I was asked today by a friend and local Realtor, how she could go about challenging a recent appraisal which was flawed.
This was an FHA appraisal which was valued about $14,000 less than sale price.
Now I have no problem telling someone that the value just isn't there. But there are other things to consider as well. Was the appraisal properly developed? Did the appraiser have "geographic competence" for that market area? Did the appraisal truly reflect comparable sales and listings - or just the most recent ones?
The last one is a common issue. I have performed many appraisal reviews for the Lake county (Clermont) market, where the appraiser simply chose the first three sales which were maybe most recent. Yet in many cases, there were better sales with more comparable features, maybe another 60 days old, and perhaps using REO and short sales do NOT represent the market. In some cases, where REO/short sales drive the market, these are certainly what a buyer would typically choose if given the option. However in other markets, where REO/short sales are spotted throughout the community yet not the predominant sale, these represent "distress" sale situations rather than true market value comparables.
So what do you do if you need to challenge an appraisal? Ahh - this is tougher than ever now! With management companies also playing another card to consider, there are more entities to deal with and more regulations to consider for sure!
With FHA - these appraisals are now ‘tied' to the property for 120 days. Meaning, a lender cannot just order a new appraisal. However, there are some considerations within HUD's guidelines to challenge the appraisal:
•1. From Letter 2009-28
"...FHA is reaffirming these requirements. Mortgagees and third parties working on behalf of mortgagees are prohibited from:....Ordering, obtaining, using, or paying for a second or subsequent appraisal or automated valuation model(AVM) in connection with a mortgage financing transaction unless: (i) there is a reasonable basis to believe that the initial appraisal was flawed or tainted and such appraisal is clearly and appropriately noted in the loan file, or (ii) unless such appraisal or automated valuation model is done pursuant to written, pre-established bona fide pre- or post-funding appraisal review or quality control process or underwriting guidelines, and so long as the lender adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that states the highest value; or...."
If you can demonstrate that the appraisal was flawed or tainted, then you have a case to have the lender document this and order a new appraisal. This is more difficult than just complaining about the value not hitting the sales price. In this recent case, the appraiser failed to consider current pending sales (which subsequently closed AT list price), the appraiser utilized inferior sales with views of large power line areas (easily seen from satellite photos from the area), and also failed to include in the sales comparison features such as a fireplace, etc.
The next question to consider is Geographic Competency. Did the lender order the appraisal through a management company, which in turn subcontracted it to an appraiser from more than 60 miles away, when other local appraisers were available? In an urban area like Clermont, FL or Orlando, FL - there is no reason to order appraisals from outside the county unless the lender requires an appraiser with a specialty. I shoot my OWN foot in that case - since I live in Clermont, FL - and work (or worked) in the Orlando market! Although I DO have competency in the Orlando market, I can't complain when a local appraiser is selected over myself since I live 30-40 miles away. Yet at the same time, there is no reason to order an appraisal from an appraiser from Orlando for a property in Clermont, FL!
So what are YOUR experiences out there? Have you as a Realtor or mortgage broker run into this wall and what did you do? And better yet....have you successfully challenged the appraisal and won?
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