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Low Appraisal Blocks Loan; What To Do?

August 22, 2011  |  by Anne

MRIS CMO, John Heithaus, is quoted in this Washington Times article.  Read full article here:


When Leslie Hutchison, a Realtor with Fall Properties in Falls Church, listed a single-family home in Falls Church that included a parklike lot on a cul-de-sac, the land assessment was $80,000 higher than for three comparable homes because of the property’s oversized lot.

The home sold with a full-price offer of $635,000 the day after it was listed. When the appraiser for the sale arrived from Fredericksburg, Va., he valued the home at $600,000 and refused to add value for the additional land and the property’s location. He told Ms. Hutchison that he does not adjust for land unless the difference is more than an acre.

“This is an example of a buyer being caught short by an appraiser from an area who does not know our current local market,” Ms. Hutchison said. “I can understand that in Fredericksburg a land adjustment would be made only on an acre or more, but certainly not inside the Beltway. I’ve seen appraisers come from Delaware, Pennsylvania and remote areas of Virginia and even from Florida who do not know our market.”

Realtors and lenders have been complaining of nonlocal appraisers and other issues with appraisals since Fannie Mae and Freddie Mac introduced the Home Valuation Code of Conduct (HVCC) rules in May 2009 in order to keep appraisals from being inflated.

“There have been huge servicing issues on appraisals for a couple of years now,” said John Heithaus, chief marketing officer at the local real estate technology developer and multiple-listing service Metropolitan Regional Information Systems (MRIS).

“One big issue is that out-of-town appraisers have been allowed to work in the area,” he said. “You have to live and breathe this market to understand it. Real estate has always been local, but now it is hyperlocal, with differences within the area between Reston and outlying areas or Rockville and Baltimore.”

Mr. Heithaus said another issue is that the rules have changed for appraisers, including restrictions on which comparable homes can be used and the range of values that can be adjusted.

Carlton Mitchell, an appraiser and principal of the Carlton Group in Silver Spring, said appraisers can easily obtain a license to work in other states, and many of them have come into the D.C. area to work because this market is more active than some other real estate markets.

“Not only are some of these appraisers lacking in local knowledge, but many of them are less experienced and are cutting corners when they make an appraisal,” Mr. Mitchell said. “Sometimes I am hired to do an appraisal review and I am appalled at the lack of logic in defining which comps to use.

“For instance, in a post-World War II neighborhood in Montgomery County, you’ll find homes in four or five different styles, some with additions and some without them,” he said. “The appraisers sometimes won’t define whether they are using homes in the same style and looking only at the homes with additions versus those without them.”

Another issue for appraisers is the downward pressure on prices from short sales and foreclosures.

“An appraiser has to consider all market activity, but the question is whether a foreclosure is an outlier or a valid indication of the local market,” Mr. Heithaus said. “The National Association of Realtors estimates that about 40 percent of all listings nationally are foreclosures, but in our market, the average is about 20 or 25 percent. Some pockets have a much higher number of foreclosures, and some have a lower number.”

The appraisal is important because a lender cannot lend a buyer more than the home’s appraised value, even if the contract price is higher. That leaves the buyer and the seller with several options.

“If the appraisal comes in below the contract price, the buyer can void the contract, the seller can reduce the price, the buyer can bring cash to make up the difference between the loan amount and the contract price, or the buyer and seller will have to meet somewhere in the middle and renegotiate the contract,” Ms. Hutchison said.

In the case of her Falls Church listing at $635,000, the buyer opted to cancel the loan and apply for a loan with a new lender. The buyer then had to pay for another appraisal made by an appraiser chosen by the new lender.

“In that case, the sellers said they would not sell for a lower price, and the buyers knew it was a low appraisal,” Ms. Hutchison said. “The buyers were willing to try anything to straighten out the problem. When the new appraisal was done, it came in at $636,000.”

Mr. Mitchell also recommends consulting with a lender.

“Buyers can ask their lender for a second appraisal if they are not happy with the results, but they may end up with the same home value since the lender is likely to use the same appraisal company,” Mr. Mitchell said. “I think buyers would be better off switching lenders completely because the new lender will be likelier to use a different appraisal company.”

Ms. Hutchison said another Falls Church listing sold at the listed price of $595,000, but the appraisal came in at $548,000. In that case, the buyer chose not to challenge the appraisal and instead added $25,000 in cash to the offer.

“The best piece of advice I can offer,” Mr. Heithaus said, “is for sellers to ask their Realtor to provide a briefing sheet for the appraiser, including a list of special features in the home that should add value to the property and a comparative market analysis on which the home’s listing price was based. This makes the appraiser’s job easier.”

If the appraisal still comes in too low, Mr. Heithaus said the sales price may have to be adjusted if the lender is not willing to have another appraisal done.

“I wouldn’t recommend switching to a new lender because lender shopping can be harmful to the buyers’ credit scores,” Mr. Heithaus said. “Even if the buyers do choose a new lender, the appraisal could come back the same.”

Mr. Mitchell said Fannie Mae and Freddie Mac are working on revising appraisal rules again. He expects changes to be made later this year.

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16 responses to “Low Appraisal Blocks Loan; What To Do?”

  1. David Charron says:

    Excellent summation of the challenge!

  2. Bingo! Recommending the Realtor provide an info sheet to the appraiser is more critical now than at any other time in my 25 year appraisal career. Quite frequently the typical appraiser being sent by a traditional bank to the property has little if any local market knowledge. The sad part is that there is virtually no flexibility with the lender on the appraised value if the appraiser made a mistake. Switching banks may be a necessity but not to be taken lightly since there is a risk it can lower your credit score. Credit is simply THAT tight. Always better to be proactive than reactive.

  3. Taylor Lewis says:

    As an appraiser in the Fredericksburg area, I’m appalled that someone from here would travel so far to appraise as well as your area appraisers who come here, none of which tend to know the out of area market. An appraiser who arbitrarily does not make a site size adjustment unless the difference is more than one is an idiot.

  4. Tony Nguyen says:

    It's been a known problem in the Metro/DC housing market and I am glad that finally, someone took the lead to bring the issue to the next level. I think the rules on appraisal certainly must revised with flexibility for adjustment based on local market, not just 1 formula to fit all. This issue had hurt my business at least on 3 recent contracts so I am taking this personally! Something must be done and I am glad it got the attention from the national level and change is on the way. But it's never fast enough!

  5. George Alexa says:

    As a real estate broker who appraises, I see many sales that are inflated…of course, the work I do are less then 15 miles from my market. If you think you had problems before with appraisers, wait till September 1 when the rules change again… UAD…

  6. Ed Schmidt says:

    As an appraiser and an agent I advise the realtors in my office to meet the appraiser at the property, if their is a question about value. Explain the market politely to the appraiser and point out some of the factors that they may not be aware of. I never have a problem with this if the agent can support this with good sales data or other pertinent information. If a house is on the market 2 days and had multilple contracts on it and I can not find data to support its sale, I assume that I am missing some part of the picture and work dilgently to discover what part of the picture I am missing.

  7. Ed Schmidt says:

    Some areas of Fairfax county converge where there are three different school districts. The affect on value can be up to 15 to 20% of the sale price of the home, from one district to another. This is a factor that many appraisers from other areas are not aware of.
    When I am appraising, if I become aware of incongruities in sale price data to similar homes in close proximity. I call prominent realtors in the area and consult with them. I often adjust my perspective after speaking to realtors who are experts in this particular market. Part of the reason you are seeing appraisals that do not reflect accurately the value of a home, is the expedited time frames that lenders are now requiring from appraisers to turn around a credible appraisal. One week time frames often do not give the appraiser the time to contact the owner, schedule a mutual time for access to the property and then time to do the necessary do diligence to correctly address the entire scope of the valuation process. Myself and the group that I appraise with, do not promise one week turn around times unless we are secure in our knowledge of that particular market and we know that the timeline will not result in an inferior appraisal.

  8. Ed Schmidt says:

    Regarding lot size, a good appraiser should always attempt to bracket a lot size, in other words, find a home with similar overall utility with larger lot or a lot of similar size and utility to support conclusions about how the market reacts to the larger lot within that market place. This should be true of all the other positive and negative features of the property appraised.

  9. MRIS_CMO says:

    Thanks to everyone for their great comments. Both of my grandfathers were involved in the industry as appraisers and I have been a keen student of the art & science of appraising since a very young age. But we're at a very important cross roads here with technology nipping at our heels, so to speak.

    Today's NPR ( features an article saying the 20% of all deals (1 in 5) are falling apart due to appraisal issues.

  10. Mike Carnahan says:

    Appraisers need to be challenged. They are getting away with everything and anything they want to do. I've challenged several appraisals, but that seems to be worthless. They don't actually do anything about my complaints. One home sold for $145,000, but appraised for $98,000 because the appraiser, who was not from the area, used comps from a run down neighborhood nearly a mile away instead of ones two and three blocks away. The only one who made money on that deal was the appraiser. The deal fell through, and my client lost everything he had put out between home inspection and appraisal. We challenged, but we lost. I don't believe any of these appraisal management companies wants to look bad, so I don't believe they will ever actually change the value once one of their appraisers has set it, no matter how far off the appraiser is. The effect is that this man lowered the value of all homes in this neighborhood by $50,000, and it can't be challenged anywhere. What a shame he is even allowed to be an appraiser. He and those like him should be absolutely ashamed of themselves.

  11. Guy Slone says:

    I have been in this situation several times, I have tried using another appraiser with the same lender But the underwriter came back and said we would have to take the average of the two appraisals. Best and only solution in my opinion is Seller to adjust price or Buyer to seek a new Lender. We did typically ask Seller to pay for second appraisal to lessen the blow.

  12. Lina Bader says:

    The problem is that the appraiser did NOT apply valid valuation methodology. In the Sales Comparison Approach, adjustments are made to documentable MARKET REACTION to a differences between the selected comparables and the subject. There should be NO FIXED judgement on the value of a feature such as the size of the lot, the size of the improvements or ANY of the value features being compared between the comparable sales and the subject. Ajustments are made when there is evidence that the typical buyer in the area reacts — with a higher or lower dollar offer amount — to an amenity or value factor. The appraiser should be REPORTING [and documenting], not DICTATING, the MARKET REACTION to a value feature found in the subject and this is done by utilizing sales that have the particular feature in question but to a a lesser, equal and greater extent. It's call "Bracketing." It answers the question of whether or not the feature has documentable market impact. AND no valid valuation can be done without it. Your don't have to insist on a local appraiser, but you do need to insist on an APPRAISER, vs a form filler that does not know who to bather, weigh and evaluate market data.

  13. Guest says:

    In my experience – when you ask the lender about the appriaser – their response is that they have no idea who is coming and from where -due to all the happenings in the past- this is key information to your client and your deal, however you may realize that the higher the closing costs could reflect that the assignments where probably being handled locally. Some lenders will tell you 'we chose the cheapest' and others will hire who's available due to a time crunch. The real scenerio is when buyers want to shop for rates/closing costs and want to pay minimum for everything and want excessive in everything -yes, that's all of them! It somehow seems as though you get what you pay for. Main point: see the costs involved and see if you can find out where the appraisers are coming from. All the above comments have good points in some matter and yes these low appraisals did not help the market move homes or become good comps for upcoming sales, despite making the agents appear inexperienced when pricing property to sell or buyers agents for properties to buy.

  14. DCGirl3977 says:

    I'm a seller who was in this situation. Luckily I did not have to lower my price because it was obvious that the comps used by the out-of-area appraiser were not valid, and my buyers knew it. I gave them some extra time to shop around and see what else was available in their price range, knowing they'd come back and find the extra cash to make the deal at the original contract price. Sellers, if you and your agent have done your homework and priced your home appropriately, there's no need to lower your price unless you absolutely HAVE to move. Your home is worth what a buyer is willing to PAY for it, not what an appraiser says it's worth.

  15. Sherry Koke says:

    I am an appraiser in the greater Baltimore area, and have done review work. Using out of area appraisers is a definate problem. Since HVCC, mortgage companies can no longer select local competant appraisers that are knowledgable in the market. And the appraisal management companies are taking so much of the fee that appraisers use to make that so many of us experienced appraisers will not work for them. I've been appraising for 27 years, and do not go to different markets to appraise, and will not work for AMC's. There are many experienced appraisers leaving this profession due to AMC's and how appraisals are ordered. Thank Andrew Cumo and our government for HVCC. And nothing has changed since the Frank Dodd bill has retired HVCC. As long as the AMC's are in control of ordering appraisals and hiring the cheapest, and quickest appraiser, (although borrowers area still paying top $ for an appraisal), problems will prevail.

  16. Rob'n says:

    That's right, a house is worth what a buyer will pay!
    Not what an appraiser says what it is worth. With 1 in 5 sales falling thru on appraisals, when will home values start to trickle upward?

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