HOW HOME APPRAISALS WORK
The Home Appraisal – The Second Sale
Often called “the second sale”, the appraisal is necessary to establish the value of a property for the lender. The home must appraise for the amount (at least) that the buyer needs to borrow for the contracted price. The bank that is issuing the loan wants to know that the market value of the property is worth the amount being loaned.
The appraisal industry has undergone a lot of scrutiny since the housing bust of recent years. Some of the blame for the mortgage crisis fell on a handful of appraisers who colluded with some mortgage companies by “puffing up” values in appraisals. There were a very small number of guilty parties, compared to the immensity of the crisis, but enough to cause a legislative reaction.
In May 2009, the Home Valuation Code of Conduct (HVCC) was adopted. The HVCC document was created jointly by members of Freddie Mac, the Federal Housing Finance Agency (FHFA), and the New York State Attorney General. One of the results has been the creation of a third party group, Appraisal Management Company (AMC), through which the lender must select the appraiser. The intent was that the lender and the appraiser never have communication and therefore, opportunity for collusion.
Results of HVCC
The other results have been a mixed bag:
- The cost of an appraisal has risen, to fund the third-party AMCs.
- The appraiser makes less, again, to pay for the AMC
- The appraiser is drawn from a pool of appraisers, often the one charging the lowest fee.
- The appraiser is sometimes the least knowledgeable about the area, because of a mandated number in the pool.
- The process is longer, often 2 weeks or more
In 2011, NAR (National Association of Realtors) reported that 24% of home sales that fell apart before settlement, did so because of appraisal problems. Most professionals in the real estate transaction are not satisfied with the results of HVCC and hope for a meaningful change in the process that will meet the needs of consumers as far as protection, but also in regards to making the process efficient.
Appraisals in A Transitioning Market
When the real estate market is in transition, as we find ourselves experiencing today, the appraisals are often a tricky aspect of the transaction. In the Frederick real estate market, we have seen the bottom and are experiencing a recovery. We have a healthy demand for housing coupled with a low inventory. These simple market forces result in multiple offers on desirable houses, increasing the contracted amount.
Home appraisals work by taking into account the previous 3 to 6 months sales of comparable homes. When prices are rising, the appraisal can result in a value lower than the price a home sells for. (Think of the squeezing of a Slinky:) It can be discouraging for the buyer and seller, and could easily scare a first-time buyer away from going through with the purchase. For a more experienced buyer or seller, it becomes, at a minimum, a kink in the process.
What Can You Do When the Appraisal is Low?
Most banks have a process to dispute an appraisal. This usually requires the buyer, via their agent to supply other comparable sales and explanations as to why they think the appraiser’s value is off. The review takes some time and can go either way. Other options:
- Another option is to reduce the purchase price, if both parties agree.
- One option, depending on the deal, is for the buyer to bring more money to close.
- Both buyer and seller can extend all time frames and the buyer can switch to a new lender.
If all parties can to work together to keep a cool head, and remain flexible, they can most often find a successful maneuver around an appraisal issue, This makes it a hurdle, not a roadblock. In a true sense, the home appraisal is the second sale. Understanding how home appraisals work will help in setting the right expectations.
The Highland Group
Frederick, Md 21704