In certain areas of the country, there are “declining markets” and the term becomes very relevant if you are buying a home or refinancing a home in a “declining market” because there are guideline restrictions for properties in these areas.
Appraisal Reports For Declining Markets
Appraisal reports prepared for collateral in declining markets, oversupply and over six month marketing time (as noted by the appraiser) should detail neighborhood marketing data for any changes in the market for the most recent quarter and preceding quarter for which data is available to include:
- Number of listings
- Average marketing time
- Sale to list price ratio
- The appearance or absence of seller concessions
In every appraisal, there is something “comparables” which is a list of sales of comparable properties that have sold in the area. The comparable sales section of the appraisal must include:
- Two sales must be within a three month period
- Two listings with list to sales ratios and supporting value
- If comparable sales within a three month period are not available the appraiser must provide an acceptable narrative to explain the considerations for negative time adjustment. The rate of adjustment and the source of the marketing trend data must both be cited, or
- An explanation with reference to the supporting data, why such time adjustments would not be applicable.
- Two comparable sales from outside the subject subdivision if the subject is new construction. The sales can be post-developer re-sales or units offered by a competing builder. The appraiser must note the consideration of occupancy trends in the development regarding investors who may have purchased one or multiple units in subdivision for future re-sale.
If this additional data does not support the value or the data indicates projected continued decline, an AVM must be obtained to be able to review previous sales in the area, value, and support that the area is no longer in a declining market. If the AVM does not provide the additional support needed, a second full appraisal from the investor’s preferred appraisal vendor must be obtained.
Are you excited about Declining Markets now and what they mean for appraisals and guidelines about lending? Chances are, neither is your loan officer.