Fighting back against lowball home appraisals
Poor appraising often makes it difficult for homeowners seeking to refinance. Make sure the appraiser takes into account accurate data on comparable sales in your neighborhood and how the market has changed in the past 6 months or less.
Record-low interest rates are a boon for homebuyers and homeowners seeking to refinance. But low appraisals are making it difficult or even impossible for some borrowers to take advantage.
Samara Glassman and her husband, David, knew their ranch house in Phoenix had fallen in value. But they were surprised by a September 2011 appraisal valuing the four-bedroom home at $385,000, down from the $604,000 they paid in 2008. The appraisal put the couple underwater on their $402,000 mortgage — and threatened to sink their plans to refinance. (Bing: Learn all about comparables)
When they examined the appraisal, they saw it was based on older homes a few blocks away that weren't directly comparable, says Glassman, a real-estate agent. They got a second appraisal in January that placed a $500,000 value on the property. That number was high enough for them to refinance into a new mortgage that will save them an estimated $250,000 over the life of the loan.
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After almost six years of falling home prices, such experiences have become common. About one-third of real-estate agents reported that low appraisals had resulted in the cancellation, delay or renegotiation of a purchase, according to an April survey by the National Association of Realtors.
Ron Phipps, a real-estate broker in Warwick, R.I., says about half of his sales run into appraisal problems. Lenders report that "overly pessimistic appraisals caused by appraisers using distressed sales as 'comparables'" are a key reason why deals are falling through, particularly in parts of the Southeastern U.S., says Michael Fratantoni, vice president of research at the Mortgage Bankers Association.
Part of the problem is that home prices have plummeted further than many people would like to believe. "Everybody thinks the value of their house hasn't fallen nearly as much as every other house in their neighborhood," says Greg McBride, a senior financial analyst at Bankrate.com. "But the three foreclosures in the neighborhood are relevant to the current market price of your home, like it or not."
Appraisal changes enacted after the financial crisis were designed to eliminate improper pressure on appraisers that often led to inflated valuations during the housing boom. But critics say those changes have resulted in unnecessarily conservative valuations and the greater use of appraisers with little knowledge of local market conditions.
Another problem: Accurate valuations can be difficult to come by when sales are thin and prices are just beginning to edge upward after prolonged declines. Many borrowers are "in a holding pattern for extended periods" because it's difficult to find comparable sales to support the appraisal value, says Terry Moore, global managing director of Accenture Credit Services, which provides consulting and mortgage-processing services to banks.
You can take steps to improve your odds of getting a deal done. Phipps, the Rhode Island real-estate agent, advises borrowers to look at comparable sales from the past three to six months before seeking a mortgage. "Whether it's a purchase or a refinance, you want to know what the range of values is," he says.
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Borrowers can't pick their appraiser, but they can accompany the appraiser during the inspection, pointing out improvements that add to the home's value. They also can provide the appraiser with comparable sales that can be used to support the valuation.
"It's perfectly acceptable to have a list prepared for the appraiser of improvements that might not be obvious," says Ken Chitester, a spokesman for the Appraisal Institute, a professional group. Data are "the lifeblood of the profession."
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Sometimes it makes sense to start over. Steve Walsh, the mortgage broker for the Glassmans, resubmitted the couple's loan application to a different lender a few months after the original refinancing fell apart because of the low valuation.
Borrowers can request that the lender review the appraiser's findings, though the chances of success are slim. If you think the value is unreasonably low, look first for factual errors, such as an erroneous number of bedrooms or miscalculated square footage.
To improve your odds of getting the appraisal overturned, you will need examples of recent comparable sales that weren't considered by the appraiser, Chitester says. You also can ask the lender to order a second appraisal, which you might have to pay for. The average appraisal cost $406 last year, according to Bankrate.com.
At U.S. Bancorp, borrowers who are unhappy with the valuation can ask to have the appraisal reviewed. If the bank agrees the appraisal wasn't good, it will order a new one. But borrowers can't simply request a new appraisal because they didn't like the initial valuation, says Dan Arrigoni, head of U.S. Bank Home Mortgage. "At our company, you have to have a reason to go for the second appraisal," he says.
Citigroup, by contrast, sometimes asks for two or even three appraisals, with the bank picking up the added costs.
"We know we don't influence appraisals at all," says CitiMortgage President Sanjiv Das. "We also know that appraisal is an art form. I will take another opinion to satisfy the customer that two came in at the same level."
To Dan whoever, The appraisal company I worked for lost over 50 clients ( banks and mortgage companies )including Country Wide. The company was forced to close as the appraisers did not stretch values. They layed off over 20 appraisers and employees. I then appraised on my own and had morgage companies tell me to come in higher ro they would get another appraiser. I quickly left the bus. Whena bank black list AN APPRAISER THEY ARE DONE, EVEN FOR NO REASON.
Homeowners can turn appraisers in for no legitmate reason, they may just think their house is worth more than it is, call the appraissal board and cause numerous headaches and expenses. When homeowners and banks influence appraisers 2006-2011 happen.
At first I thought @Stacey's reply to @svalue made good sense, i.e. the "value" of anything is determined by what a free-will buyer is willing to pay and what a free-will seller is willing to accept - no third parties need be involved, other than in an advisory role, as requested by the buyer and/or seller. The market should dictate prices (allowing them to rise or fall) BUT...
In the case of a mortgage, a third party (the bank) DOES have an interest in the asset. The bank is the party (rightly) requiring the appraisal in order to protect their asset. If you borrow $80k on a $100k house, you do not own a $100k house - the bank owns $80k of it and needs to be able to get their money back (by selling the house) if you default on the mortgage (gee, that never happens, huh?).
Let's say some fool buyer is willing to pay $200k for the above property. Buyer, Seller, Realtor all agree this is ok. Now, Buyer gets a mortage for $160k then defaults on the mortage. What are the odds that the bank can sell that house to anyone for $160k? What are the odds that another fool will come along and offer $160k+ for that house? Ain't gonna happen. That is why appraisals are necessary - to protect the party holding any mortgage. When you are asking someone to lend you (or your buyer) money, they have a right to protect their interest, whether you like it or not. If you don't object to a seller's price, fine, that is your right, but then use your own money, not someone else's.
BTW, over-inflated prices are but one of the many reasons for this mess; not the only or primary, yet another straw on the camel's back. In many cases, this is why people are underwater - they wanted the house so badly that they were willing to pay the asking price, sometimes competing on the front lawn with other buyers. We all read the news stories about homes in part of CA and FL that sold within hours of listing. Buyers acted irrationally, thinking that had to have it, regardless of price, and now are reaping the consequences of their folly. And sellers were more than happy to accomodate them. I have no sympathy.
It's like agreeing to pay $8/beer at a ball game then complaining that you went home broke - nobody held a gun to your head to pay that price, but you wanted it that badly and were willing to make an irrational choice.
If an appraiser has made significant errors, like not measuring a home correctly, Another error is obviously not driving comparables because of view, condition or location adjustments not being made that could have made a difference in value,. Make sure Ihe person doing the inspection is the person doing the appraisal, (always ask for a card or identification from the person showing up at the door), and see that is the person who has signed the appraisal, If you find significant problems, then the appraiser should be reported to your state licensing board governing appraisers. In many states you can find that on-line and print the forms.
Bad appraisers hurt all of us. Poor sloppy appraisers need to be either gotten out of the business or have required retraining. Right now they are hiding behind AMCs (appraisal management companies) who protect the trash they do because AMCs have no liability....they only want to make money. They pay appraisers so little that appraisers are cutting corners so that they can make a living. We need to dump AMCs so that appraisers will again be accountabl the the lenders and borrowers who can tell the difference between a decent appraisal and a something funky.
To all you appraisers.....you are just as guilty as the banks for the crash. You were enticed and DID inflate the values when all that was going on. How can we have confidence in you after that? The appraisers on this page who are chastising others are so hypocritical it is sickening. I would take the advice of a truthful non-professional than a present BS appraiser that was and still is influenced by the banks. You use the excuse that the banks currently want these loans to process and have no interference with your findings. That’s a crock!!! Banks are making their money anyhow and are reluctant to put out more loans due to the past exposure and bailouts. Go and put your BS somewhere else. Not all people have bought into your scam and lack of morals.
We had an appraiser in western WI that ignored what we told him at the walk through, left out items and valued a finished, walk out at $3 a square foot. We provided info on the items he missed, the extras that would change the 'quality' portion from a basic to a custom design and local valuation amounts per square foot from other appraisers and he told us 'He didn't make a mistake'. We went back to the Credit Union and told them they could either get another appraiser out at their cost or we would sue for failure to exercise due diligence in the appraisal process. After the CU reviewed the info we provided, they sent another appraiser and the apprasal increased 25%.
If you have an appraiser you think is wrong, DOCUMENT the errors and fight it with the lender based on due diligence. Opinions don't count, but if you can show failure to include square footage, missing extras or errors in valuation amounts based on local ranges of valuations, you can succeed. Don't accept that the appraisal won't change/the difference is too minor.
I am an Appraiser and would like to please ask that every one do your homework before trying to refinance. I can't tell you how many times I have an appraisal ordered when I know the buyers are not even close to where they need to be to refinance. Appraisals are based primarily on the sales comparison approach of historical sales. This means that we compare your home to recent sales and make adjustments to the sales based on several factors ranging from upgrades, updating, gross living area, vehicle stoage, etc. If the comparable is superior in that area than we adjust the sales price down. If the comparable is inferior in that area than we adjust upward. After all adjustments are made then we have a value range of your home's market value.
The sales comparison approach is really the only thing lenders are willing to look at on residential appraisals. This is a secured loan you are seeking and the lender wants to know what they can sell the property for today if they take it back. So PLEASE research sales in your area PRIOR to paying $300 to $500 for an appraisal. Since the lender orders the appraisal they are our client we can NOT disclose any information regarding the value of the home to the homeowner. (Yes, even though you paid for it.) You will find out the hard way when they send you the appraisal.
Also, keep in mind that appraisers CAN use short sales and foreclosures when comparing to your property. The reason they can do this is if your market area has been strongly impacted by distressed sales than the typical buyer your property is likely to consider these distressed sales when purchasing. While they can utilize distressed sales, they should be market tested and similar to the property in overall condition.
I do agree with the article that you should have a printed or hand written list of updates/upgrades and when they were done. By doing this the appraiser is more likely to consider all of the items because they know you will be looking for them to be mentioned on the appraisal.
No market is perfect and there are almost always always a large range of sales that support a range of values. Sometimes you will get a super conservative appraiser who uses thebottom of this range. When this happens the only thing you can do make sure all your upgrades/updating is acounted for.
Appraisers are not perfect. We are merly demonstrating the value of a home given the data that is available to us. We do not personally inspect each of the comparables and we only know what is told to us by the agents, MLS, and tax records. This can make it difficult when tyring to extract and demonstrate the value of certain upgrades to an underwriter. Also, utilizing historical data is flawed. (Expecially when values are increasing.) Lenders are less likely to accept pending sales as upper limits (this method was a common practice during the boom) and appraisers are limited to using the value ranges of the historical sales. This can put a damper on values that are trying to increase.
So PLEASE, PLEASE, PLEASE do your research. Most appraisers feel terrible appraising a home when they know the borrower is not going to be able to use the appraisal. Again, there is nothing we can do. It is considered unethical to disclose value to the borrower or to the client unless the appraiser has been engaged to do the appraisal. If we disclose this information it is a violation of USPAP and we can be fined or lose our licenses.
Here is a novel idea. If you are so sure you know more than a qualified appraiser, you can always buy the house anyway. It just costs you more out of your pocket. Since you know more than the appraiser, you are not going to lose money...right? Or you could trust a qualified professional who has no interest in the transaction. Agents, sellers, buyers all have interests in the transaction. Agents and loan officers don't make money if the transaction does not close. Do you really think they care about the buyer? Most buyers only know what the agent tells them. Does anybody see anything wrong with that?
Something else you might want to consider is basic business. In all professions, poor workmanship, poor customer service, poor quality does not get rewarded with repeat business. The appraisal profession is different. Appraisal Management Companies worry less about quality and more about profits which means getting the cheapest appraiser they can find. The most qualified appraisers will not work for AMCs because their fees are insulting to the appraiser. Before HVCC and Dodd-Frank, if appraisers did not hit the number, they did not get repeat business as loan officers and real estate agents would blackball appraisers for providing honest appraisals that did not support their commission sale or refinance. Many appraisers were strong armed into hitting values to stay in business and the less honest appraisers thrived while churning out poorly trained appraiser clones that did not know how to do a proper appraisal without a target number. The purpose of HVCC and Dood-Frank was to eliminate the target hitting appraiser, but the result gave control to money hungry AMCs who care less about quality, but more about their profit lines. Good ideas sometimes get the rong results.
This week alone, I have had to appraise two homes with contracts higher than market value. The first was situated on a busy farm to market road. The house sold for $93,000 more than the most similar sale next door that was the same size, updated (not an REO or short sale0 and only five years older. There is no way for an appraiser to justify a price difference of $93,000 with the only difference being five years in age. Of course, I am the incompetent appraiser.
The second was a 1700 sf tract home on a half acre lot for $150,000. The most recent 1700 sf home sold for $134,000. There were only four sales from the immediate neighborhood over $150,000 and the highest was $156,000. All four were 250-500 sf larger homes.
Usually the first words out of an agents mouth is how much nicer their listing is than the other homes, but when you invesigate you find out the highest sales are just as good or even better than their. They will point out something another sale does not have, but will not acknowledge what the other sale has that their's does not.
Last week I appraised a nice tract home with a pool...a $52,000 pool with a $22,000 retaining wall. The contract price was based on what the seller needed to walk away from the home. The agent wanted me to ignore the other sales (with pools too) in the subdivision and use other sales from subdivisions futher away to justify the sales price. I included some of those other sales. They did not support the sales price either.
Yes, there are bad appraisers just like there are bad agents. The key is not to use a mortgage company that uses Appraisal Management Companies that will choose the cheapest appraiser, not the best to increase their profits.
And another thing, it takes twice as long and way more work to come in low on a appraisal because we have to be sure to support our values with the most similar accurate data available. It is much easier when a property is properly listed and sales support the sales price as it takes no extra work or additional data to justify a proper price.
As an appraiser I encounter resistance daily, people are shocked to find out their home is valued less than it was the last time it was appraised. We don't make the market, we report it and unless you have your head in the sand you would know that the housing market and the ecomomy are terrible right now and getting worse. Everyone is an expert except the person trained to actually complete the appraisal- I'm sick of it. One thing that nobody seems to understand- COST DOES NOT EQUAL VALUE! So go ahead and install gold plated toilets, elaborate overpriced pools, etc. you're not going to increase your home's value dollar for dollar. Basically your home is worth what your neighbors are selling their homes for. And please stop with the price per square foot methedology nonsense in residential appraising- it doesn't work. The only time it's accurate is when you have the exact same home on the same street on the same size lot. For example, a home 1,000 sq ft sells for $100,000, $100 per sq ft right- so that means the house across the street which is 2,000 sq ft on the same size lot must be valued at $200,000 since $100 x 2,000 = $200,000 right- WRONG. This method doubles the value of the site for the 2,000 sq ft home. So when you remove site value the formula falls apart, don't rely on this as a way of determining value. Agents, bankers, mtg brokers and most importantly the home owners- please let appraisers do their jobs, we don't tell our doctors, cpa's, builder's etc. how to do their job. It's the same thing when you question us! This article was not written by an experienced certified appraiser and is full of inaccuracies.
Housing is cratering. You are right about interfereing or talking to the appraiser. It will can get you into trouble.
But inflated appraisels was not the biggest problem at all. It was people buying more house than they could afford, and no down payment programs, and easy qualifying that got us into this. Way to many loans were made to people that had no business buying a home.
This reeks of conspiracy between the homeowner, the broker, and the appraiser, and possibly the lender. A bank would never do this deal with any knowledge of the first appraisal, and most banks would order a desktop or walk through appraisal to verify an outside appraisers assessment especially if it came in this close to the original loan amount AND the selling price in a depressed market. If the appraiser was someone the bank also works with, it should at least have ordered a DTA from another vendor to aviod a conflict of interest.