Appraisal the 'weakest link' in real estate investing
by Bob Bruss
reprinted courtesy InmanWiki www. inman.com
About 10 years ago, I recall Greg Baramore, then president of General Electric Mortgage Insurance Co., pontificating at a press party in Dallas about the benefits of PMI (private mortgage insurance) for home buyers. Then a member of the press asked him, "What is the weakest link in the mortgage process?"
Without missing a beat, Baramore responded "the appraisal." Next, he explained how General Electric Mortgage Insurance and others were experimenting with computerized appraisals to solve the significant problem of residential appraisals, which are above or below current market value.
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A few years ago, I personally benefited from the results of computerized appraisals. When I applied online at www.wellsfargo.com for a home equity credit line on my second-home condo, I requested an $80,000 credit line based on my guesstimate of its $120,000 market value.
A few days later, I received a phone call from a nice Wells Fargo loan officer who told me I was wrong. Based on a computerized appraisal of my condo, she reported my condo was worth at least $145,000, and I could obtain a $100,000 home equity credit line rather than the $80,000 requested. Naturally, I accepted.
ARE APPRAISERS OBSOLETE? Not quite yet. However, mortgage lenders are increasing their use of computerized appraisals and relying on in-person appraisals less.
To illustrate, a few weeks ago I was in Minneapolis where I was talking with a Wells Fargo customer service person about my checking account.
I should emphasize Wells Fargo bankers are trained to "sell, sell, sell." Wells Fargo is so sales-oriented it calls its offices "stores," not branches.
After he straightened out my checking account, the customer service representative suggested Wells Fargo could reduce my home mortgage interest rate. Then he introduced me to a nearby mortgage officer who asked me a few questions and almost instantly came up with a computerized appraisal of my home, which is 1,500 miles away in California. His computer's estimate of my home's market value was a bit conservative, but acceptable for a no-cash refinance to reduce my interest rate.
However, he said because of the value of my home, an actual appraisal would be necessary. Oh, darn! I was hoping to write an article about a 100 percent computerized refinance. Close, but not quite yet.
WHY APPRAISALS ARE STILL THE WEAKEST HOME FINANCE LINK. Having dealt with so many appraisers I've lost count during my many years of real estate investing, I know there are good appraisers and bad appraisers.
I recall one great appraiser who appraised the worst fixer-upper house I ever purchased (it had real skylights in the roof where rain and tree leaves came through into the front bedroom and living room).
The bank lender assigned him the task of appraising the house "as is" (about $200,000) and if it were fixed up to neighborhood standards (over $300,000). The happy result was the bank felt safe and loaned me the full purchase price. I fixed up that house (which had been condemned by the city as unfit for human occupancy) and turned it from a neighborhood eyesore into a jewel. The bank even featured that house in its newsletter as a "community reinvestment loan."
But the worst appraiser I ever encountered was hired by an out-of-state lender to appraise my house for a refinance. He showed up on a very hot day dressed in a suit and tie, with white tennis shoes. That was my first "red flag."
After he competently measured and photographed my home, as I was chatting him about my home's market value and handed him recent nearby comparable home sales price information, he arrogantly said, "I don't need all that." The result was this out-of-area appraiser's estimated value was far below my home's correct market value and his lender lost my business.
THE HOME APPRAISAL PROCESS. An appraisal is an estimate of a property's current market value. Accurate appraisals depend on the input of recent sales prices of comparable nearby residences, plus the appraiser's addition and subtraction of values for the pros and cons of the home's features and deficiencies.
Theoretically, a licensed appraiser should be able to appraise a home anywhere and determine its estimated fair market value. Computerized recent comparable home sales price information is a great help to appraisers.
However, unless the appraiser has considerable experience appraising homes in the vicinity, the reality is an out-of-area appraiser is unlikely to arrive at an accurate estimate of a home's current market value unless neighborhood homes are very similar.
APPRAISAL IS AN ART, NOT A SCIENCE. Especially when there is a local seller's market (meaning there are more qualified home buyers than homes for sale), buyers tend to offer unusually high purchase prices because of the shortage of homes for sale.
When a mortgage lender hires an appraiser to value a home that has been sold in a seller's market with rising home prices, appraisers often have great difficulty justifying the sales price. The primary reason is, even with the help of computerized information of recent comparable home sales prices, often there are no recent nearby home sales prices (called "comps" or comparables) to justify the purchase price offered by the buyer.
Appraisers are under considerable economic pressure from mortgage lenders to "hit the number," meaning appraise the home for the sales price, or higher. If the appraisal comes in considerably below the sales price, the appraiser knows he is unlikely to get hired again by that lender because the borrower will obtain a mortgage elsewhere.
When two appraisers estimate the market value of the same home, their appraised value should be relatively close. But in the real world, appraisals from two licensed appraisers can differ by thousands of dollars, depending on their experience and the comparable home sales price information they used to arrive at the appraised value.
If an appraiser over-values a home and doesn't have an objective basis for the appraisal, that is negligence or fraud (deceit), for which the appraiser can lose his/her license. Being an appraiser is a difficult job, although it has been extremely profitable during the recent and current home sales and mortgage refinance boom.
HOW TO GET AN ACCURATE APPRAISAL OF YOUR HOME. Having a basic understanding of how home appraisals work, and the pressure on the appraiser from both the lender and the borrower, here are four key steps to obtain an accurate appraisal of your house or condo:
1--GET THE RESIDENCE INTO TIP-TOP CONDITION. Whether you are the home buyer or seller, or you are refinancing your residence, a home in tip-top clean condition is likely to get the best appraised value. If the property is messy, with junk in the yard or inside, the appraiser is likely to have a negative viewpoint, although the clutter really doesn't affect the home's fair market value.
Appraisers will photograph the home's exterior for their appraisal report. They usually include a "street scene" to show the lender the neighborhood atmosphere. Some appraisers want to photograph the interior. When I refused permission for interior photos of my home, I still got the loan.
2--ALWAYS ACCOMPANY THE APPRAISER AND ASK FOR A BUSINESS CARD OR IDENTIFICATION. The homeowner, buyer or real estate agent should accompany the appraiser. Insist on receiving a business card or identification.
The reason is some unscrupulous licensed appraisers have sent inexperienced assistants or trainees who are less than competent to evaluate homes. If you're paying for the appraisal, you deserve to have a licensed appraiser inspect the property.
3--GIVE YOUR APPRAISER A WRITTEN LIST OF THE HOME'S FEATURES AND RECENT NEARBY COMPARABLE HOME SALES PRICES. The best appraisers inspect three or more homes every day. They can't possibly remember the details of each residence.
Appraiser's photos and notes help their recall when preparing an appraisal. But the best way to get an accurate top-value appraisal of your home is to give the appraiser a written list of the home's features to be included in the appraisal report.
Also hand the appraiser any details you have on recent nearby home sales prices because the appraiser might not yet have that "comp" information in his computer database.
4--ASK YOUR MORTGAGE LENDER FOR A COPY OF THE APPRAISAL. Whether you are buying a house or condo, or refinancing your current home, insist that your lender agree to promptly supply you with a copy of the appraisal. Technically, the appraiser is hired by the lender, although appraisers now often demand cash up front before they will appraise the house.
Many appraisers now refuse to accept personal checks because they know if their appraisal is not satisfactory to the borrower, a "stop payment" might be made on the check.
If you, the borrower, are not satisfied with the appraisal, be sure to contact the appraiser promptly by phone. Maybe the appraiser confused your home with another he viewed the same day. Point out specific errors the appraiser made and ask for a prompt corrected appraisal.
If the appraiser refuses to correct the errors, ask the mortgage lender for a "review appraisal" by another appraiser, or a new appraisal by a different appraiser, to be paid by the lender.
CONCLUSION. Appraisals may be the weakest link in the home mortgage process, but appraisals are still one of the most important. Mortgage lenders depend on appraisers to be their inspectors.
After the borrower is satisfied the home shows its best, the borrower or the realty agent should be sure to accompany the appraiser to be certain the appraiser's questions are answered and the appraiser is handed (a) a list of the home's features and (b) recent comparable sales prices of nearby homes. Lastly, insist on promptly receiving a copy of the appraisal to be sure the appraiser didn't make any mistakes when arriving at the home's appraised market value.
reprinted courtesy InmanWiki www. inman.com
brought to you by Wailea Makena Real Estate Inc.
www.wailea-makena-real-estate.com
Peter Gelsey R (PB)
Wailea Makena Real Estate, Inc.
direct (808) 357-4552
Toll free 800-482-5089
fax (808) 442-0946
email pgelsey@aol.com