Home appraisers are the unofficial umpires of residential real estate sales, deciding whether offering prices are fair or foul. But much more often than in the past, they’re striking out deals and sending buyers and sellers back to the dugout. Each month, between 10 and 20 percent of real estate agents are seeing accepted offers to buy a home founder or collapse as a result of appraisals that came back too low, according to recent surveys by the National Association of Realtors.
Low appraisals hurt both buyers and sellers. When an appraisal comes back lower than expected, buyers usually can’t qualify for as large a mortgage. That means they have to put up a larger down payment to buy the house – something they often can’t do. As a result, the sale might fall through, or the seller will have to lower the price in order to salvage the deal.
There are ways to improve your chances of a good appraisal. But first, it’s important to know why this problem has arisen lately.
During the height of the real estate boom, real estate agents and mortgage brokers often played a big role in selecting appraisers. These agents and brokers had a strong interest in high appraisals, because a high appraisal meant that it would be easier to get a deal to go through. So many appraisers felt pressured to turn in optimistic numbers, fearing that if they didn’t, they wouldn’t be hired again in the future.
Arguably, this resulted in a rash of unreasonable valuations, which contributed to the housing bubble.
As a result, two years ago the federal agencies that control the bulk of residential mortgages, such as Fannie Mae, barred real estate agents and mortgage brokers from choosing appraisers.
This spawned a new industry, called “appraisal management companies,” or AMCs, which hire appraisers to provide independent valuations to lenders. Today, about 70 percent of appraisals are done through AMCs; most of the rest are done by in-house appraisers who work directly for banks.
Some appraisers think this is a good thing, because they can be objective and are no longer under pressure to skew the numbers upward.
On the other hand, some appraisers say they now have the opposite problem – they feel pressure to skew the numbers downward and to be as conservative as possible, out of fear that they’ll get in trouble if a high appraisal leads to a bad loan and a default.
Some appraisers say they feel pressure to skew the numbers downward and to be as conservative as possible, out of fear that they’ll get in trouble if a high appraisal leads to a bad loan and a default.
Other critics say that AMCs have resulted in lower-quality appraisals. Because AMCs keep a lot of the money that used to go directly to the appraiser, appraisers receive less compensation for each job, and thus they have to look at more properties in less time in order to make the same income. As a result, critics say, appraisers don’t make as careful an inspection as they might, and don’t give as much thought to whether the “comparable sales” they use for valuation truly involve comparable properties.
Some appraisers complain that in order to increase their volume, they have to accept jobs outside their local area, where they are unfamiliar with the neighborhoods and less able to make informed judgments about comparable sales.
What you can do
With home appraisals now presenting a much higher hurdle than in the past, here are some suggestions for getting a good result:
- Treat the appraisal as a “second sale.” Just as you fixed your home up to look nice for an open house, you’ll want it to look nice for an appraiser, too. It’s not necessary to make your house spotless or to have fresh flowers on the table, but it’s a good idea to mow the lawn, trim the hedges, remove marks from walls and clean soiled carpets. All these things will factor into the appraiser’s “condition” rating for the home.
- Make a list of all the improvements you have made to the property, and give it to the appraiser. Include the date and the cost, or an estimate if you don’t have the exact figure. Include even small upgrades and maintenance. It’s particularly important to include items that might not be obvious on a brief inspection, such as new insulation or a new roof.
- Also tell the appraiser about any recent major improvements to the neighborhood, such as a new school building or park.
- Fix any peeling paint. This is especially important if the house was built before 1978 (when lead paint was banned) and the buyer is using an FHA mortgage, because the agency will require the paint to be removed before approving the loan.
- If you can, give the appraiser your own list of recent comparable sales. The appraiser will do his or her own homework, but providing a list can’t hurt, especially if you highlight truly comparable properties with good sale prices. Two things are especially important: (1) If you know of any homes in the area that were “for sale by owner” (with no real estate agent involved), and that fetched a good price, tell the appraiser because these sales probably won’t show up as quickly in the appraiser’s database. (2) If any comparable properties in the area were recently sold as short sales or foreclosure sales, let the appraiser know. These types of sales generally result in lower prices, and if the appraiser knows the circumstances behind the sale, he or she might be able to adjust the valuation upward.
- Finally, be considerate of the appraiser. Most appraisers like to go through a house uninterrupted, so don’t follow around too closely and save your questions for the end. You might also want to keep small children and dogs out of the way.
The Rhode Island home appraisal attorneys at Bardorf & Bardorf serve communities throughout the state, including Newport County, Kent County, Bristol County, Washington County and the cities and towns of Newport, Middletown, Portsmouth, Aquidneck Island, Tiverton, Little Compton, and Jamestown, RI.