Appraisal Myths and Misconceptions
Even though Northern Virginia Real Estate market is considered a stable we do have occasionally issues with appraisal. In some scenarios like a unique property, or a home with tons of custom upgrades or an investor flipping the property in a neighborhood with low turn over can be an issue with appraisal.
“Appraisal Myths and Misconceptions”
Let me first say, that I have a number of friends that are appraisers. Let me also say that I have been very critical of HVCC and Dodd-Frank, which governs the appraisal process through appraisal management companies, which for me goes against the free enterprise system and put some very good appraisers out of business.
Appraisals that are done are not an exact science. Let me share an example and why the system doesn’t work in the best interest of the consumer. All these rules are put in place to protect the consumer from themselves.
A couple of months ago, I took a mortgage application for a client that had been referred by a local Realtor. The property was being flipped by an investor that purchased and completely renovated the property. The sale price was $169,900 with the seller paying $5,000 toward closing costs. Because the property was being flipped, two appraisals were required, which is common in these situations.
The first appraisal was done and came back with a value of $163.000. The two Realtors in the transaction both thought the appraised value was incorrect and contacted the appraiser with additional comparables showing a higher value. In the meantime the second appraisal came in $172,500. How is this possible? The appraisal process is not an exact science.
We requested the lender allow a 3rd appraisal to be done, which they didn’t allow. The original appraiser would not adjust the value based on the information that was supplied by the appraisers. The lender came back saying the second appraisal could not be used and would only accept the 1st appraisal with the $163,000 value. Explain to me how this makes sense?
The buyers could not come up with the difference, so the seller had a decision to make. In this case, accepted the lower price and took the $6,900 hit.
The Top Myths and Misconceptions in the Appraisal Process Dispelled for Clients
By: Dione Spiteri
“An educated customer is your best customer,” the saying goes.
As a mortgage broker, chances are you are intimately knowledgeable about the Appraisal Independence Requirement (AIR) as part of sound underwriting for financial institutions. And though you may be familiar with the provisions for gaining information to safely loan on a property, be careful not to take for granted that buyers are aware of the legislation or the purpose and process of the appraisal overall.
With interest rates at all-time lows, consumers continue to consider refinancing and buying as growing options. Low rates and competitive housing prices present an opportunity for mortgage brokers to address a happy client’s needs for financing more than once, potentially, over the course of several years. But with more people getting into the market, with varying levels of education about the home buying process, opportunities for misinformation, and therefore, dissatisfaction, can be high. Consumers are likely to be disappointed if they do not understand why their appraisal amount did not come in as expected, are not made aware of the need to pay for an appraisal again in certain circumstances, or simply do not understand the process and what to expect.
How can you set expectations on the appraisal process with borrowers? What myths and realities should every consumer be aware of? The following is a list of misconceptions in the industry that can be addressed early on—either directly in person with the client or through a checklist to educate them on the process.
Myth:
Appraisers have been appraising properties at lower than market rates because of AIR.
Reality:
Appraisers have been appraising properties lower because most markets are declining. Keep in mind that market value is the “most probable price that a typical buyer will pay when the property is exposed to the market for a reasonable amount of time.” Foreclosure sales, short sales and other distressed sellers have added low-cost inventory to the market for which every property must compete for buyers. Any buyer that could purchase the house next door in foreclosure for half the list price, would do so if given the opportunity. The appraiser’s job is to determine the most probable price, not support the existing sales contract price. The fact that appraisal values have been lower has everything to do with market trends and factors, and nothing to do with AIR.
Myth:
The homeowner pay for the appraisal and therefore, owns the appraisal report.
Reality:
If federal money is involved in the transaction – Fannie Mae, Freddie Mac, HUD, VA, or other programs – then by federal banking regulations, the lender must be the client of the appraiser. Another important fact to remember is that the person or entity who orders the appraisal is the client, not the person delivering the appraisal fee for the client.
Uniform Standards of Professional Appraisal Practice (USPAP) and federal banking regulations address the issues of client/appraiser relationship, confidentiality, and who will be the client if federal money is involved in the transaction. Once the client/appraiser relationship is established, the appraiser cannot discuss or provide copies of the report to anyone without the client’s permission. A copy of the appraisal report must be obtained from the client/broker, not the appraiser.
Myth:
If a homeowner has an appraisal done with one lender, they should be able to use the same appraisal report with a different lender.
Reality:
Other lenders cannot use the report for lending purposes until they establish the client/appraiser relationship. The appraiser will need to get permission (a release) from the original client and any/all subsequent clients before reappraising the property for the new lender. To avoid being misleading, the appraiser must disclose to future clients that she/he has previously appraised the property.
In addition, if the effective date of the appraisal has changed, the appraiser must research any new market conditions and update the existing appraisal report. In volatile market areas, this could mean drafting an entirely new appraisal.
Myth:
Using foreclosures and short sales as comparables when appraising a home for refinance is not correct as houses not under duress are worth more than those that are being sold in duress.
Reality:
If you could buy a box of Tide for $100 or buy a box of Tide for $10, which would you buy? This is the same logic that can be applied in the marketplace. When two homes in the same neighborhood are for sale and one under duress is selling for considerably less, the home that is listed higher is now overpriced for the market. Once the house under duress sells at the lower price, this now becomes the market value for competing homes in the area. Remember, appraisers’ use the principle of substitution by determining what other homes in the market area can be purchased for the same price.
Myth:
The homeowner put $10,000 in improvements into the home so the appraisal should be at least $10,000 higher.
Reality:
The cost of improvements does not necessarily equal the market value of those improvements. For example, adding another bedroom may have cost $10,000 but buyers in the market may only be willing to pay another $5,000 for homes that have an additional bedroom. You can view the Cost vs. Value Statistics for details on specifics improvements by market area.
Myth:
AIR requires lenders to use Appraisal Management Companies.
Reality:
Use of appraisal management companies is not required under AIR. Lenders may engage appraisers directly without the use of third parties.
Myth:
The licensing of an appraiser ensures his or her competency.
Reality:
Licensing does not necessarily ensure the competency of an appraiser. The Fannie Mae and Freddie Mac Selling Guides require lenders to review the appraiser’s education and experience. Specifically, the Fannie Mae Selling Guides state:
“A lender must not assume—simply based on the fact that an appraiser is state-licensed or state-certified—that the appraiser is qualified and knowledgeable about a market area or is aware of the appropriate market data sources for the area and will be able to obtain access to them. If an appraiser is not knowledgeable about a particular location, is not experienced in appraising a particular type of property, or is not familiar with (or does not have access to) the appropriate data sources, a lender should not give the appraiser assignments in that market area or for that particular type of property.”
image courtesy of renjithkrishnan/freedigitalphotos.net
Joe Petrowsky, NMLS #6869
Right Trac Financial Group, Inc. NMLS #2709
110 Main St.
Manchester, Ct. 06042
Office: 860 647-7701 x116
Fax: 860 647-8940
Cell: 860 836-9294
Email: joe@righttracfg.com
Joe Petrowsky does not guarantee nor is in any way responsible for the accuracy of the information provided herein, and provides said information without warranties of any kind, either expressed or implied.
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