The Broken Appraisal Process
Everyone is clamoring for improved appraisal “quality.” That’s the one key word and the industry seems to be searching for an easy answer; just put more pressure on appraisers to make their reports better. Sounds pretty simple… NOT EVEN CLOSE! Banks and government programs want appraisals with comparable sales that meet (often-unrealistic) lending guidelines. At a time when there are fewer sales available for comparables than ever before, banks are expecting perfect appraisals, at least by the “new standards” they’ve adopted. The whole process has turned upside town. The appraisal industry is floating around in the Twilight Zone! For consumers and mortgage investors, this entire recreation of the appraisal process is like putting a used Band-Aid on the last barricade during a category five hurricane. It’s almost to the point of being funny, if it wasn’t so sad. There is a lot of finger pointing, and the public is being led to believe that by “fixing” the appraisal process, the real estate market will be safer and get back to normal. Ridiculous!
It’s all a smoke screen with big banking using appraisers as a diversion, shifting focus on the appraisal process rather than take the chance the government will look closer at the banking process. To keep this on point, the appraisal industry will never improve until the information they use improves. The key to more accurate appraisals is better information in MLS. No rocket science here. Banks need to have realistic lending guidelines and appraisers need accurate information to calculate home values. For an industry that lives by the all-powerful price-per-square-foot formula, no one wants to be responsible for gathering this information. More and more, the information being reported in MLS is being taken from the local tax department. Just like automated valuation products, which is a guaranteed formula for flat out WRONG home prices. It is a dangerous line we are walking and something needs to change alright; listing agents must be responsible for providing accurate square footage details, and more property details (photos) about every home. Appraisers are comparing apples and oranges half the time and then we wonder why we are having low appraisals. The system is broken and any solution must include the MLS and Realtor organization.
Dear Mr. & Mrs. Homeowner:
Sorry to tell you at the last minute, but your sale won’t be going through. The appraisal has come in low and there are just too many adjustments for us to approve the loan. We hope you will be able to find another buyer in the near future, after you adjust your home’s price. It happens much too often – many times three days before the loan is scheduled to close. What a last minute surprise. Maybe it’s time for changes? Know the possibilities…
To hear real estate professionals tell it, appraisals are still the wild card in today’s market. If low valuations aren’t the No. 1 reason sales are falling through, they say, they are a close second, behind only the inability of would-be buyers to qualify for financing.
Obviously, accurate appraisals are important to lenders. They are putting hundreds of thousands of dollars on the line, so they want to be certain the subject property is actually worth what the sales contract indicates it is.
But accurate valuations are important to buyers and sellers too. If an appraisal comes in too low, sellers are simply not going to get what they think their homes are really worth. They’re going to have to lower their expectations, or their buyers are going to have to reach deeper into their own pocketbooks to make the deal work.
Buyers, on the other hand, often look to an appraisal to be sure they are not paying more for a property than they should be. Because financing depends on the appraised value of the property, the appraisal serves as a fail-safe mechanism that allows buyers to vacate what has turned out to be a lopsided contract.
That’s the natural ebb and flow of the marketplace. And it all depends on accuracy. But real estate agents, appraisers and even lenders complain that precision these days is a moving target clouded by inexperience, unfamiliarity and the need — or desire — to get the job done as quickly and as cheaply as possible.
“There is a tendency today to award assignments based on the lowest fee and the minimum time,” says Frank Gregoire, a St. Petersburg, Fla., appraiser and a past chair of the National Association of Realtors’ appraisal committee. “Quality doesn’t enter into the equation.”
It would take too much space to explain the reasons for all this consternation. What’s more important is how a seller can make sure the appraisal on his property is, indeed, on target. That process starts even before you have a signed contract, according to Anna Ruotolo of RPM Mortgage in Walnut Creek, Calif.
Information sheet
If your agent hasn’t done so, says Ruotolo, you should prepare a sheet of any features such as location, view or upgrades that make your home different — and potentially more valuable — than other houses like it.
Ruotolo also suggests creating two more sheets — one that documents any discrepancies with information contained in your tax assessment file, and another that lists recent sales of houses similar to yours.
Data used to value properties for tax purposes are often inaccurate or incomplete. Perhaps your local tax collector says your house has 2,500 square feet when it really has 3,500, or maybe the official doesn’t know that you’ve finished off your basement or attic and the place now has four bedrooms instead of three.
Owners tend to “overlook” issues such as these because their property taxes would otherwise be higher. But when it comes time to sell, such discrepancies can come back to haunt you, because appraisers use the assessor’s data to glean information for their reports.
The sheet of comparable sales is important because “comps” are the foundation on which appraisers make their valuations. Consequently, you want to make sure the appraiser hasn’t missed any, or used comps that aren’t as comparable as they could be.
You’ll want to list properties that are most similar to yours — ideally, four to six houses that have sold within the previous 90 days and are no more than 15 percent larger or smaller than yours and no farther than a mile away. Also list three or four places similar to yours that are currently on the market.
When the appraiser arrives, you and your agent should meet with him and accompany him as he checks out the house. Before he starts, you should pepper him with questions —not in an adversarial way, but in polite conversation — to make sure he is competent.
There’s nothing in the rules that prevents agents and their clients from speaking with an appraiser. By law, you can’t pressure — or try to bribe — an appraiser to arrive at a certain value. But you can talk to appraisers and share information with them.
“Don’t you dare let him go out without talking to him,” Ruotolo advised a group of real estate agents recently. “You can talk to him about anything you want.”
For starters, make sure the appraiser has access to the local multiple listing service. If not, he won’t be able to compare the details of your transaction with those of other deals — the all-important comps. And if not, says Gregoire, the Florida appraiser who also is a former regulator in his home state, he “should be turned in” to the office in your state that licenses appraisers.
Geographic experience
Determining whether your appraiser has geographic competency in your particular area is a bit tricky. Even if his office is 150 miles away, he may still know your market inside and out. But to make sure, Ruotolo suggests asking how familiar he is with the area, how frequently he performs valuations there, and when he last actually did one.
While many realty agents and veteran appraisers often blame low valuations on the appraiser’s inexperience, you can’t deny the appraiser access to your property on that basis alone. But if he lacks the geographic experience, you can and should refuse to allow him inside.
“It’s your right and your obligation to deny access,” Ruotolo told the agents.
If, on the other hand, the appraiser is qualified, now is the time to share your lists with him.
Point out your special features, make sure he knows about the discrepancies with the tax data, and review with him the comps you and your agent used to develop the listing price.
He doesn’t have to use those comps in making his valuation, but at least you’ve made them available.
Once the appraiser sends his report to the lender, says Ruotolo, the bank becomes the client. But since you paid for the appraisal, you have the right to receive a copy. And if the valuation comes in too low for your liking, you should review the report for errors and omissions.
If you think the appraisal is faulty — say, it misstates the number of bathrooms or it uses comps with just two bathrooms and your house has four — you can protest it with your lender, who can assign a second appraiser (at an extra cost to the borrower) or deny your request and tell you to like it or leave it.
Lew Sichelman Chicago Tribune 12/16/11
