When it comes to > buying a house, an off-base appraisal can kill a deal.
Already this year, 11% of realtors reported a contract was canceled in the first quarter because an appraisal came in less than the price agreed on by buyer and seller, while another 16% said a contract had to be renegotiated because of a low appraisal, according to the latest home sales survey by the National Association of Realtors. (The NAR just began to ask this question in its monthly survey. In the first quarter of 2009, appraisal-related contract cancellations were probably less than 5%, a spokesman says.) The increase in lower appraisals stems from a variety of factors, ranging from market conditions to new regulations which appear to be skewing the appraisal process in some cases.
Typically, appraisers use comparable sales data or comps (recent sales of nearby properties) to determine the value of the home. Lenders in turn, use the appraised value of a home to determine the maximum amount they ll loan to a buyer. That amount will be either the appraisal amount of the agreed-upon sales price whichever is lower. If the house is appraised for, say, $375,000, and the buyer and seller agreed on $400,000,the buyer would end up getting a smaller mortgage, but still have to make up the difference.
But in the wake of the mortgage crisis, every part of the loan process including the appraisal is coming under more scrutiny. Lenders want more recent sales, more comparable sales they re being scrutinized more for accuracy than they were in the past, says Greg Zadel, a real estate broker and owner of Zadel Realty in Firestone, Colo.
One of the complicating factors is a set of regulations that took effect last year and which apply to mortgages sold to Fannie Mae and Freddie Mac. Called the Home Valuation Code of Conduct, the regulations were designed to make appraisals more reliable and to prevent mortgage fraud by severing the relationship between appraisers and lenders. Instead of being done by the lender, appraisals are now ordered through a third party appraisal management company, which takes some of the money that used to be paid to the appraiser.
However, an inadvertent side effect of the new guidelines has been that the management companies in some cases are steering work to appraisers who cost the least, not those who know the neighborhoods the best. Many times people that do it the cheapest are not qualified; they don t know what they don t know, says Leslie Sellers, president of the Appraisal Institute.
Appraiser quality depends on the individual company used by the lender, says Rod Olsen, national account manager for AMC Links, an appraisal management company based in Lehi, Utah. Some, like AMC Links, are full-service firms, which only hire certified appraisers who work in the assignment s market area. Others will put the assignment up for bid and the appraiser who bids low gets it. Appraisers with the least amount of work or experience sometimes are willing to work for less. They will grab those assignments, they re willing to drive farther out of his geographic area to get it, says Olsen.
What s more, the new guidelines haven t done much to stamp out faulty valuations. In a report released last month, the Mortgage Research Institute found that in 2009 the incidence of frauds involving property appraisals increased by 33% from the year before, while overall loan-related fraud rose by 7%. (The most prevalent types of appraisal fraud in 2009 involve incorrect, or fabricated, comparables, omitted information and value inflation, according to the report.)
The Appraisal Institute recently sent a memo to its members (which represent about 25% of the appraisers in the U.S.) reminding them of their standards of practice, says Sellers. Appraisers are supposed to be competent in three areas, one of which is knowledge about the home s local market. That s the one violated at times by appraisers, Sellers says.
Indeed, out-of-area issues are a top complaint, says Tara-Nicholle Nelson, a real estate broker and attorney in the San Francisco Bay area, and consumer educator with Trulia.com. For instance, Nelson says she sees appraisers from Pleasanton or Tracy, Calif., coming out to do appraisals in Oakland or San Francisco which she describes as nuts because they re five or six cities apart and don t have knowledge of the local market. And the problem is that even within one of these towns, there are so many nuances in property type and neighborhood that often an outsider doesn't appreciate, Nelson says.
What to do about an appraisal you think is flawed?
The onus is on the buyer to get it corrected, Nelson says, and it s usually the buyer s mortgage broker who has to handle the appeal. Reasons for appealing the appraisal include: the home s condition is inaccurately described in the appraisal report; there are comps geographically closer that should have been used; or another property type better approximates the value of the home than what the appraiser used.
To request an appraisal revision, the broker would contact the loan underwriter with documentation that demonstrates why they think the initial appraisal is wrong. That would include data on recently sold homes or other information about the property that the appraiser failed to include in his or her valuation. Perhaps the sales data included a nearby short sale or other kind of incentive offered by the seller to get the deal worked out an appraiser may not always have expertise in these nuances and wouldn t make the proper adjustments, says Sellers.
At the same time, the buyer s mortgage broker should be submitting this rebuttal to the appraisal management company and ask the appraiser assigned to their property to consider revising their valuation, Nelson says. If you re lucky, the appraiser will agree and make the revision. Sometimes they ll say nothing, or will disagree, Nelson says.
Occasionally, when an appraisal comes in off-base, the buyer and seller can still manage to salvage the deal. Zadel recently had a low appraisal but his client, the buyer, was still comfortable with the original price. So they agreed to meet in the middle -- the buyer paid a bit more and the seller lowered the price. But often sellers can t afford to do that or they re unwilling to; likewise buyers may not have the funds to make up the difference between the lower loan amount and the agreed purchase price.
I ve seen buyers start from square one and go to another lender, Nelson says. But in that case, watch out, because the seller may take another offer in the meantime.