In 2009 Fannie Mae & Freddie Mac changed the regulatory guidelines for residential appraisals by establishing the Home Valuation Code of Conduct or HVCC. The purpose of HVCC is to shield the appraisal process from the participants in the transaction. Specifically, lenders, brokers, buyers and sellers. Since that time and particularly in rapidly appreciating markets in which every closed sale tends to set a new record for value, the quality and accuracy of appraisals has declined.
That is exactly the predicament we are in now and without going into the minute details I can say that the anonymity created by HVCC has made it more difficult to close deals. In the past, Realtors, lenders and appraisers were able to communicate with each other. Prior to HVCC, appraisers would often call the lender and agents to alert them of a possible valuation problem. That’s not to say that we always “fixed” the problem but it did give the parties an opportunity to plead their case before a final judgement was made. There are many moving parts in a real estate transaction and this lack of collaboration often makes it more difficult than it should be. With that in mind let’s start by discussing some strategies that may help to avoid the failed appraisal in the first place.
* Try to NOT over-price or over-pay: Easier said than done in this market but all parties should review comparable sales (comps) carefully prior to submitting or accepting offers. At the very least this will help the participants determine the overall risk of losing appraisal/inspection fees and for sellers, lost time on the market.
* Agents should meet the appraiser at the property: For goodness sake be nice, and helpful. Bring a list of comps that informed the buyer’s decision but don’t attempt to shove it down the appraiser’s throat. In most cases the appraiser has not physically seen the active or sold comps while the buyer and seller’s agent likely have and that can be very insightful. Share this information as tactfully as possible (I simply add notes to the list of comps) and preferably while holding the dumb end of the measuring tape.
* Create a detailed list: Hidden upgrades and features such as heated flooring, smart-home devices and water or air purifying systems often go unnoticed. Perhaps the roof, furnace or water heater were replaced just a couple of years ago. If that is the case put that on your list too rather than following the appraiser from room-to-room, pointing out features. They have a detail-oriented task to complete and providing an upgrades list rather than talking about it will actually make their job easier. The information will be even more compelling if it includes invoices for the repairs and/or upgrades.
* Provide relevant charts and graphs: Most brokers have access to quality data that can illustrate the current market conditions down to the neighborhood level. Appraisers do not always have access to these tools and the numbers can be quite compelling.
* If you received multiple offers: Provide evidence of those offers.
Okay, let’s pretend that in spite of all this hard work, the appraisal still comes in low. What next?
* Make an appeal to the appraiser: This requires some work from the agent(s) as someone will need to review every line of this 20+ page report. Look for missed features in the subject property’s description and pay particular attention to the “adjustments”. Adjustments are made when measuring the subject property’s amenities against those of the comps. This section is where you’re most likely to spot errors. Or, at the very least, points that can be contested.
* The parties re-negotiate: Sellers always have the option of reducing the price but are rarely compelled to do so in a market that is appreciating 2% per month. Depending on the type of loan the buyer can compensate for the deficit by increasing the down-payment or I’ve seen it split down the middle between the parties.
* Why not get just another appraisal?: If the appraisal is deemed “flawed” the lender may have the option of ordering a second one. The fact that the 1st appraisal came in low is not in itself grounds for its’ being considered flawed. Errors in the report must be clearly demonstrated with substantial evidence and verifiable information, this is a high bar to clear. Who pays for that 2nd report and whether or not the parties will be bound to the results should be considered while negotiating.
Appraisals will continue to be a challenge in our market until the supply increases and/or demand decreases. Neither are likely to occur in the near term so if you are jumping into the market now, hire an agent or broker that has experience in these market conditions. As a wise broker once told me, “Just about any agent can get a deal to first base but the good one’s guide it all the way to home-plate almost every time.” This is the second post in this series, click here to see the first.