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 $406 last year, according to Bankrate.com.
At U.S. Bancorp, borrowers who are unhappy with the valuation can ask to have the appraisal reviewed. If the bank agrees the appraisal wasn't good, it will order a new one. But borrowers can't simply request a new appraisal because they didn't like the initial valuation, says Dan Arrigoni, head of U.S. Bank Home Mortgage. "At our company, you have to have a reason to go for the second appraisal," he says.
Citigroup, by contrast, sometimes asks for two or even three appraisals, with the bank picking up the added costs.
"We know we don't influence appraisals at all," says CitiMortgage President Sanjiv Das. "We also know that appraisal is an art form. I will take another opinion to satisfy the customer that two came in at the same level."
As an appraiser I will tell you that the housing crisis cut our pay in half. We are now controlled by third party management companies that take half our pay while creating unrealistic deadlines which if not met means you either get your pay cut or removed from their list. You may be paying 400-500$ for an appraisal but the appraiser is only receiving 200-250$ for their services. The appraisal industry has become a joke. Most seasoned appraisers, like myself, will not accept work for the low balled fees companies are will to pay us therefore you do get the in-experienced and desperate appraisers. The deadlines create rushed evaluations in order to get the full 200-250$ fees. The government has created this and it is appalling to see it being blamed on appraisers again just as the housing crisis was. Wake up and realize the realtors are over paid salesman that truly don't have the home buyers interest at hand only how much commission they can make. The banks and mortgage brokers are only trying to close the deal to make their own commission. The appraisers, who don't have an organazation large enough to fund Lobbiest to represent them in congress, are left holding the bag of blame. Realtors, Mortgage Brokers, nor Bankers seen their pay cut by a third party who is taking their fees and or commissions. In the end you get what you pay for. The appraisal industry has turned into Cheaper Chucks Discount Evaluations. Enjoy!
When I was a Loan Officer I had an appraisal come back with pictures of course, the house was woefully undervalued, upon a closer look at the pictures there was one of the bedrooms that had an unmade bed, the next picture was of a different angle of the unmade bed, the next picture was a close up of the unmade bed, I pointed this out to the man;s boss and he later returned my call and did indeed say that the Appraiser he hired felt that if they were too lazy to make the bed then they deseved a lower appraisal.
The Appraisal company did fire him and did another appraisal for me which came in fine for the value.
The moral is that as long as appraisals are subject to opinion there will be drastic differences and....there are idiots everywhere.
Pricing a house on Zillow is a huge mistake... They do not have current data on the value of homes and are incorrect most of the time... They use out dated county records... Large real estate companies are closer and more on the money than Zillow is...
I have attended many professional education classes with residential appraisers and am often dismayed that many of them don't recognize that they are following the market - that is to say that when markets are down they become overly pessimistic and fail to see any improvements. When the market is climbing, they become overly optimistic and fail to see the signs that things are slowing down. If an appraiser feels (without justification) that a market is in decline he may arrive at a value that is lower than the most recent comparable sale. If that appraisal becomes a sale, the next appraiser will use that sale as a comp and sale prices in that area will drop - all because appraisers are pushing prices down due to their pessimistic view of the market - which may have been incorrect in the first instance. The same is true for booming markets. I am not sure how to fix this problem but am sure that when things begin to turn around, the same mistakes will be made on the upswing.
You're supposed to fight the appraisal because it's too low if you're trying to sell or refinance. Then you're supposed to fight the appraisal because it's too high when it's time for property tax assessments.
I don't pretend to know that appraisals are coming in too high or too low, because I don't. But I do know that the value of anything, including a home, is only what someone else is willing to pay for it. A lot of people make improvements on their homes that cost several thousand dollars, like a finished basement, that really don't usually add much value to the home. Just because you spent ten grand on improvements doesn't mean it adds ten grand to the value of your home. It only adds what someone is willing to pay you for those improvements.
With respect to the example of the couple trying to refinance a house in Phoenix - that market has lost about 50% of its value since the peak of the real estate market back in 2006. To have an appraisal that suggests the property lost about 36% of its value since the time of purchase is not unreasonable considering the S&P Case Shiller Home Price Indices which suggests that values dropped approximately 33% over a similar period of time in the Phoenix area. The second appraiser probably went way out on a limb and did them a big favor as far as getting a refinance done, but probably did them a disservice with respect to what the property is really worth.
I can tell you it is really, really hard to appraise is the current real market environment with so many foreclosures, short sales, and lender imposed guidelines. And for anyone who wants to criticize an appraiser I suggest you try wearing their shoes for a few days. It's easy to speculate all day long about values, but when your license, income, and career are on the line you'll have a different perspective.
I am an appraiser and I take offense to every incompetent idiot (yes this includes RE Brokers) who blame the appraiser for their housing market inadequacy. Appraisers are restricted to using only lender guideline comparable sales, period, end of conversation. Next time you might think about preparation prior to an appraisal appointment with competent detail regarding property amenities and upgrades as well as a handful of researched comparable sale properties from your neighborhood. Just make sure those comparable sales that you have discovered are the same property floor plan, quality of build, similar square footage, and they can’t be aged by more than 90 days. Appraisal expertise, like any profession, can run from very seasoned to rookie (yes, you get what you pay for). Final reminder; it’s not the appraiser who determines loan amount, it is the lending institution. Appraisers provide an OPINION of value. Oh, and by the way it’s also a good idea to take 5 minutes to pick up your dog poop in the back yard so the appraiser does not track into your house.
I am an appraiser, and we are often times being second-guessed by underwriters at lending institutions who have their own software for determining value and finding recent sales. Often, if we do not use distressed sales that are situated in the subject neighborhood, the underwriter wants an explanation as to why they were not used, or wants us to use them. Lenders are now requiring copies of our licenses, and Errors and Omissions insurance policies with each appraisal. Makes you wonder if they will be looking for someone to sue? The problem, in my opinion, with many appraisals is that appraisal management companies are keeping large portions of the average $406 fee. Many want to pay the appraiser less than $300 per appraisal, without divulging to the borrowers that the appraiser is not receiving the entire fee. By turning over assignment and follow up on appraisals to management companies, many lenders are able to reduce staff, decreasing their costs, while basically paying the management companies with a portion of the appraisal fee. Bottom line, many appraisers are making less, while their costs of doing business continue to rise. Many experienced appraisers have dropped out because of this, and some new appraisers lack the experience necessary to make proper judgement calls on what adds value. In addition, some appraisers are accepting assignments in areas they are not familiar with in order to make a living with these reduced fees. Like many modern day jobs, it is more stressful than ever, with less pay, after having worked for 27 years in the business. I have no problem walking through the house with a borrower or list agent explaining recent improvements or taking a look at sales which they may consider comparable. Unfortunately, many times borrowers or sellers do not understand that some improvements do not add value, could possibly be over-improvements for the neighborhood they are in, and that ignoring all sales in your neighborhood to use sales from a more expensive neighborhood is not permissible. Hurrah for the real estate agent that fought for the seller and did the homework to protect the client. We need more real estate agents out there like that. Meet the appraiser at the house at the time of the appraisal and explain how you see it. I am a broker too, and have had to fight for a second appraisal in a recent transaction. Fortunately, the second appraisal exceeded the sales price. Lets face it, this is not an exact science, or the lenders would have computers doing it. That is scary!