The Home Appraisal is a Hurdle on your way to buying a home.
You’re close to the goal of buying a home, the purchase offer has been accepted and you are submitting for a loan on the property. The financial instituting requires an appraisal establishing the property’s market value. An appraisal is the expert opinion of a certified, state-licensed professional who determines the value of a piece of property. If you and the seller have agreed upon a $900,000 purchase price and the appraisal shows the home be be really worth only $850,000, then the home is overpriced.
But is it? And why do we have to depend on the expert advise of a stranger? In this article, we’ll take a look at the challenges appraisers face in today’s rapidly changing market and how we can assure an accurate appraisal.
Appraisals are the final hurdle you face in getting your home loan approved; and it can be a significant task to get past this barrier. I can be of help. Appraisals in recovering markets are a particular challenge to appraisers. It was easy enough to follow the market down but now that home prices are recovering, how well prepared are appraisers to face this new challenge?
There are many excellent appraisers, often you will meet appraisers with 20 or more years experience. But they are truly working with one hand tied behind their backs. Quickly review the following frequently asked questions, they will give you a “taste” of the challenges appraisers face.
[faq title=”Frequently asked questions:”][faq_question]Is getting a mortgage harder today?[/faq_question][faq_answer]If you last purchased a home prior to 2008 the answer is yes. Prior to 2008 financial institutions focused on Repayment Risk and the decision was based on “Will the Customer repay the loan?” – that focus placed emphasis on income and credit history and lenders often made common sense decisions such as approving a loan based on the almost assured future income of a recently graduated medical professional.
Since 2008 the focus has shifted to Repurchase Risk – “Will the investor purchase this loan?” – this is a dramatic shift, one that places the primary emphasis on documentation while decisions became more “rule based”. As such the appraisal is critical component of the documents submitted to the the financial institute funding your home loan. [/faq_answer]
[faq_question]What is an Appraisal?[/faq_question][faq_answer]A factual, accurate, and adequately supported description of:
The condition of the property
The surrounding neighborhood
The market trends
The market value of the property
The Key determination: Does the property provide sufficient security for the mortgage loan?
Source: Fannie May[/faq_answer]
[faq_question]What are comparable sales?[/faq_question][faq_answer]
After the appraiser inspects the property, they will compare the qualities of your home with other homes that have sold recently in the same neighborhood. These homes are called “comparables” and play a significant role in the appraisal process. Using industry guidelines, the appraiser will try to weigh the major components of these properties (i.e., design, square footage, number of rooms, lot size, age, etc.) with the components of your home to come up with an estimated value of your home. The appraiser adjusts the price of each comparable sale (up or down) depending on how it compares (better or worse) with your property.
[faq_question]The Appraiser Must?[/faq_question][faq_answer]
Be certified or licensed by the state
Have local market knowledge and experience
Have access to appropriate data sources
Examine and describe the property and neighborhood
Report on the properties conditions
Provide an adequately supported opinion of the market vale
Follow Fannie May and USPAP guidelines
Source: Fannie May[/faq_answer]
[faq_question]How long does an appraisal take?[/faq_question][faq_answer]
The physical inspection of the real property being appraised can take from approximately fifteen minutes to several hours, depending upon the size and comlexity involved.
After the initial inspection of the property the appraiser spends time touring through the neighborhood or area. The purpose of this tour is to search for comparable sales (other properties that are similar to the property being appraised) that have sold within the last six months to a year or so. When the field work is finished, the appraiser completes the report at his office. The report generally consist of a short form report (typically under ten pages) that usually takes between three to six hours to complete.
[faq_question]How much does a home appraisal cost?[/faq_question][faq_answer]
You are looking at $350 to $500 for most single family homes. [/faq_answer]
[faq_question]What complaints are made about appraisals?[/faq_question][faq_answer]
Single Family Residential
Complaints filed by Borrowers/Homeowners
Property description errors
Errors in Comparable Sales Information
Errors in valuation
Non-delivery of pre-paid appraisal
The bottom line, appraisers face demanding requirements that have to be accomplished in a very short time frame. The actual appraisal will cost you as the buyer between $350 to $500; but the appraiser will get only about half that fee, the rest goes to an Appraisal Management Company. Part of the problems facing appraisers and home buyers? You bet!
Take a few minutes with me, this is important. During the housing boom, some banks were pressuring appraisers to “hit a number”, in order to sell more mortgages. To fix this problem the Home Valuation Code of Conduct (HVCC) was enacted to separate appraisers from bank control. But what actually happened, read this quote from the National Association of Realtors in testimony before the Congress.
“The HVCC drove business to appraisal management companies, which were designed to be independent third parties, uninfluenced by the mortgage lenders. Mortgage lenders now require originators to place their appraisal orders with an AMC, who then contracts with an appraiser to perform the work on behalf of the borrower.
Today many of these AMCs are directly or partially owned by mortgage wholesalers and large national banks. They hide behind the firewall of an independent company, but if they own that company, either in whole or a piece, who are they kidding?
Consumers are paying more for residential appraisals. The appraisers who are doing the work are receiving a fraction of what they once earned. Unfortunately this structure has chased away many good appraisers who are unwilling to do more work for much less money.”
An appraiser should be selected based on their expertise, competency and knowledge of the the local market. But it increasingly seems assignments are based largely on two factors: fees and turn-around time. Assignments are often awarded to the appraiser responding first to an email blast.
[quote_right]If you are paying $350 to $500 for an appraisal, it would be logical to think the vast majority is going to the appraiser. But this is not taking place; appraisers in many market areas are getting approximately half the fee you are paying the appraisal company. [/quote_right]
With the diminished importance of appriser competency in winning assignment and low fees, is in any wonder that our most experience appraisers are leaving the industry? Add that to the fact that some AMC’s are insisting appraisers provide reports with a significant scope of work in unacceptable turnaround times and for a significantly reduced fee; you can understand why few experienced appraisers will accept these assignments. We face challenges as we deal with less experienced appraisers accepting these assignments.
A sharp and long-term decline in the number of new people entering the field;
A high rate of future retirements due to the high mean age of appraisers;
Individuals leaving the profession due to challenging business conditions;
Increasing government regulation;
Wider use of alternative valuation technologies displacing some appraisers (especially in the residential sector)
CHICAGO (Aug. 14, 2013) – Hiring of appraiser trainees will remain weak for the next one to two years, according to a recent survey conducted by the Appraisal Institute, the nation’s largest professional association of real estate appraisers. Fewer than one-tenth (9 percent) of residential appraisers said they would add full-time trainees, according to the survey of U.S. real estate valuation professionals conducted in May-June.
The number of appraisers continues to decrease at a rate of about 3 percent per year;
The appraiser population could decrease 25 to 35 percent over the next 10 years due to age attrition and fewer new entrants.
How can I help both you and the appraiser in the appraisal process?
Communication between appraisers and real estate agents is not prohibited, and in some cases it is welcomed.
[quote_simple]Contrary to incorrect interpretations of appraiser independence requirements, appraisers welcome information that would assist development of a reliable, credible opinion of value. Consumers can accompany appraisers when conducting the property inspection and may provide the appraiser with any information they consider important. SOURCE: The Appraisal Institute[/quote_simple]
I will request an appraiser with local knowledge, and then conduct an interview to get a better understanding of the appraiser’s qualifications, education and experience. This is not to be adversarial, rather it is a discussion between professionals on the challenges the appraiser faces followed by my offer to provide credible information where it is needed, and valued. [quote_left]To be valued, the information provided must be usable within the confines of the appraisal report that has to be produced.[/quote_left]
“The best way for homeowners to combat potential problems with appraisals is to ensure the appraiser hired by their lender is highly qualified and competent,” said Appraisal Institute President Ken P. Wilson, MAI, SRA. “Consumers have every right to demand the use of someone with field experience in their market and knowledge to handle the assignment properly.” SOURCE: The Appraisal Institute
Comparable Sales: Comparable sales are the single most important and sensitive element in any appraisal. Basically you have to allow the appraiser “do his/her” job in this area. However one can point out upgrades in the home being purchased that add to its value and present information on recent sales that had factors that influenced a lower price where it is information that would not be readily available to an appraiser in a simple data search.
Neighborhoods: The appraiser must review market statistics about your neighborhood, such as the typical length of time homes are offered for sale before selling and the trend in values for verification that values are steady or increasing. Lenders will also make sure that the value of the home being appraised is in the same range as other homes in the area. There should also be a discussion about the proximity to employment and amenities, appeal to the market and any adverse environmental influences. Since I constantly monitor sales trends and focus on neighborhoods in my research, I will provide the appraiser with helpful information to help finalize this portion of the report.
Market Conditions: Comparable sales reflect past market conditions. They are recorded sales that took place in the last three months and the actual purchase decision was made at least one month prior to the sale being recorded. In an improving market the appraiser can make a “time adjustment” for the appraised value but it is time consuming and some what complicated. Open the toggle below (The Market Conditions Addendum) and you will see tracking services that are acceptable sources and the form that has to be filled out by the appraiser. I provide this data and translate it into the knowledge the appraiser needs to fill out this form. In a rapidly changing market and under a short timeframe and budget, this makes it more likely the appraiser can take on this task with confidence.
[toggle_content title=”The Market Conditions Addendum” class=””]
[faq title=”Frequently asked questions:”][faq_question]How do I recover from a low appraisal?[/faq_question][faq_answer]An appraisal of $249,000? The home seller learns that his $300,000 asking price is much higher than the actual property value. If you are the buyer, this figure means that the amount you can finance on the property is much lower than you expected.