Appraisal Game Has Changed

Some Strategies Can Help Homeowners Get Fair Property Value As Lenders Raise Standards

August 09, 2009|By Mary Umberger | Mary Umberger,Tribune Newspapers

Tim McCarthy remembers what usually happened in the old days - just a few years ago - when a property appraisal would land on a mortgage lender's desk.

"The lenders would get a two-page appraisal, they'd look at the bottom of the second page [at the estimated property value], and just say, 'Next!' " said McCarthy, who owns an appraisal company in Tinley Park, a Chicago suburb.

That was when property values seemed to be going nowhere but up, and many lenders giddily presumed that the appraised worth of the collateral for the loan - the house - was a safe bet.

Nowadays, chastened by the cascade of bum loans that came back to haunt them, most lenders are casting a wary eye to just about everything in an appraisal, according to McCarthy and others in the field.

They say it's in a property owner's best interest to understand how these valuations work to keep their home sale alive.

And though one might automatically expect the appraiser to be asking the homeowner lots of questions, they also say the smart homeowner, in return, should be asking a bunch of questions of the appraiser.

"Consumers have to be proactive today," McCarthy said. "For too many years, the consumer would fill out the paperwork and wait for it to come back, but in today's market you have to be more educated and work harder."

The biggest change, McCarthy said, is the demand for detail.

"Lenders are requiring much more market information from the appraisal than I can remember in my 30-year career," he said.

That translates to more facts about the structure, more photographs to document the findings and more demands for "comps," or comparable properties, to help establish a baseline for the home's value.

"It used to be three comps," McCarthy said. "Now they want five or seven."

In addition, a recent, controversial policy change within the industry may affect which appraiser is sent out to evaluate your home, and some in the housing industry complain that may, in effect, be strangling a lot of home sales.

The new policy agreement, from regulators and Fannie Mae and Freddie Mac, is called the Home Valuation Code of Conduct, and it's intended to keep appraisers and lenders at arm's length to ensure unbiased valuations.

But critics complain that one result of the rules is that non-local appraisers - who may be unfamiliar with neighborhood real estate norms - are being called in, and their less-informed opinions are skewing appraisals and causing deals to founder.

Some members of Congress are calling for a moratorium on implementation of the code until the issues can be worked out.

Meanwhile, homeowners should be present during their appraisals and be prepared to ask questions, according to Maureen Sweeney, who owns a Chicago appraisal firm.

She says homeowners should politely inquire about an appraiser's familiarity with the neighborhood and recent local sales to make sure the house gets an apples-to-apples comparison.

"Consumers are acutely aware of what's going on in their neighborhood," Sweeney said. "I always ask, 'Are there any sales in the neighborhood that you would like me to look at or consider?' "

The homeowner and the appraiser should be in agreement on what, exactly, constitutes "the neighborhood," Sweeney said.

McCarthy said having your real estate agent at the appraisal could be a good move.

"I never turn down information from a real estate agent," McCarthy said.

If there are any doubts about the appraiser, the homeowner or agent should contact the lender before the appraisal is turned over to the lender - otherwise, if they're unhappy with the results of the appraisal, it just looks like sour grapes, Sweeney said.

And there's the issue of nearby short sales (in which the house is worth less than the value of the mortgage) and sales of bank-owned foreclosures, both of which may have sold for significantly less than "non-distressed" properties.

It's not necessarily a given that the appraiser will consider these two types of sales as comps, dragging down your own, non-distressed home's valuation, according to Chip Wagner, who owns a Naperville, Ill., appraisal firm.

"It can vary," Wagner said. "There are some neighborhoods where short sales and foreclosures are a major part of the market, and some where there are just a few."

The difference to the appraiser, he said, is whether they seem to be dominating the area's pricing.

Sometimes, the foreclosures are the only closed sales to use for comparable data, and there's no alternative, Wagner said.

Another concern that didn't used to influence most appraisals: Lenders now want to know not just about sold comps, but about nearby houses that are for sale.

"The reason they want to see them now is because in a declining market, the competition is the listings," McCarthy said. "They say more to an underwriter than sales from six months ago."

Be prepared to offer your opinion to the appraiser whether those houses, like the ones recently sold, are truly comparable, McCarthy said.

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