The Real Estate Appraiser Fiasco is a true story of a home in Sequim that was appraised by an out-of-town real estate appraiser who missed true fair market value by almost $20,000! Appraiser mistakes like this always spell D-I-S-A-S-T-E-R for the seller, for the buyer, and for the listing agent, the selling agent, and the buyer’s mortgage broker. Today I’ll explain exactly how this can happen and why it’s such a disaster for everyone involved. I’ll also share best practices to resolve this kind of appraiser fiasco.
When a buyer finds the ideal home they plan to finance, once they’ve reached an agreement with the seller on price and terms, they will seek out a mortgage broker to help them get the loan. The mortgage broker, or in many cases a loan officer, will collect the essential documentation, order a credit report, and put together a package he hands off to the loan processor who does an analysis to be sure the buyer qualifies. During this process, an appraiser is appointed through a third party company. This is where it gets interesting.
During the last real estate crash that started in 2007 and lasted for almost a decade, politicians and regulators created an entirely new system for hiring appraisers for single family home loans. No longer can mortgage brokers refer to an experienced appraiser they know has a good track record. No longer can the Realtors or anyone in the transaction recommend an appraiser with integrity and who has a reputation for reliability and for returning the appraisal promptly.
Who hires the appraisers? Third party entities known as appraisal management companies, which are private sector contractors who now control who your appraiser will be. Of course, the idea with this new bureaucratic system was to eliminate the fraud that occurred between a dishonest appraiser and a dishonest mortgage broker and a dishonest real estate broker or buyer. This was allegedly the cause of the mortgage debacle, and while there were some dishonest appraisers and brokers, they probably made up far less than 1/100th of 1% of all mortgage loans.
So they created appraisal management companies (AMCs) to create separation. What they created was a monster 1,000 times worse than the original problem. These independent AMCs charge appraisers a fee up front just to be included on their rotating list of appraisers for that market area. That fee can be $150 to $350, and then many of these AMCs are also taking a part of the actual appraisal fee. One appraiser told me that their AMC takes $125 out of every $500 appraiser they do. To say that appraisers are upset about this insane process would be a gross understatement. Many of them refuse to be a part of that system, which means they are not on the AMCs rotating lists.
But it gets worse. Because many local professional appraisers with integrity refuse to be part of the AMC con, when a mortgage broker has to defer to an AMC for the appointment of an appraiser, the AMCs often appoint out-of-town appraisers who do not know the local market at all. In the story I started with, the appraiser who came to the house was an out-of-town appraiser, and she only spent five minutes in the house. In addition, she apparently was also doing five more appraisals on the same day over a large geographic area. This kind of appraisal practice screams unprofessionalism and incompetence and a number of other unpleasant things.
Here’s where the low and disastrous appraisal blows up–just before the transaction is supposed to close. At this point the sellers have scheduled their moving vans, packed up almost everything in their home, and the buyers have done the same. Suddenly, the two are forced to the table to essentially re-negotiate the transaction price, and maybe a new closing date, which throws everyone’s schedule off in what they all would call a nightmare scenario.
If the seller did agree to take the lower price, the buyer would have to come up with the difference in addition to the down payment required by the lender based on the loan to value ratio of the appraised value, but many buyers will not have the down payment plus an additional $20,000 in their back pocket.
But what if the appraiser is ridiculously low and everyone involved knows it is way below true fair market value? What if the seller cannot afford to drop the price by $20,000? Then the transaction must be terminated, and everyone goes back to square one–a huge nightmare thanks to an incompetent appraiser appointed by an appraisal management company from somewhere else in the country.
Here’s the best solution. A good mortgage broker will get help from the listing agent to assemble fair comparable sales with a narrative explanation supporting the value of the sales price, and offer this to the appraiser for a reconsideration. If the appraiser accepts good data, then he can re-do his appraisal and the transaction can move to closing without delay. But if the appraiser refuses, the transaction is either dead or the parties move to their last option.
The last option is for the seller to have a second appraiser appointed. That will mean an extension on the closing date, assuming the buyer and seller can both reschedule their moves and plans. It gets very complicated after that, because two different appraisals require a method to resolve the difference, and a mortgage underwriter is not likely to simply accept the second appraisal over the first appraisal. There is usually a provision in the contract for the appointment of a third appraiser to resolve the difference, but we’re back to the question of will the underwriter accept the opinion of the third appraiser? And who is going to pay for all these appraisals when they are charging between $500 and $1,250 for an appraisal, and maybe more for an “expedite fee”? A real estate appraiser can make a mess out of a transaction if they are an out-of-town real estate appraiser who doesn’t have a clue.
What is my final word of advice? A nightmare scenario requires the best of the best in your corner. That means you would be extremely wise to make sure from the get-go that you have an experienced and professional buyer’s agent working for you. I cannot tell you how many calls I have gotten from buyers who hired the wrong buyer’s agent and end up in a nightmare that agent cannot handle. You also need the best of the best mortgage brokers in your corner to handle anything that comes up, including a low appraisal, and do not under any circumstances hire a mortgage broker who is not local to the home you are buying. Online brokerages often spell disaster, and do not hire the mortgage broker in your hometown far from your destination. They don’t know the local market either.
I share this experience and advice with you passionately, because I’ve been doing this for 40 years, and I could share a 100 more stories like this. It sounds like I’m trying to sell myself as your Sequim buyer’s agent, and I do hope you hire me, but that doesn’t mean I’m not right about all this.
Possibly Related Posts:
- Are Zillow Zestimates Accurate?
- Appraisal Management Companies
- Sellability and Appreciation
- Fair Market Value (FMV) and the Comparative Market Analysis (CMA)
- What if You Get a Low Appraisal?