Valuation Gets Tough When Sales Slide

In cooling real estate markets, it's one of the hottest questions: How do you value a specific piece of property when local home sales are down 20 percent to 40 percent from last year, inventories of unsold homes have ballooned by 200 percent or more, and all the trend lines are pointing negative?

It can be tough. Traditionally, real estate appraisers focused heavily on sales of similar properties -- "comparables" that sold in recent months -- to make their valuations. But that doesn't work well in markets that had been superheated -- prices rising at 1 percent to 2 percent a month -- but are now stalled out or falling.

It also doesn't work well in markets where recent closed sales prices often were inflated by incentives provided by sellers to buyers -- contributions to closing costs, for example, "buydowns" of mortgage interest rates and other sweeteners not always on the public record.

"It's getting pretty dicey out there," said John D. Bredemeyer, a residential appraiser and spokesman for the Chicago-based Appraisal Institute, the largest professional group for the industry.

"Just looking at historical data can be perilous. You've got to open up the window and see what's really happening now. You've got to answer the question: 'Where are we in this cycle?' And you've got to factor that into your valuation."

Some mortgage lenders and relocation companies now expect appraisers to examine a wide range of data they never emphasized during the boom years. Gary Crabtree, owner of Affiliated Appraisers, based in Bakersfield, Calif., said that besides the traditional "recent comps," he now factors in at least eight other types of data in determining the value of a house:

· Pending sales under contract.

· Listing prices of houses in the area.

· Market supply and demand.

· Length of time unsold on the market for current listings.

· Price reductions or increases on current listings.

· Notices of defaults and notices of trustee's sales.