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Low-Ball Appraisals Nix Home Sales

Financial reform law may help sellers by curtailing controversial guidelines

by Andrea Downing Peck, AARP Bulletin, July 28, 2010

Buried in the 2,000-plus pages of the new financial reform law is a little-noticed provision that could help end low-ball real estate appraisals blamed for sinking many home sale deals in the past year.

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See Also: Downsizing in Retirement

The new act eliminates federal guidelines known as the Home Valuation Code of Conduct (HVCC), which critics say often result in underpaid, less qualified appraisers valuing—and often undervaluing—properties in unfamiliar markets.

Essentially, the code, implemented in May 2009, requires banks or mortgage brokers that sell loans to Fannie Mae or Freddie Mac to get appraisals through independent appraisal management companies.

The goal was to end chummy relationships in which lenders or real estate agents selected appraisers and could encourage them to return inflated valuations that would justify high loans. Inflated home values were blamed in part for the collapse of the housing market, which helped bring on the current recession.

But critics say the HVCC caused the valuation pendulum to swing too far in the other direction, toward artificially low numbers. Many appraisers guard against accusations of pumped-up valuations, while some highly experienced appraisers won’t work for low fees paid by the appraisal management companies.

The financial reform bill calls for the HVCC to end in October and requires that “reasonable and customary” fees be paid appraisers. The change may provide a slight tonic for sluggish home sales.

“We think it will have an impact,” says Lucien Salvant, public affairs managing director for the National Association of Realtors. “Not a large impact, but it will make the real estate closing process move smoother and quicker.”

John Mechem, spokesman for the Mortgage Bankers Association, is taking a wait-and-see approach to the multifaceted financial reform package. Until the Consumer Financial Protection Bureau and other enforcement agencies created by the massive legislation are up and running, he said, it is “hard to know what the impact” will be.

Low-ball appraisals hurt retirees

Older Americans making a transition from independent living to retirement communities or downsizing to smaller homes have been affected.

After moving into a senior community in Brentwood, Tenn., Tom and Charlotte Ritter decided to sell their second home, a 3,000-square-foot house in a golf-course community in Bonita Springs, Fla. Originally listed at $639,000, the recently renovated house languished for 18 months as the bottom fell out of the real estate market. After twice dropping the price, the Ritters accepted an offer for $440,000, but that deal collapsed when an appraiser valued the home at less than $400,000.

Jim Boeglin of Coldwell Banker Residential Real Estate in Bonita Springs said the appraiser cited as a comparable property a nearby house of the same size and age that was in poor condition, had a history of termites and had sold as a distressed sale.

Such deal-busting appraisals have caused Boeglin to take the previously unheard-of step of asking sellers to accept lower-priced offers from buyers who do not need a mortgage.

“If we can get an all-cash deal that does not require an appraisal, we’ll try to get our customer to accept less money rather than subject themselves to the risk of an appraisal that will blow up the deal,” said Boeglin.

Next: What appraisers look for. >>

What appraisers look for

When determining a home’s value, appraisers consider location, square footage, room layout, quality of construction, functional appeal and upgrades. Recent sales of comparable homes nearby also help establish value. Factoring in foreclosures or distressed sales, however, can artificially affect valuations if they are an anomaly and do not accurately represent the market.

In the current real estate climate, some appraisers talk of pressure to low-ball. “I’ve done this for 17 years and the one thing I’ve learned is that there is not one number for a home,” said appraiser John Montgomery of Willow Glen, Calif.

“It’s a range of value, and right now I’m incentivized to go to the low end of the range just to stop getting questions from these people at management companies.”

The Appraisal Institute, the nation’s largest professional organization of real estate appraisers, says the financial reform law will right many of the wrongs caused by the HVCC.

“With distressed sales prevalent in the real estate market, it is critical that highly trained appraisers be actively involved,” says Appraisal Institute President Leslie Sellers.

In the meantime, Sellers says, a homeowner refinancing a house or a buyer applying for a mortgage can take steps to help ensure an accurate appraisal. If an appraisal management company is involved, the owner can request use of a certified appraiser located in the same market area as the home. Certified appraisers have education and training above those of licensed appraisers.

Owners should also provide the appraiser with details of all improvements made to the home. They may also inform the appraiser if factors such as divorce or bankruptcy forced the sale of a neighboring home at a depressed level.

How to raise your home’s appraisal

Here are five improvements that may boost an appraisal’s bottom line:

  • Upgrade a home’s plumbing, heating and air conditioning or electrical systems. While replacing an outdated mechanical system may not be a “sexy” upgrade, it will catch your appraiser’s eye because it extends the home’s “economic life,” a key component of a valuation assessment. This work may be overlooked “because aesthetically it doesn’t do anything for a house, but it does have a big impact on the value,” said appraiser Craig Jennings of Garfield Heights, Ohio.
  • Modernize outdated bathrooms and kitchens, but don’t install high-end features, fixtures and cabinetry that far surpass the quality in the rest of your home or neighborhood. “You really have to consider where you live, where your home is located, and what the typical buyer is willing to pay for those upgrades,” said appraiser Armando Malanga of Temecula, Calif.
  • Neutralize wall or flooring colors such as pink or purple that may not appeal to a potential buyer or to an appraiser. “Appraisers don’t like things that are out of the norm, whether it be functional—an outdated water heater or dated tub-shower, or odd colors,” said Sellers of the Appraisal Institute.
  • Update closets in an older home by installing space-maker closet systems to improve function and appearance.
  • If your budget does not allow for a complete kitchen renovation, consider upgrading only the appliances.

Andrea Downing Peck is a Bainbridge Island, Wash.-based journalist who writes frequently about real estate, finance and military family issues.