Recently I posted an article on paying a fair price for a home and making sure you don’t overpay. The guidance I offered was to make sure your Realtor conducted a comparative market analysis (CMA) on the home you were considering to purchase. Also, I said the back up was the appraisal.
My advice still stands; however, now I am wondering if the appraiser valuation is unfairly hurting the buyer as well as the seller. In May 2009, the Department of Housing and Urban Development issued new rules with the goal of reducing appraisal fraud (inflating the value of a property). These rules are known as the Home Valuation Code of Conduct (HVCC), otherwise known as “the Code.”
The Code does not allow individual banks and mortgage brokers to select the appraisers who are knowledgeable of the market where your home is located. Instead, banks and mortgage brokers must go though an appraisal management company. In other words, there is now a “middle man” who selects appraisers at random and if you are selling your home, you may get someone completely unfamiliar with your community.
The result? I am witnessing valuations that are either way too high or way too low. This is very frustrating to both buyer and seller.
Here’s an example scenario. As a buyer, let’s say you look at 20 homes armed with the knowledge of what price point you are willing to pay and what homes in the marketplace fall within that price range. Then, you make an offer on a $200,000 home, in great condition, and on the lower ended price range. Along comes the randomly picked appraiser armed with the Code and he appraises the home $20,000 below your offer price. The buyer knows this is wrong and wants the house. The seller knows this is wrong and wants to sell. Both Realtors know this is wrong and want to earn their commission. The mortgage company has no say in the matter.
What can be done with this mess? Unless the buyer is willing to sell his home for less than it is worth, there is nothing that can be done. There is no appeal mechanism to my knowledge.
To simply conclude this article of frustration, that the appraisal process has swung too far in the wrong direction. I am finding some ridiculously low appraisals and other Realtors in Indianapolis tell me that they are struggling with this problem as well. Oh yes, I have even had a ridiculously high appraisal!
I had a home listed for $310,000. The appraiser called and asked me why I was selling a $500,000 home for $310,000. The problem was he did not know the neighborhood. In this case, the neighborhood consisted of a section of Beazer homes in the low $300,000 range, the other part of the neighborhood consisted of custom-built homes with an average price around $575,000. The problem was the appraiser was comparing a track-build home with a custom-build home. He gave me his comparables and all three homes were custom-build homes. He made these buyers feel like they were getting instant equity in their home. Believe me, that was not the case.
Another example, I listed a home that the county has appraised for $145,000 and it had been sold twice in the last five years for an average of $120,000. An investor who put more than $30,000 worth of improvements in the home was trying to sell the home. My clients made an accepted offer of $118,000. The appraiser gave it a value of $101,000 and the deal fell apart.
So, yes you have a safeguard against paying too much for your home. However, you may have found your dream home at a fair price and along comes the appraiser who says “no” and you have no recourse. Isn’t it funny how we punish everyone for the sins of others?
This situation is not limited to a certain area; I sell in the Indianapolis Metropolitan area, especially Northwest Pike Township, Zionsville and Brownsburg. I sell homes all over the area and this is a very common problem.
I still advise getting a good CMA from your Realtor. Talk to your mortgage company about the appraisal process and they will help you all they can, but they are certainly very limited in what they can do because of past mortgage fraud.