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Updated:         May 30, 2018

In the past, we often relied upon the "willing buyer, willing seller" concept to establish value. Given today's circumstances, lenders rely upon appraisals to know that there is sufficient value to support their loan amount. This is particularly critical on high LTV loans where there is little equity for protection. Thus, even when a buyer is willing to "pay a seller's price", the appraisal may not justify the requested loan amount. The loan amount a borrower can acquire is determined by the purchase price or the appraised value whichever is lower. Sellers, thus, need to know that they are placing their property on the market at a reasonable and saleable price, and buyers want reassurance that they are purchasing at market value . (Lenders are required to provide a copy of the appraisal to the borrower .)

There are times when the appraised value is lower than the purchase price but because of a low LTV, the lender will still make the loan. In a higher LTV transaction, even if a buyer, in spite of the low appraisal, wishes to proceed with the purchase, there may be insufficient cash to do so. [i.e., Sales Price = $200,000; Appraised Value =$190,000; Original anticipated loan = $180,000 (90% LTV); Lower loan amount based on appraised value now = $171,000; Therefore, the Buyer is required to make up the $9,000 difference in cash to continue the purchase.]


When preparing to sell a property, it is a good idea to secure a Comparative Market Analysis (CMA) from a Real Estate Licensee to assist in determining the appropriate sales price. A comparative market analysis, by identifying recent "similar" sales (known as "comps"), assists in setting the probable value at which the property can be expected to sell. Comps can also be helpful when encouraging a buyer to "make their best offer" when contemplating a purchase. Remember, this is not an official appraisal but is a professional opinion of value using much the same information that an appraiser may use.


An appraiser uses "comparable sales" ("comps") to support his/her opinion of value for a specific property. Here is what a good comp represents: A comparison of a recent (not more than 3 months ago) "closed sale" of a similar type home in the same neighborhood (not adjoining developments or across town). "Similar" means in style, construction, size and age (typically not more than 3 years older or newer than the subject). Any comp that does not meet the above criteria must be "adjusted" for any differences.


Pending sales in escrow, while noted, are given little weight. Instead, "closed" home sales are more important in determining the anticipated value. Appraisers must now also note the "list price" for any homes for sale in the same neighborhood. This could have an impact upon your sale if there is a present listing at a much reduced and/or increased price from most recent sales. The appraiser will be required to comment on whether values are declining (which is less likely in a current appreciating market) or appreciating and why. It is imperative that good comps are acquired to support today's listing and/or sales price from the very beginning of the transaction. It must be recognized that a recent sale of a 1 or 2 year old home will not support a sale of a 10 year old home without a value adjustment being made.

Sellers, eager to acquire top dollar, can be disappointed if the appraised value is less than desired. On the other hand, a buyer has immediate value appreciation if the appraisal is higher than the purchase price. As values escalate in today’s real estate market, appraisers are again finding it difficult to keep up with the rising prices and make the appropriate adjustments.


When an appraisal comes in lower than the sales price, the first instinct is often to blame the appraiser. In the past, appraisers were sometimes asked to "push up the numbers" or "meet the sales price". (Appraiser complaints that they were being coerced by real estate licensees and mortgage originators regarding home value appraisals, resulted in the adoption of a new process called Home Valuation of Code of Conduct (HVCC) explained below.)


While an appraiser wants to accommodate all persons in the transaction, if s/he succumbs to the temptation to "make it work", there is the risk of an appraisal review being done by the lender. While appraisal reviews are generally infrequent, lenders could re-initiate the process should there be concerns about values. 


A review means that after the loan file is submitted to the lender with the accompanying appraisal, there is an "in house" appraiser who reviews the adjustments made and the final reconciliation figures. If any "red flags" appear, a more complete review might be required. Obviously, this impacts an appraiser’s desire to be accurate the first time and avoid said reviews which can affect value and create time delays.


Appraising today can be difficult. But, by understanding the restraints placed upon the appraiser (by lenders) in determining value, hopefully, we will not be so quick to blame the appraiser, especially for a low appraisal. A Realtor can assist a seller in determining the anticipated selling price of any property. By acquiring sufficient information ahead of time, a seller can avoid confusion, controversy and disappointment when setting the selling price for their home or other property.


Appraisals and the New HVCC Rules

The appraisal process for conventional financing was, for many years, less complicated than that for FHA or VA loans. In May 2009 that process was severely impacted with the adoption of the Home Valuation Code of Conduct (HVCC). Lenders (including mortgage brokers and other loan originators) were no longer able to order an appraisal from a selected local appraiser. Instead, a system of Appraisal Management Companies (AMC’s) was established from which appraisals assignments would occur.


The motivation for the plan was to establish regulations to “enhance the quality and independence of the appraisal process”. In other words, to “protect” the appraiser from coercive interference from lenders or real estate licensees, who were thought to have contributed to an invalid valuation process by “running up” home values during the heyday of sub prime lending.


Critics immediately countered that the new process was a way to deflect attention away from the fact that the agencies did not provide sufficient oversight in the housing debacle. Plus, critics indicated that local appraisers did not create the market but were most often caught in a spiral in which they were “chasing” home values as property kept selling for ever increasing amounts. Ironically, the fraudulent case that spawned this “regulation” was conducted via an appraisal management company, the very same type of entity that is now proposed to protect consumers from appraisal fraud.


The concerns of a united real estate mortgage community that the new rules would impact how local appraisers, mortgage lenders and realtors did business began to manifest themselves immediately as the new process was initiated. But worse still were the perceived negative impacts for the borrower/consumer. The increase in the cost of appraisals, while most noticeable, was the least of the impacts. More critical was that a lender had to be identified immediately in order to initiate the appraisal process. Previously, the borrower’s application and documentation could be acquired along with the appraisal before selecting a lender. This allowed the loan originator to search for the best loan option, avoid guideline changes that could affect the borrower and “discuss  any concerns with an appraiser before incurring a cost for an appraisal that might prove ineffective.


Lenders were also affected. Additional costs were incurred as they had to establish procedures and commit staff to monitoring the process and developing quality controls with the AMC’s. Most costly was devoting time to working out appraisal errors and valuation problems through a convoluted process that did not allow for direct contact with the appraiser. Complaints about errors, inappropriate comparison properties, inaccurately identified additions (requiring non-existent building permits) and just plain bad appraisals mounted, especially during the first months of the new process. The mortgage originators had little access to the appraisal in order to identify valuation irregularities. Acquiring an appraisal copy only after it had been completed and delivered to the lender coupled with the prohibition to contact the appraiser directly eliminated any timely or easy way to correct problems.


As feared, many local appraisers, who best knew the market, were taken out of the process. It seemed to many that assigned appraisers were not only often new and/or inexperienced but seemed to be super conservative in their valuations. Complaints of receiving under-valued appraisals, compromising home sales, seemed numerous. Because the AMC’s represented a third party that must be paid, appraisers received less money per appraisal. The result in some situations was a reduction of service (e.g., acquiring building permits when required). Advocates of the new process indicated that the complaints are exaggerated. Whether accurate or not, the “perception” that something was very wrong can and did often replace reality. The process was likely neither as bad as its critics suggested nor did it perform as well as its advocates anticipated. 


What many loan originators, lenders and appraisers believe is that appraisers were made the scapegoats, suggesting that they were responsible for the skyrocketing home value spiral when it was the un-regulated “easy” credit with its lack of any buyer qualification that spawned the sub-prime debacle. Whether the HVCC process has reduced the perceived fraud within the valuation procedure is perhaps questionable but the new rules certainly impacted the process for good and bad. We do know that the timeliness of the appraisal process has been expanded, the potential for correcting errors quickly has eroded and any local loan originator expertise and assistance in guiding their borrowers’ appraisal experience has disappeared.


What we do know is that the appraisal process is always evolving and change is inevitable and we will make the necessary adjustments to serve our buyers and sellers. The HVCC rules appear to be here to stay and we seem to have adapted to them. In 2010 the Wall Street Reform and Consumer Protection Act required the appraisal process to be completely reviewed while retaining the core purpose of the HVCC, which was to assure appraisal independence. Any new rules were to encompass a complete study of appraisal methods and would apply to the continuation of the HVCC set to sunset November 1, 2010. These changes are noted in the “history” portion of the tip sheet entitled “Appraisal Process Explained”. We will keep you informed as additional changes occur and we learn the details.


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