Homebuyers and sellers who expect an appraisal to sail through to closing without a hitch may be surprised to discover that home appraisals today can be problematic. The reasons for the change are complex, but there’s no question that mortgage lenders have started to demand more reviews and do-overs.
Rob Johnson, vice president of lending at San Diego Funding, a mortgage company in San Diego, attributes the increase in home appraisal reviews to lender-specific requirements imposed due to past problems with certain types of home loans. For example, a mortgage lender might demand more scrutiny of an appraisal if the borrower has a marginal credit score or high debt level relative to income or if the property was a foreclosure that was fixed up and flipped by an investor.
Appraisals may lag home prices
Home prices are also a factor. When prices are on the rise, perhaps because buyers have bid more in a multiple-offer situation, appraised values might still be lower. The reverse is also the case.
“Any time you have a market in transition, appraisals aren’t going to keep up because the appraisal is based on historical data,” Johnson says.
Inadequate “comps” can present problems as well. (“Comps” refers to recent sales of nearby homes that are similar, or comparable, to the home that’s the subject of the appraisal.) The mortgage lender may deem the comps inadequate if the homes were too far away or were sold in such nontraditional circumstances as a short sale or foreclosure or if the sales occurred too long ago. If the comps aren’t sufficient, the lender may order a review or second home appraisal to verify that they were chosen correctly.
“If (the appraiser) can’t find three comps within that area and has to expand, that is where you start to get appraisal reviews or secondary appraisal requirements to make sure the appraisal was valid or that (the lender) was comfortable,” Johnson says.
The term “second appraisal” generally refers to a new start-from-scratch valuation. An appraisal review could be a “desk review,” in which the appraisal gets an extra look-over by an office-bound person, or a “field review,” in which the appraisal is subject to another drive-by or in-person inspection of the property. A review is more common than a second appraisal.
New guidelines distance lenders from appraisers
Leslie Sellers, 2010 President of the Appraisal Institute in Chicago, says a lender might order a new home appraisal if the first one was based on factual errors or the appraiser wasn’t competent in the local area.
Some second appraisals, he adds, result from a misunderstanding of the Home Valuation Code of Conduct, a set of guidelines that was meant to prevent undue pressure being placed on appraisers to inflate home valuations, but may have caused some lenders to cut off communication with appraisers.
“The banks are thinking they can’t even talk to the appraiser,” Sellers says.
Sellers can offer comps to appraiser
An appraisal review can cost several hundred dollars while a second appraisal generally involves a second full fee, according to Sara Schwarzentraub, owner of Inter-State Appraisal Service in San Diego. These costs usually are paid by the buyer.
“It’s commendable that the lenders are being cautious and having stricter criteria to protect themselves because in the long term that protects everybody, but it does make it more costly,” she says.
Home sellers can offer the appraiser information that might affect the appraiser’s opinion of the home’s value. This information is best handed over before the appraisal is prepared.
Real estate brokers can help buyers and sellers find comps to offer the appraiser, Johnson suggests. If the broker believes comps may be present a problem, the buyer and seller can plan accordingly.
“A good real estate agent is aware of these issues. Many times, an agent will call us and say, ‘I know we are going to have problems with comps on this,” he says.
Neither the buyer nor seller can choose the appraiser, but Sellers says buyers can insist on a minimum competency, which he defines as having local market knowledge and being certified as well as licensed.
Buyers and sellers also can agree on longer timeframes for the home appraisal contingency and closing date. Schwarzentraub suggests that asking for a 45- or 60-day closing, rather than 30 days, is not unreasonable.
Buyers are entitled by federal law to a copy of any appraisal for which they’ve paid a fee. Buyers should look over the appraisal and notify the lender of any errors that could have affected the appraiser’s opinion of the home’s value.