We’ve been reading a lot about how low appraisals are slowing the housing market recovery — everyone from the Wall Street Journal and the LA Times to Smart Money magazine and the National Association of Realtors has addressed the issue. Well, I recently experienced the problem firsthand, with clients purchasing a home in Sisters, and it was a nightmare.
Luckily, the buyers and sellers were able to come to an equitable compromise themselves. If they hadn’t, this single issue would have derailed the purchase. Here’s the big-picture problem at hand: Our real estate market is evolving (shifting from declining to improving), which makes it more difficult to accurately calculate a home’s value — especially in smaller markets with fewer sales, like Sisters. Combine that with an extremely conservative lending environment very hesitant to take any financial risks plus new lending-industry regulations (which were designed to benefit home buyers but that often have the opposite effect), and you have the perfect appraisal-disaster storm.
Actually, the problem my clients faced wasn’t a low appraisal (when a well-documented value comes in lower than the agreed-upon purchase price) but a bad appraisal (a value that cannot be justified). The appraiser hired by their lender (one of the big guns) made several key errors. First, she used an incorrect purchase price as her basis, which was (by coincidence?) identical to the appraised value she ultimately arrived at. She also claimed the Sisters market was declining by 4 percent and subsequently devalued every comparable sale used by 4 percent. Ouch.
Now, you’d think this problem would be simple enough to rectify. And we did, in fact, submit a request for a second appraisal (with the egregious errors we found, we didn’t want the original appraiser involved). Our request was denied. We were told that because the loan was backed by Fannie Mae/Freddie Mac and because of those new regulations I mentioned above (the Home Valuation Code of Conduct, or HVCC, for short), a second appraisal could not be ordered.
We were, however, granted a review of the existing appraisal. So both the listing agent (a former appraiser!) and I submitted separate detailed arguments as to why the appraisal was incorrect; we addressed in detail each error that had been made, provided several different comparable sales that we believed were a better fit and submitted extensive sales data to support our arguments that the Sisters market was not declining. I even included an article that had appeared in the Bend Bulletin that day, discussing how much the real estate market had improved in Deschutes County from this time a year ago: Median sales price, average price per square foot and days on market were all significantly improved.
We were confident the information we’d provided would result in a revised appraisal. We were wrong. Although my clients’ mortgage processor did submit the “revised” appraisal (the only item changed was the corrected purchase price) to a senior loan officer for an additional review, it was still accepted. End of story. For us, anyway.
Actually, from what I’ve been told, it’s the end of the story for most buyers who face this problem. Sure, I’ve read plenty of articles from those who advise submitting a request for a revised appraisal, but I have yet to find an example of someone who’s been successful at it.
There are some things you can do to minimize the likelihood of being waylaid by a bad appraisal, however. Perhaps most importantly, choose your lender wisely. This is one reason it’s a good idea to stay local. All lenders are now required to have no direct contact with their appraisers and instead must enlist the aid of a third party to assign their appraisals. In many instances, a local lender has more control over the appraisers that are among those in their “pool” of options. The national mortgage lenders — most of which are located thousands of miles away — aren’t as discriminating; they use third-party appraisal management companies that may or may not choose an appraiser from your area. And, even if they do choose a local appraiser, because the HVCC requirements have meant a higher fee for home buyers but lower fees for appraisers, many of the most experienced appraisers are opting not to enter those lenders’ pools.
My client had chosen their lender before meeting with me to begin their home search. In the past, when that was the case, I hesitated to intervene in an already in-the-works financing decision. In the future, I won’t. This issue is too important — and the problem isn’t going away any time soon.
If the appraisal does come in lower than the agreed-upon purchase price, a buyer’s options are limited and less than ideal: Convince the seller to lower the sales price (which will probably be difficult if the seller has the comps to back up the price); agree to pay the difference in the sales price and the amount the lender is willing to finance; try to get the appraisal revised (good luck with that one); or take their business to a different lender and hope the next appraiser does a better job (that one will cost you both time and money).
As for me, from now on, if I’m representing a buyer securing financing and the listing agent opts not to personally meet an appraiser on site for their review (something I always do as a listing agent), I’ll make sure I’m on hand to provide access to the property. No, we can’t discuss sales price with the appraiser, but we can provide pertinent information about the property and the neighborhood that the appraiser might not have or might overlook. And, if I can’t be present (as was the case here), I’ll insist that the appraisal be rescheduled, even if it means a delay in closing.
After all, a delay beats a dead deal any day of the week.
About the Author
Lisa Broadwater, GRI, CDPE, is a Central Oregon-based real estate professional who specializes in listing and selling homes, especially in Sisters, Tumalo, Bend and Redmond.