Knowing the Right Time for a New Appraisal

3/18/2010

Though it may seem elementary, an area that is commonly criticized by examiners is the proper understanding and use of appraisals. This is particularly true when refinancing a loan with different purposes. Regulators often believe that bank management should obtain updated values on properties when the purpose has changed. Common criticism is that this, at times, is not completed, but should be. For example, instances where the property type changed from a single-family residence to a rental property, it is common for banks to overlook the need for a new appraisal. The question that needs to be answered is that the appraisal or evaluation should be commensurate with the property type.

Another area to be aware of when questioning the need for a new valuation concerns the status of a project that is not performing as originally anticipated. Guidance is given to ensure a new appraisal is obtained if a note is renewed and there is significant change in the project. A common example cited is a development project that has “stalled” and the market conditions had changed significantly, which resulted in the original appraisal being invalid.

One last suggestion to remember when renewing a real estate secured loan is to conduct a real estate evaluation. Safe and sound banking practices dictate the need for an evaluation to be conducted if an extension is made even if there has been no new monies advanced.

With the significant deterioration taking place within real estate values and the effect this is having on a bank’s loan portfolio, it is important to remember the three things discussed to aid in reducing potential regulatory criticisms.