Even when both sides agree and enter into an agreement to purchase, the deal could fall apart thanks to a low appraisal.
Here's the increasingly common scenario: The seller lists the house for $325,000 and after negotiation, an agreement is signed on $300,000 sales price. Then, a week before closing, the mortgage company notifies that the appraised value is $265,000.
Who's going to make up the $35,000 shortfall?
In the above example, the seller as already reduced the price $25,000 and typically doesn't want to drop the price further. The mortgage company says they will provide a mortgage on the $265,000 value only. The buyer may not have the available cash, or may not be willing to pay more than the appraised value.
Unfortunately, this is a disturbingly growing trend. The National Association of Realtors (NAR) records for the last year show 12 to 13 % experienced a contract cancellation due to appraisal issues.
Why did this Happen
One of the main reasons is due to the Dodd-Frank Mortgage Reforms. Specifically, The Home Valuation Code of Conduct (HVCC). HVCC is a set of guidelines to curb inaccurate appraisals developed by New York Attorney General Andrew Cuomo.
The HVCC prohibits mortgage companies from having direct contact with appraisers. Most have opted to work through Appraisal Management Companies, (AMCs) to comply with the HVCC rulings.
One unintended consequence of the Dodd-Frank reforms: AMCs are increasingly sending out-of-county or even out-of-state appraisers to calculate property values. Appraisers say this happens because, AMCs in some cases, assign homes to appraisers essentially at random.
The current average appraisal costs are between $350 and $500, according to Zillow. The new HVCC regulations now require appraisers to fill out more paperwork, with the size of the typical appraisal record having doubled to about 30 pages. Given that some residential appraisers can earn only about $150 per job after the AMCs take their cut, appraisers feel there’s too much work for too little money.
In 2010, there were 90,000 appraisers in the U.S. That figure had shrunk more than 10%, according to the Appraisal Institute, which says its ranks are thinning due to retirements and fewer people entering the profession. Today, more than half of appraisers are between 51 and 65 years old. And less than a third of all appraisers work in the residential sector, the institute says.
How can you try to Protect yourself
Here are some suggestions for both buyers and sellers.
If you're a buyer:
Tell your lender, in writing, that you want an appraiser who comes from your county. After all, you're paying for the appraisal.
Request that the appraiser have a residential appraiser certification and a professional designation. Examples include the Appraisal Institute's senior residential appraiser, or SRA, or member of the Appraisal Institute, or MAI, designations.
Experts say there’s no benefit for the owner or buyer in tagging along with the appraiser. It is advisable to have your Realtor provide a Comparable Property Search of sold homes. Also, the Realtor can provide properties that were sold bank foreclosures and short sales as they may skew the value. If the appraiser is not familiar with the area, it can help and save the appraiser some time and effort.
And yes, you can speak with your appraiser; the prohibition only applies to your mortgage lender.
If you're a seller:
Get an appraisal before you list a home. You can search for a qualified appraiser in your area on the Appraisal Institute site.
Use the appraisal to set a realistic listing price for your home.
Give a copy of your prelisting appraisal to the buyer's appraiser. Professional appraisers will understand that you're just trying to add more data and another perspective.
Question a low appraisal. Ask for a copy of the appraisal and review the comparable sales that were used to determine the appraised value. Ask your Real Estate Professional to provide comparable sales in the area to forward to the lender as additional information that may be used to ask for an appraisal review.
Consumers do have recourse: Federal law requires that a copy of any appraisal be given to consumers who request it in writing. And unlike inspectors or agents, home appraisers have to answer to Uncle Sam, which means dissatisfied customers can complain to the feds. Complaints about appraisers and their practices can be filed with the Appraisal Subcommittee, which is part of the Federal Financial Institutions Examination Council.
Hope this Helps
Kathy McKinney, Realtor - RS188360L
708 Main Street, Harleysville, PA 19438
Office 267-647-9800 ext 412
Author:Kathleen McKinney Phone: 215-500-3424 Dated: December 7th 2015 Views: 1,209 About Kathleen: My experience level is at your disposal ! My background in mortgages and rock solid understanding of...
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