ActiveRain MasterMinds - February 2011 - What are some of our strongest issues related to appraisals, and how do we solve them?
Submitted by the Stalwart Six
Before we address solving our strongest issues related to appraisals, we must identify the definition of an appraisal as it will be discussed in this report and identify our issues.
Real estate appraisal, property valuation or land valuation is the practice of developing an opinion of the value of real property, usually its market value. For mortgage valuations of residential property in the US, the appraisal is most often reported on a standardized form, such as the Uniform Residential Appraisal Report. Appraisals are controlled by HVCC, Home Valuation Code of Conduct.
Reforms in the mortgage lending industry have given rise to changes, not all of which seem to be for the better. To evaluate appraisals and the problems encountered by real estate professionals and consumers, we interviewed agents, buyers, sellers and loan officers and appraisers to get an all-round perspective.
The HVCC established standards in the provision of appraisals for mortgage home loans including:
- Solicitation
- Selection
- Compensation
- Conflict of interest and appraiser independence.
In October 2010, the Federal Reserve board released an interim final rule to ensure that real estate appraisers are:
- Free to use their independent professional judgment in assigning home values without influence or pressure from those with interests in the transactions.
If we had to report our findings in one sentence, it would be, "All real estate is LOCAL -
especially when it comes to APPRAISALS."
A Realtor's Perspective - Issues and Suggestions
ISSUE: Frustrated Realtors have experienced appraisals coming in under sales price.
SOLUTION: Realtors should be pro-active in their approach to the appraisal of their listing.
(1) First, remove your keybox from the property to ensure that you will have an opportunity to communicate with the appraiser assigned;
(2) Inquire as to the appraiser's geographic area - if you believe the appraiser does not have knowledge of the area in which your property lies, request another appraiser who understands the unique distinctions of the neighborhood and community;
(3) Prepare a booklet for the appraiser including features of the home you want to make sure are considered, and include quality comps you considered when you and your Sellers decided on list price (or more current ones if needed). If the utility bills are extraordinarily low due to energy-efficient features, include that information. If the home is the ONLY one for sale that backs up to the greenbelt and that is a desirable feature, include that explanation in your booklet. If the school district or homeowner's association or nearby amenities improve the value of your property, point that out.
(4) By the same token, if there is a comp that should be excluded, print it out and explain why it is not a good comp for the subject property. If it has the same number of bathrooms, but you have to walk through a bedroom to get to the only first floor bath, that needs to be pointed out to the appraiser who would have no way of knowing about the layout and disadvantage. The Listing Realtor should participate in the appraisal process just as thoroughly as when originally pricing the property.
(5) Explain special circumstances. If your property recently sold for much less than its current sales price, explain the circumstances so that the appraiser doesn't have to guess.
Present this material to the appraiser in a professional and helpful manner. Do not be pushy or aggressive - instead, present well organized and useful information.
ISSUE: Many Realtors do not understand how to read an appraisal, much less provide useful information to accurately represent their Sellers' property advantages.
SOLUTION: Our local, state and national associations need to offer courses to Realtors so that they can understand the basics of appraisals and be prepared to participate in the appraisal process.
ISSUE: Appraisers question Realtors about previously closed transactions to obtain more accurate data.
SOLUTION: Report Sellers' Concessions in MLS when a transaction closes. Local associations will have to adapt if this is not required or an available field in MLS. It is a direct violation of the National Association of Realtors Standard of Practice for a Realtor to discuss a previous client's transaction, and it is not appropriate for an appraiser to solicit this information from agents.
ISSUE: No standard procedure to challenge an appraisal.
SOLUTION: Create a procedure where an appraisal can be challenged; something similar to mediation required when there is a dispute between Buyer and Seller.
An Appraiser's Perspective - Issues and Suggestions
ISSUE: Insufficient Information Available
SOLUTION: Encourage Listing Realtor to provide useful and pertinent data The two appraisers with whom we spoke are happy to have input from Realtors, because they can only adjust for upgrades of which they're aware. Because their information comes from the MLS (Multiple Listing Service) and they can't see inside the homes that are already sold, they are dependent on written descriptions. If the description doesn't point out that the kitchen countertops are granite or that the refrigerator is subzero, appraisers can't make adjustments for that.
ISSUE: AMC (Appraisal Management Company) that reviews appraisals are NOT licensed appraisers and may have little training. They slow down the process because they don't know how to review or interpret appraisals.
SOLUTION: Require AMC members to be licensed appraisers. Require that reviewers have geographic knowledge of the area of the subject appraisal.
ISSUE: Many AMCs are owned wholly or in part by the Lender.
SOLUTION: Affiliation between Lender and AMC should be disclosed to real estate professionals and consumers.
ISSUE: Appraisers feel underpaid and are either leaving the business or having to double up on work. Although a consumer is charged $400 for an appraisal, in some instances, the appraiser only receives 50% of that amount.
SOLUTION: Fees paid to appraisers need to be established to reflect the purpose of the appraisal - and that is to protect the consumer. The AMCs need to focus on their job of reviewing appraisals for accuracy and not profiting at the expense of the quality of the appraisal produced.
A Lender's Perspective - Issues and Suggestions
ISSUE: Question the validity of appraisal - seems appraised value often equals contract sales price, even when a property is sold well under market value.
SOLUTION: The USPAP (Uniform Standards of Professional Appraisal Practice) requires that the appraisers review the contract on purchase transactions, so we see no way to prevent appraisers from knowing the contract purchase price. However, if the appraisal comes in equal to a sales price that a Lender suspects is not valued correctly, notification should be sent to the appraisal reviewers to encourage a meticulous review. Suggest further information as to why appraiser NEEDS to see sales contract.
ISSUE: Lender or loan originator has no control over the amount of time required to complete an appraisal. Often the client can get questions answered faster than the Lender.
SOLUTION: Better communication is needed between the Lender/Loan Originator and the AMC; increased transparency.
A Consumer's Perspective (Buyers & Sellers) - Issues and Suggestions
ISSUE: Sellers' property is appraised under contract sales price.
SOLUTION: Sellers should provide Listing Realtor with as much information as possible to support list and sales price. [Note that Realtors taking over-priced listings may be contributing to this problem.]
ISSUE: Buyer wants to know true value of property. Nobody wants to start the biggest investment in their life with negative equity.
SOLUTION: The accuracy and integrity of appraisals need to be improved because the intent of an appraisal is to protect the consumer.
ISSUE: Transactions may need to be renegotiated due to the result of the appraisal.
SOLUTION: Impose deadline for appraisal to be due, just as we have deadlines for inspections and financial approval.
SUMMARY: We all need to work together as professionals in the real estate field to successfully close transactions that are good for the consumers, our economy and real estate professionals. We believe addressing the above issues and proposed solutions will benefit all and encourage a streamlined process in the selling and purchasing of real estate.
Submitted by the Stalwart Six
Team members left to right: Corinne, Tricia, Lori, Paulette, Sharon, Kat
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