Are faulty home appraisals killing deals? The answer is yes, but this issue requires careful consideration to understand what is going on and why. At the outset, let me say the problem is less about professional appraisers than it is about a system that is defective. Like every profession, there are a few incompetents, but 99.9% of all appraisers are both highly competent and honest. The real problem goes much deeper. Perhaps this real life example in Sequim, Washington will help clarify the problem and the issues.
Home Appraisals and Lions and Tigers and Bears, Oh My!
I sold a home in Sequim, Washington that never closed because of these issues with home appraisals. This home was originally listed at $850,000 and after two and a half years on the market, the listing price was reduced to $500,000. That’s when I helped my clients negotiate a price of $450,000. The home was appraised, and lo and behold, it appraised for exactly $450,000. The underwriter subsequently rejected the appraisal, saying that the six comparables in the appraisal report were insufficient because they were not all sales within the past six months and they were not within the maximum radius.
Home Appraisals and Accurate Comparables
Appraisers are challenged to find good comps in this recession. A good comp is a similar home with similar features in a similar area. In smaller markets, like Sequim, Washington, comps can be few and far between. That means a loan underwriter may simply reject the appraisal, and the transaction is dead.
The appraisal industry is reeling from the effect that short sales and foreclosures are having on real estate values. It seems clear to me that a garage sale price on a foreclosure should have no more impact on regular home sales than a garage sale behind Walmart has on their prices. In other words, desperate foreclosure sales should not be included as comps for appraisal and lending standards.
Home Appraisals and Underwriters
The mortgage debacle and this recession was the impetus for major structural changes in lending practices, mortgage processes, home appraisals, and underwriting. The earthquake that shook each of these industries created a multitude of new laws, new regulations, and amended procedures, and unfortunately there was no master coordinator. What has resulted is chaos interspersed with order. Like new software in a beta version, it may take years to work out all the bugs and get order back into the mortgage business.
The chaos reverberates like this. A home is sold. The buyers apply for a loan, but lending standards have gone through the roof to the point that many millionaires are getting their applications rejected for reasons that make no practical sense. If an average qualified young couple get their loan approved, it’s almost like winning the lottery. But even if a buyer’s loan is approved, the track is still full of hurdles. An appraiser may not satisfy an underwriter. And there are a hundred nuances along the way, and even what would normally be a low hurdle can trip a buyer who is never given the chance to get to the finish line. [Read What’s Wrong With the Appraisal Business?]
What happened to the home I sold for $450,000 that never closed? It was foreclosed, and ultimately sold for $375,000 cash. The two banks with loans lost over $100,000 on this desperation sale, and the sellers sill owe the second bank a lot of money, which will result in a judgement and a nightmare that will probably last for years. The cash buyer got a good deal, the seller and two banks lost a lot of money, more than necessary because of problems with home appraisals.
Last Updated on October 13, 2012 by Chuck Marunde