If you’re planning on selling or buying a home any time soon, you would be well advised to brush up on the latest news regarding appraisals. Be ready to take steps to avoid the kind of appraisal problems that are killing thousands of mortgage deals across the country.
Appraisals by professional, licensed real estate appraisers are required by lenders to determine the value of the properties they plan to finance. The purpose of the appraiser is not to help either buyers or sellers determine a fair value for a property but to protect lenders from lending more than the property is worth and suffering the consequences should the borrower default.
Appraisals take place after a lender has agreed to provide financing and before settlement. However, should an appraisal come in lower than the amount upon which the parties agreed—a short appraisal—the buyer will have to come up with the difference or the seller will have to agree to a lower sale price in order for the deal to go through.
Short appraisals are increasingly frequent these days for several reasons:
- Appraisals are based on the value of comparable sales near the property to be financed.
- In recent years, large numbers of foreclosures and short sales, which sell at a significant discount from full-price homes, have made it difficult for appraisers to avoid including these lower-priced properties in their calculations.
- Most housing markets have been volatile, first falling dramatically and now rising, making it difficult for appraisals to capture the most current price fluctuations.
Complaints regarding appraisals have increased steadily in recent years, due in part to the housing market’s instability and new industry regulations. According to a survey by the National Association of Realtors, over the past three months, some 35 percent of Realtors reported having a problem with an appraisal. Some 11 percent said an appraisal problem led to a contract cancellation, 9 percent said it led to a delay, and 15 percent said it resulted in a seller getting a lower price.
State licensing authorities reported nearly 16,000 complaints regarding appraisals in recent years and the FBI investigated 817 mortgage fraud cases involving appraisal fraud, where home values were deliberately understated or overstated. The vast majority of complaints, however, stem from fast-changing market conditions, concern that short sales or foreclosures as comps unfairly lowered values, or appraisers that were unfamiliar with local market conditions.
In 2013, the Appraisal Subcommittee, a federal agency charged with monitoring the state bodies that regulate appraisers, plans to launch a hotline for homebuyers, real estate agents, lenders, and others in the industry to file complaints.
TIP: If you’re planning on buying a home in the next year, pull your credit report and credit score now to make sure that all the information is accurate and that you won’t find any surprises when the mortgage lender pulls your credit score.
Next time, I’ll address how you can avoid your mortgage falling through due to a low appraisal when you’re buying a home.
Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.
Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.