September 19th, 2011 6:40 PM by Sherry Lee
Low appraisals continue to block people from selling homes or refinancing mortgages, leaving many sellers and real estate agents unhappy. "We really feel we're at the mercy of appraisers," said Randy Lane, a Broward County homeowner whose sale fell through recently when two value estimates came in well below the negotiated price. Yes. You are at the mercy of Appraisers. Not only are they using recent sales to establish a value for your property, but, in a market that is moving up or down rapidly, they also may use a multiplier to project future value. It's not a perfect science. But it is a reflection of the current market. Who knows better than appraisers what homes are selling for and what the over-all trend in the market is? And who knows better than banks that values will likely continue to fall given the amount of shadow inventory they are stockpiling and accumulating?
When a sale collapses because of a low appraisal, the buyer is angry for having agreed to pay more than the home is thought to be worth. Meanwhile, the seller puts the home back on the market and considers adjusting the price – all the while not knowing whether another potential sale will suffer the same fate. I don't know that buyers are angry. They usually see it as an opportunity to get a better deal on the home and are grateful that the appraisal protected them from over paying. Real estate agents have the difficult task of telling the seller that they can accept the lower price now, or accepting it later.
A May 2009 law required that appraisers work independently and without undue influence from mortgage brokers, lenders and real estate agents. Mortgage fraud prosecutors say the overhaul was necessary to curtail conflicts of interest and bloated estimates that contributed to the housing debacle. This law, like so many, is based on rare cases of fraud and will do little to help the broader market. In my nearly twenty years in the business, appraisers were always chosen by the lender. Real estate agents and mortgage brokers had no influence over them.
More than two years later, real estate professionals say the change has inadvertently led to inaccurate appraisals, which is delaying a housing recovery. "This requirement is costing everybody, including the consumer, because we're not getting quality appraisals," said Tim Singer of Coldwell Banker in Fort Lauderdale. Define 'inaccurate appraisals'. Define 'quality appraisals'. I can understand the frustration of agents and mortgage brokers if their deals are not going through. They want to blame someone. And if the appraiser is from out of the area, it's easy to say it's because they don't know the market. However, the appraiser can still examine recent comparable sales online, call the participating agents and ask questions about the properties and the terms of the sales to establish value - and without bias. Sometimes the real estate agents work and live in the neighborhoods they are selling in and become overly protective of the old higher valuations. Their bias is more common and potentially blinding than that of a detached appraiser.
Appraisers bristle at the criticism. While some concede that concerns about the law are valid, they also say real estate agents and sellers have vested interests that blind them to the reality of falling home values.
"Don't shoot the messenger," said Ken Chitester, spokesman for the Appraisal Institute, a Chicago-based association with 24,000 members nationwide. "It's very easy to point fingers, especially in a depressed market." The abundance of foreclosures in recent years has dramatically reduced values, and appraisers say they can't help but factor in those comparable homes when they're preparing estimates. But many of those homes are in disrepair, and real estate agents point out that appraisers often don't consider the condition of the properties, leading to unnecessarily low appraisals.
In home sales, buyers who need mortgages pay for the appraisals, which cost about $350 in South Florida. Banks require them to make sure they don't lend more money than the homes are worth. Cash buyers typically don't request appraisals, real estate agents say.
For years, an appraisal was considered a formality. A mortgage broker would commonly suggest a business acquaintance to do the work, virtually assuring the appraisal, an opinion of value, matched the sale price. The 2009 law put a stop to that by insisting on appraiser independence. It also discouraged prolonged communication between an appraiser and the real estate agent, who used to work more in tandem.
Many lenders now hire appraisal management companies, which randomly select appraisers. Real estate agents and others complain that the companies assign appraisers from out of the area who aren't familiar with specific neighborhoods. Another complaint is that the management companies don't pay a fair wage, which deters experienced appraisers from accepting assignments. The result: low valuations, real estate professionals say.
Charles Ware, president of Elite Appraisal Management Inc. in Michigan, said it's up to the appraisers to reject assignments if they aren't familiar with certain areas. His management company lets appraisers set their own fees. "We're not gouging," he said.
Nine percent of real estate agents reported delayed sales contracts in recent months because of low appraisals, according to the National Association of Realtors. In addition, 13 percent said a contract was renegotiated to a lower price because an appraisal came in below the agreed-upon price. The Realtors' trade group didn't say how many sales were canceled by low appraisals. Wow. Let's go nuts because 9% of agents had delays in their sales contracts due to low appraisals. And a whopping 13% actually had to renegotiate their contracts. Maybe, and I am going out on a limb here, agents should do a better job of establishing pricing for their listings. We are qualified to appraise property. And if we are going to complain about appraisers not giving proper valuations because they are from out of the area, then who better to assign value than agents from within the area?
Lane, the homeowner, said he interviewed five agents to help him establish a $1.15 million asking price for his four-bedroom waterfront home in Fort Lauderdale. I could be wrong, but when someone is shopping with that many real estate agents, they want to hear the highest price. This is again the fault of the agent who takes an over-priced listing in the first place. There are many reasons to take an over-priced listing, but it should never be for any other reason than to prolong a short sale for a seller's benefit. Too many agents do it for self-serving reasons.
After he signed a contract with a buyer, the appraisal came in $500,000 below the agreed-upon price. A second appraisal was more than $200,000 off. At that point, the buyer backed out, and the home remains on the market. Lane obtained copies of both appraisals, and he said the homes his was compared with weren't similar in location, lot size or square footage. In the second appraisal, two of the comparable homes weren't on the water, Lane said. He insists the two appraisers didn't work hard enough to find similar properties. "At least be fair," said Lane, 50, who wants to downsize into a condominium. "Take the time to do your job. Now we're praying for a cash buyer." Sorry, but their job is not to be fair or partial in any way toward you or your property. And remember, they are not only looking at what has just sold. In many cases they have to apply a multiplier to determine a value that will hold six months from now. The buyer's lender is protecting themselves with the appraisal. Not you. Not the buyer, directly. But themselves. Think about it this way; if a buyer is putting 10% down and the bank is loaning 90%, a market that is falling 12% per year will leave that buyer under water in less than 12 months. Not a good place for the buyer or their lender to be.
Appraisals are especially troublesome on short sales, when a lender agrees to let the homeowner unload the property for less than the mortgage amount, said Judy Trudel, an agent for Balistreri Realty inLighthouse Point. The seller's lender wants the home to appraise as high as possible to reduce the financial hit, but the buyer's lender hopes the appraisal comes in low, Trudel said. This is not always true. The seller's lender does not always want a higher appraisal. Every short sale is different. Some lenders are participating in TARP, or have Credit Default Swaps on the loan and actually need a lower appraisal and sale price in order to make the deal.
Scott Dooley, a Fort Lauderdale appraiser, shrugs off the criticism, saying appraisal complaints come with the job and tend to increase in a down market. "But once it stabilizes," he said, "things will improve and our jobs will be a little easier." From your lips to God's ears, Dooley. Now if we could only get our County Property Appraisers to tax us on our actual property values and not their favored 'five year moving average', we might see stabilization in the market in the next decade !!