreclosures, as many of our neighborhoods have "comparable properties" that have been foreclosed on, sitting right on the same street. The speaker indicated that when appraising a "traditional sale" home in a neighborhood, foreclosed and short equity sales can be excluded if adequate traditional properties exist from which to draw comparisons. If they do not, then foreclosures and short sales must be used.
He cited examples of homes that are finished with upgrades "to the max" being compared to comparable homes in the same neighborhood that are either not upgraded and/or distressed inventory (meaning financial distress), and that very little credit can be given for the upgrades to a home. One specific example he provided was a "man cave" in an outbuilding that had over $8000 worth of high-end interior finishes, of which the appraiser could only give a value of $1000 because "there were no comparable propeties that contained finished man-caves from which to determine a true estimate of market value (for the man-cave.) i.e. only REAL market data can be used - no opinions as to value are allowed.
Unacceptable appraisal practices include:
- Reporting an opinion of market value that is not supportable by market data
- Misrepresentation of the physical characterisitcs, improvements or comparable sales
- Failure to comment on negative factors such as neighborhood, the subject property, or proximity to adverse issues
- Failure to select and use comparable sales that are locationally and physically the most similar to the subject property
Some other miscellaneous notes from the session include:
- Basements are valued at 50% of the price per square foot of the above-ground square footage
- Gross living area is calculated using the exterior dimensions of each floor, exluding garages and basements
- A level of the home that is not above ground at all points is considered below grade
- Below grade square footage is calculated like a basement - at 50% of above-grade
- Outbuildings may or many not increase the value of the home depending on the level and quality of finishing, if such a building is typical for the market, and if the building is an over-improvement
- Surplus land is not necessary to support the highest and best use of a property (i.e. 7 acres vs. 5 acres may be appraised the same, depending on the property)
- In-ground pools in Minnesota are given minimal appraised value regardless of finishing and may be seen as a liability in some cases. The speaker indicated a $50-$70K pool will commonly receive a $10K appraised value depending on various factors.
The new standards allow for a 3% variance between appraisal price and sales price of the home. That said, in a neighborhood that has few traditional sales and higher distressed sales, we questioned how does that neighborhood ever recoup values, if the distressed properties are used as comps, and only a 3% variance is allowed? We also questioned the reason for homeowners to install high-end finishes into a home when such little value was given for these items when competing with distressed and/or or non-upgraded inventory on appraisals. 
Given the housing crisis (which does seem to be improving significantly, by the way) it is understandable why banks must protect themselves and borrowers. However, in our opinion, the purpose of the appraisal should be to SUPPORT THE PRICE, instead of to find reasons to NOT support the price.
Buyers are savvy and should be able to have some determination of value. If a buyer has looked at 50 homes, and the home with the $8000 man-cave is worth $5000 in his eyes based on everything else he has looked at in the marketplace, then some weight to that calculation in his offer price should be granted there. Docking the seller $7000 because no other man-cave exists is not necessarily the best solution to the appraisal problem.
The rules are very new and so much remains to be seen. We hope that the combination of rising sales rates, low inventories and low interest rates keep sales moving rapidly enough where distressed inventory becomes quickly absorbed and the traditional market may flourish.
"If you look deeper into the strong sales figures, you can see which segments are leading the charge," said Cari Linn, President of the Minneapolis Area Association of REALTORS®. "With inventory down, especially among foreclosures, and good purchase demand, buyers are finally looking harder at traditional properties."