There is a high cost of low appraisals. If you are trying to do a cash-out refinance loan and your appraisal comes in too low, there could have to pay for a second appraisal or your loan application might not be approved. That’s what happened to one of our readers.

The High Cost of Low Appraisals

Q: We live in a west coast Florida beach town. We applied for a cash out refinance in June, 2021 so that we could consolidate our finances and pay off our mortgage on a long-held home in the north.

We were shocked, as was the lender, when the appraisal came in much lower than expected ($575,000). The problem seems to be that there are no appropriate “comps” since the town is very small and properties are extremely diverse.

Our home is a 5-year old “Key West” style small, 1,320 square foot ranch. It was custom built above the floodplain, higher than the required hurricane standard, with tied down roof trusses. It is a net zero home, with solar, pneumatic elevator and super insulation. Our electric bills are virtually nothing, and are rarely above transmission and taxes.

Despite all these amenities, the property comps were a 96-year old wood frame home, constructed at ground level with additions, a tear down and a house that’s a good comp now because the new owners rebuilt it, but those improvements don’t show on the appraisal. I contested the appraisal, to no avail.

Paying for a Second Appraisal, at a Higher Cost

Recently, two homes that are very similar to ours sold, both for around $750,000. We reapplied for our cash-out refi and as soon as the new appraisal was ordered, we were asked to pay $150 more than a normal appraisal due to the “large home and difficulty of the coastal town appraisals.” So our appraisal cost us another $550.

I say all this because we really feel the independent licensed appraisers here are taking full advantage of their third party status. Is there anything we can do besides coddling them? Their independence just seems to have fueled their ability to screw the homeowner.

Did the Appraiser Take Advantage of the Sellers?

A: We understand your frustration. Sometimes appraisers have a hard time with loan refinances. We have a friend who was thinking of listing his home for sale and thought it would be a good idea to hire an appraiser to give him an idea of the property’s value.

Well, to their surprise, the appraisal came in about $100,000 less than they expected. They talked to the appraiser and he told them that he had found quite a number of comparables in the area ranging in price between $700,000 and $900,000. Given that range of comps, he decided to split it down the middle and gave them an appraisal of $800,000.

A week or so later, they interviewed real estate agents who all thought that the property was worth $850,000 to $900,000. They listed the home for just over $900,000 and sold it for $850,000. The appraiser wasn’t necessarily wrong, but appraising a home is more art than science.

Appraiser Jonathan Miller Weighs In

We asked our friend, Jonathan Miller, CEO of Miller Samuel, a commercial appraisal company based in New York City and author of the weekly “Housing Notes” blog, to weigh in.

“I believe the reader misunderstands the role the appraiser plays in the mortgage process, and this is a public trust problem for the industry and largely the fault of The Appraisal Foundation, that sets appraisal standards and qualifications” for the industry, Miller explained.

Appraisers and Appraisals: New Rules Post Great Recession

A little history: In 2009, as the Great Recession was underway and home values were crashing around the country, the Home Valuation Code of Conduct (HVCC) was created as a solution to a lawsuit between New York State and Fannie Mae and Freddie Mac (which underwrite the vast majority of home mortgages). The concern was that lenders were picking appraisers who were providing appraisals that were high enough to seal the deal, rather than true independent assessments of value. Because buyers weren’t being given an independent analysis of how much a home was worth, they were being hurt (by potentially overpaying) even as lenders were getting deals done.

A year later, Miller explained, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed (now overseen by the Consumer Financial Protection Bureau), sunsetting HVCC, but setting up a system where lenders don’t have direct control over the appraisers. Instead, they hire a third-party institutional middle company (known as an Appraisal Management Company, or AMC) and the company hires the appraiser.

Appraisal Management Companies Take a Big Chunk of Appraisal Fees

“Those AMCs take a large part of the borrower’s application fee from the appraiser, in many cases 50 to 70 percent of it, so what kind of experienced appraiser will that compensation attract?” Miller asks.

This has caused a different set of issues because the middle companies are now incentivized to keep appraisal costs as low as possible, so sometimes appraisers are brought in from far away, who don’t know the local housing stock and have little to no experience.

“The value the appraiser is providing is a professional value opinion, which is not a fact,” Miller said. “I have no idea whether this reader had an experienced appraiser in the local market or just the low bidder who could do this report quickly. I suspect the latter based on what the reader has presented.”

Banks Over-Emphasize Low Cost Appraisals vs. High Quality Appraisals, Miller Says

“Since the financial crisis, the banking industry has over-emphasized low cost and fast turn times and showed a limited concern about quality,” he explained. In addition, the appraisal industry is suffering from the same employment issues as other industries. Miller says appraisers continue to skew older as fewer young people enter the profession because of what he calls “nearly impossible economics.”

“The bank appraisal industry is literally feast or famine. The appraisal profession represents one of the last steps in the mortgage process on a purchase or a refinance and is the only one whose compensation is not contingent on the mortgage closing. What the reader describes is EXACTLY what happened during the financial crisis where lenders lost their minds and pressured appraisers all day long,” he wrote in an email.

When it comes to financing or refinancing real estate, an appraisal is an opinion about the value of a piece of real estate. Most borrowers don’t realize that the appraiser is not working for them, only the lender. That’s why Miller believes the reader’s frustration is misdirected.

“The only way an appraisal opinion is worthwhile is if appraiser’s take ‘full advantage of their third-party status’,” Miller noted. “Otherwise, we are back in the housing bubble all over again.”

Push Back Against Your Lender If the Appraisal Fee is Too High

A final thought from Miller: “Incidentally, the second appraiser had nothing to do with the first appraiser, so the fairness of the additional fee (I assume it was through the same bank) is a bank decision, not the appraisers’. Those appraisers are kept separate from each other, so they aren’t influenced by the other’s result. Incidentally, the bank is the entity that made the decision without considering the new data.”

In short, if you have a problem paying an extra fee for your second appraisal, you should blame the bank, not the appraiser. Or, perhaps the AMC, which suddenly decided to charge more once you were asking about a higher valuation.

FAQs About Appraisals

Q: Do I Hire The Appraiser?

A: If you’re applying for a loan, the lender will hire the appraiser. If you’re a buyer or seller trying to establish value for a property, you might hire an appraiser. However, the lender is not obligated to accept your appraisal.

Q: What is the Appraisal Process for a Home with Few Comparables

A: When you have someone sign a contract for the purchase of a home, the appraiser knows the contract price and then can work with comparables (homes that have recently sold that are similar in size, shape, amenities and location) that can meet that contract price. If a home has many improvements but there are few comparables, the appraiser doesn’t have a target sales price for the home and doesn’t have a large volume of homes to use to reach a price. In that situation, the appraiser will have a hard time establishing value and could come in with a low appraisal. 

Q: Should the Agent Be at the Appraisal?

A: Yes. Real estate listing agents should be there when the appraiser comes through the home. They, in turn, will have comparables for the appraiser to look at. They also will have information to give to the appraiser on any amenities the home might have that would increase its value. You might want to follow what they do and put together a package to assist the appraiser in evaluating and appraising your home.

Q: Should I Point Out Any Home Improvements To the Appraiser?

A: Yes. You can list the improvements you’ve made to the home by itemizing the cost for these improvements and you can find other properties that have some of your characteristics that show these improvements increase it’s value. Remember, that an appraiser works to add and subtract value to a home based on positive and negative attributes in a home. A pool might increase a home value by say $50,000 but living next to an industrial facility might decrease its value by $50,000. (We’re giving these numbers as examples and they are not representative of the numbers an appraiser would use.)

But it’s important for you to understand that an appraiser works by putting together a whole bunch of pieces to a puzzle in coming up with a price for your home. A good real estate agent that knows your area and the values in your area uses their expertise to come up with what they think you should list the home for and what they think it should sell for. We hope this explanation gives you a bit of insight into the appraisal process.

Read More About Appraisals

10 Steps to a Fair Appraisal

Should I Get an Appraisal Before Listing My House?

Appraisal Update: Be Prepared for the Worst

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