Non-Local Appraisers Killing Deals

Reblogger Nicole Borsey
Managing Real Estate Broker with Coldwell Banker Residential Brokerage

I hate the new appraisal system and non-local appraisers. (see video below)

Let me explain. The government came up with a brilliant idea to curb another housing meltdown!

Assuming (you know what they say: It makes an "Ass out of you and Ming") most lenders and appraisers were fraudulent, they decided to put a great wall of china in between the lender and appraiser. So instead of having a "reliable" and experienced local appraiser, they instead farmed out the process (and sometimes to a company they own) to a company that would then find an "independent" appraiser. 1 problem is, the appraiser has no accountability.

Also problem #2 is now another middle man has to make a cut, but the cost to consumer is the same. The result? The cost to the appraiser goes down. The result? NON-LOCAL APPRAISERS.

You know you are in trouble in Northern Virginia if your appraiser gets out of the car with a cowboy hat & boots. So if you (Mr. Appraiser) don't know the area, what are you going to do? Pick the wrong houses and appraiser more conservatively (they can only get in trouble if they appraise a place too high, so why not just make it come in lower. It also takes more work to come in higher). An appraiser's job is not to be conservative or aggressive, but to be as correct as possible. Recently we had a listing where a bank promised that they used local appraisers.

The appraiser came from Purceville! Over 50 miles away! The appraisal made comments about Ballston and Rosslyn being where the jobs were. As if Clarendon was 2nd fiddle and not desirable. (If you aren't from the area, like the appraiser, you wouldn't know that Clarendon is the most expensive and nicest place in Arlington, see Arlington Rap )

Even before the appraisal system was mixed up, I would always warn my buyers "hey if it comes in higher than what you paid, don't really celebrate. Sometimes appraisers like to come in higher, just to make you feel good, and oftentimes they aren't really "real" in my book." Why would I burst their happy dance? Because I warn them that the flip side (a low appraisal) is also possible. Just because an "appraiser" says something has a value of X, that doesn't mean it is the "true" value. While some might argue there is no "true value" or "it is worth what somebody is willing to pay for it", I'm referring to the other problems with appraisals.

APPRAISAL PROBLEMS:

1) BANK SALES IN COMPS Appraisers usually include bank sales on the MLS. These are homes that are oftentimes underpriced, they get 7-20 offers and the all cash offer wins. NOT THE HIGHEST OFFER. So a $400,000 bank listing might get bid up to $415,000 with an "all cash" buyer, and 3 other buyers had offers in for $435,000. What is it "worth?" Well the appraiser says $415,000, but the market says $435,000. And this isn't even going into whether a regular, properly marketed identical listing would sell for $450,000. So what is the "value?" of this $415,000 closed home? For some people this means NEVER being able to buy a home. They live in areas that are full of investors buying with all cash (like WOodbridge). Those sales then drive down the price of a regular listing but not enough. The appraisal will still be low, and the 3% down FHA buyer doesn't have the money to make the difference (yes, I got emails on this).

2) SHORT SALES Similar to the above, but the seller has NO interest in trying to get full market price. Actually the banks expects to sell them for 5-15% off market price. The seller just wants a patient buyer, oftentimes an investor. And as I have written in all my other Short Sale posts, these deals will go 3-6 months and oftentimes never pan out. So yes they have to sell for less, to compensate the buyer for the hassle and high chance of never closing. Many buyers will not even look at short sales. So are these good comparable for an appraisal? I think not.

3) MARKET UPSWING? Oh my! Could it be? Could it be possible that homes and condos in Arlington are actually selling for more than the low in June 2009? Yes. In reality they are (this is the first time I have said anything about the market going up), yet the appraiser is more likely to call the market "steady." All you need is a small 1-3% increase for a $500,000 place to now be selling for $515,000, yet the appraiser won't adjust for that.

4) LOW INVENTORY Rarely will an appraiser adjust for low inventory. IE, Ain't nothing else out there to buy in this price bracket. Good appraisers will see this and understand supply and demand.

SOLUTIONS TO LOW APPRAISALS?

So this is what I see happening. When a low appraisal comes in, the buyer oftentimes freaks out. It is the buyer agent's job to warn them about this (see post above) and then discuss what they want to do. About 1/3rd of the time the buyer will walk (until it happens to the next property!), 1/3rd of the time the seller will just drop their price and the last 1/3rd get new appraisers or work it out.

1) DEMAND A LOCAL APPRAISER Put it in the contract (as the lister) that you will only entertain a local appraiser. Maybe give it a 15 mile range. If the lender can't do this, make the buyer get a new lender and new appraisal if somebody non-local does the appraisal.

2) GET A NEW APPRAISAL. CHALLENGE IT. Either the buyer or seller can get a new appraisal. Yes, my buyers have hired new reliable and local appraisals. Why? Because the buyers have been to each home in the area for the last 3 months and they know the value. While a bank won't flat out accept the new appraiser, it can be used to challenge the first appraisal.

3) PAY THE DIFFERENCE While it might be painful, it might be the only way. Especially if you have gone through it a few times, if you start all over, it will likely happen again (unless you are willing to wait 3 months for a short sale to MAYBE close).

Appraisals falling short is occurring in about 50% of transaction. IT EVEN HAPPENED TO ME! The home I bought did NOT appraise. Yes, I paid well over the "appraisal" price. (yep soon that will be a good post, make sure to subscribe to the blog).

Thanks for hearing me out. Now I can warn my clients with a link to this post instead of giving a limited explanation to the appraisal problem. The goal is not to pressure a buyer to increase their price. I really hope this didn't come off that way. Instead the goal is to explain the process and for buyers to not ignore their own perceived "value" and ignore their Realtor, when some $20 an hour newbie appraiser from West Virginia says otherwise.

Written by Frank Borges LL0SA- Broker Owner FranklyRealty.com and FranklyMLS.com

Map image from Scott Wall of China photo from jaaron Cowboy shot by imdan Freak out by agnes

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Rainmaker
182,188
Sherry Chastain
Hendersonville, Nashville, Old Hickory, Lebanon Tennessee - Hendersonville, TN
Realtor, Selling Homes, Lake Properties,Luxury Homes,Short Sales

Appraisers... they can always ad a twist to your deal. I had a buyer that almost walked because the home she was buying appraised for her purchase price. I tried to convince her that was a good thing. She thought that if it wasn't higher she was getting a bad deal. This market you better be jumping for joy it appraised!

Jan 30, 2010 03:51 PM #1
Rainmaker
145,706
Scott Gephart
Rockwell Real Estate Group brokered by eXp Realty - Medford, OR
Rockwell Real Estate Group brokered by eXp Realty

Very interesting, I have experienced some of the same situations. thanks for the great info.

Jan 30, 2010 04:00 PM #2
Rainer
204,514
Keith & Shannon French
www.KeithandShannonFrench.com - Catonsville, MD
Baltimore's Best for Rent To Own Homes

Thanks for the great post!  I, too, have the same take on what's been done to the appraisal industry.  They claim fraud, yet replace it with a different fraud...and I agree, it's worse.  I'm amazed at what these appraisers will take as far as pay...who cares if it's made up for in volume...that's MORE work!  More work, less pay, quality and accuracy are going to be compromised...it's a universal law.

I have seen a very recent appraisal where the FIVE comparable properties were TWO LEVEL townhomes, not THREE LEVEL townhomes like the subject property.  This was a Baltimore city property where values change per BLOCK and all five of the comparable properties were OVER a mile away!  Someone paid $450.00 for that useless piece of garbage.

We sold a renovated semi-detached and the FHA appraisal coming in at $175,000 (should have been higher, but it worked for us).  A friend of ours knew about the sale (and it was an MLS transaction) and purchased the attached unit on the other side which was BETTER than our unit as it had basement egress and a bit more square footage in the basement & hardwood floors (if that makes any difference these days).  His appraisal, LESS than 3 months from our SALE, came in at $140,000!!!  Give me a break.

What I'm interested to find out is the actual success rate of challenging appraisals.  I've only heard that people are completely stonewalled by the bank and no new appraisal will be accepted or considered and they are shamed with comments like they shouldn't try to influence the appraiser.  The first appraisal is it.  

Furthermore, on another deal, we had to pay another $350.00 for some schmuck to drive by and do a second DRIVE BY appraisal because the sale was happening less that 180 days of our purchase (we did a full $35,000 renovation) and it was supposedly to verify that the first appraisal was okay.  What the hell can driving by a property do to verify it's value???  They didn't even provide the appraisal we paid for!  I rode that mortgage officer's ass until she sent it to me...which was weeks after the sale.

I've been to closings where they charged the Buyer $875.00 for the appraisal and I know the appraiser only got $250.00.  And we won't even get into the junk fees I saw on their side that equated to at least $3k that they didn't have to pay.

Anyways, sorry for my rant.  Thanks again for your post.

Jan 31, 2010 02:27 AM #4
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Rainmaker
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Nicole Borsey

CDPE | Stamford CT Real Estate
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