Recent buyers of Sacramento homes know all to well the potential issues with appraisals. The Sacramento market has been experiencing extremely low inventory, high buyer demand and with that multiple offers that create bidding wars. The problem: if the buyer is getting a loan, the house has to appraise for the value. In 2011 this was a HUGE problem. As the market was trying to turn positive, the appraisers just did not have the comparable sales to justify the higher prices. Things have improved in 2012 in Sacramento as cash buyers are supporting higher values and a new wrinkle this year. Some buyers that are getting loans, are removing their appraisal contingency in their initial offer. That means if the house appraises for less than they offered, they are willing to make up the difference with cash! Here's a recent news article discussing the topic. The Sacramento Market is ahead of most of the country in the turn around so this has to do with what was going on mostly last year but still a little bit now as well.
Appraisals draw fire as housing market remains uneven
When Cris Robinson put her Rancho Santa Margarita, Calif., townhouse on the market earlier this year, she noticed that the only nearby homes selling were foreclosures and short sales.
"There wasn't a single standard sale to (compare) me with," said Robinson, an equity seller.
Robinson said a buyer offered to pay $317,000, but the appraisal came in at $310,000 - the price at which another home in the neighborhood recently sold. That townhouse was the same model, Robinson said, but it was distressed and needed work. By contrast, her own place had thousands of dollars in custom upgrades, including travertine floors.
A homeowner looking askance at an appraisal is nothing new. But many Realtors also complain that lowball appraisals are hurting home sales.
The National Association of Realtors says a recent survey indicated that in some cases appraisals are lagging behind the recovering housing market. Appraisers aren't always familiar with neighborhoods, and some use foreclosures and short sales as comparable sales without adjusting for them.
Real estate agents note that the low inventory of homes for sale has created bidding wars for many homes, pushing prices higher than recent comparable sales.
In the national survey in September, 1 out of 3 Realtors said they had problems relating to home appraisals in the previous three months. Eleven percent of them said a contract was canceled because an appraised value came in below the price negotiated between the buyer and seller; 9 percent reported a contract was delayed; and 15 percent said a contract was renegotiated to a lower sales price as a result of a lower appraisal.
Appraisers say they don't set the value of a property; they reflect it. They say neither real estate agents nor homeowners are trained to appraise homes.
A nationwide appraisers' professional association, meanwhile, cites problems in the way appraisal management companies are assigning and paying appraisers. The appraisal management companies contend that their role is misunderstood.
Appraisers say they are the only people involved in real estate transactions who don't have a stake in the price of a property or whether it sells.
"We're there to protect the public trust," said Sara W. Stephens, president of the Appraisal Institute, the nation's largest association of real estate appraisers, addressing a group of real estate investors in Yorba Linda, Calif., last month.
Stephens testified before Congress in June, saying, "We often hear from real estate agents,homebuilders and others that appraisals are 'killing deals,' and/or holding back the economic recovery. These accusations are unfounded and misguided. ... Appraisals are not meant to simply support contracts - they are obtained to help lenders assess their overall risk.
"Fundamentally, it does neither the borrower nor lender any good to enter into a mortgage for more than the value of the property," she said.
Gilbert Valdez, owner of Coast Appraisal Network, has been appraising homes for nearly 30 years. "The biggest misconception is we're out there creating value. We're not," Valdez said recently as he stood outside a Fountain Valley, Calif., tract home with a measuring tape and a camera, ready to begin an appraisal. "We have a mirror. We're going to reflect it exactly the way it is."
Valdez said a home's location typically is given the most weight, followed by size and condition. He noted that upgrades don't necessarily pay off as much as a homeowner may expect. He also said the price gap has been closing between foreclosures and standard sales. Short sales, he said, have been "iffy" and "all over the place," but even short sales are improving.
Ideally, he said, he'll use three sales that closed in recent months, a pending sale and a listing most comparable to the home in question. He stressed the word "ideally."
In the case of Robinson's townhome, the appraiser could not be reached for comment, and it's unclear what adjustments might have been made. The townhome eventually sold, Robinson said, but for about $6,000 less than what she and the buyer initially agreed on.
Appraisers were among those blamed for the housing bubble - and bust. In turn, appraisers said they felt pressured by mortgage brokers to bump up their property valuations, which helped to drive deals and got borrowers bigger loans.
In 2007, then-New York State Attorney General Andrew Cuomo filed a lawsuit against an appraisal company, which led to Fannie Mae and Freddie Mac implementing the Home Valuation Code of Conduct of 2009. It required that lenders use a third party, typically an appraisal management company, to arrange for an appraisal. The code of conduct prohibited lenders from speaking directly with the appraiser about the valuation process.
The code was replaced by provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. In addition to working with appraisal management companies, lenders now can set up their own firms. There still are standards to ensure appraisal independence, and the firewall between the lender and the appraiser on any specific appraisal is supposed to remain intact.
Appraisers complain management companies pay them lower fees, and that many appraisers, after seeing their incomes reduced, have left the business.
The Appraisal Institute says on its website: "Today, many lenders utilize third-party management companies to conduct administrative functions. These firms often seek out the lowest-cost service providers, not necessarily the most qualified."
The National Association of Appraisal Management Companies disagrees with that description. George Panichas, president of the association, said while the companies take a cut of what a lender pays for an appraisal, the firms provide services for appraisers including quality-control reviews and marketing, which helps appraisers get more business. "There are many reasons why an appraiser will work for a reduced fee," he said.
He added, "It is undeniable there are a handful of appraisal management companies that will try to grind an appraiser down on fee. (But) the vast majority of appraisal companies, we want to pay the appraiser a good fee because we want a good product."
Stephens, the institute president, also said some appraisers are being required to use eight to 10 comparable homes, more than twice as many as in the past, and appraisers have been sent as far as 400 miles away to evaluate property.
"Having someone who's local ... someone who understands what's going on in the market is key," she told the real estate investors gathered in Yorba Linda.
Panichas said lenders, not the appraisal management companies, are requesting additional comparable homes. And he said appraisers may be sent far distances at times, but they should never accept an assignment unless they're "geographically competent."
Appraising real estate is not a black and white matter. Adjustments need to be weighed. Judgment is involved. Even appraisers don't always agree.
Mortgage broker Dennis Smith cited an appraisal on a small apartment property in Long Beach,Calif. The seller and buyer agreed on a sales price of $730,000. The appraisal came in at $620,000.
Smith said some comparable sales the appraiser used were more than three miles away, and a few were sales dating back more than a year.
The appraisal may have been a challenge, Smith said, "But over $100,000 (lower than) what the seller, listing agent, selling agent and buyer felt the property was worth?"
He found some fresher sales for comparable properties with fewer units, but his appeal was rejected.
"So we canceled with that lender and went to another lender and ordered a new appraisal," said Smith, co-owner of Stratis Financial in Huntington Beach, Calif. The second appraisal came in at $720,000 - with some of the comparable homes he cited in the appeal.
"Same property, same price, same transaction," Smith said.
The initial appraiser could not be reached for comment.
Realtor Patti Zermeno said she appealed an appraisal of a four-bedroom, three-bath home on more than five acres in Corona, Calif., that she listed this year.
The contract purchase price was for $565,000, but the appraisal came in at $450,000.
"When the numbers came in low, I called (the loan rep) and told her, 'I know there's value there. We need to appeal this appraisal,' " said Zermeno, with Century 21 Award in Rancho Santa Margarita.
She said the lender allowed a second appraisal, which raised the value by $15,000, to $465,000.
That appraisal was still much lower than the contract price. But it didn't kill the deal.
"We were able to close at $500,000 with the seller reducing his price and the buyers increasing their purchase price," Zermeno said.
"It was a team effort to get it done," she said. "But I knew I could fight the appraisal."
In Stephens' view, the appeal process is not always fair to the appraiser.
Sometimes the person reviewing an appraisal for a lender has less experience than the appraiser does, she said.
"It's a matter of asking for more and more information (from an appraiser)," she said, "and less and less weight being placed on that information."
Here are some tips for consumers from the Appraisal Institute, a professional association:
-Make sure your lender hires a qualified appraiser. Ask the lender for an appraiser's qualifications and whether he or she has a designation from an appraisal organization.
-Accompany the appraiser during the inspection. "Did the appraiser spend enough time at the property to observe important features or improvements or potential problems?"
-Ask for a copy of the appraisal report. "Federal law requires lenders provide routine delivery of the appraisal to consumers whether credit is granted, denied, or the application is withdrawn."
-Examine the appraisal report. "Appraising the Appraisal: The Art of Appraisal Review," says common errors in appraisals include "misuse of adjustments to comparables, disregarding special financing and concessions, or miscalculation of ... living area."
-"Ask yourself: Do adjacent homes add or detract from the value of the subject property? Is the subject property equal to or lower in price than surrounding homes? Does the floor plan have any functional problems? Does the house (particularly the kitchen and bathrooms) require major remodeling to make it comparable with similar homes in the same price range?"
-Appeal the appraisal if you believe it is incorrect, or ask your lender to review the report. Most lenders have appraisal appeal procedures, known as "reconsiderations of value."
-You can ask your lender to order a second appraisal. If problems were found with the first appraisal, you should get a second one.