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East Bay Real Estate Focus

Providing Definitive Information for the East Bay Area

By Carl Medford | Agent in Fremont, CA

Missed It By THAT Much: Top Four Solutions To Low Appraisals

As a kid I loved watching “Get Smart.” The sliding doors, phone booth elevator, cone of silence, shoe phone, Agent 99 … it was all great, but the line that made Max famous was, “Missed it by THAT much.” It always came after a near-death experience of some kind, and his deadpan delivery left us howling.

 

Strange how some things are hilarious on TV but in real life … not so much. In fact, the bay area housing market is currently experiencing a “missed it by THAT much” scenario that’s no laughing matter. Not even close. In reality, it’s turning out to be VERY upsetting to buyers, sellers AND transactions.*

 

Low appraisals. LOTS of them.

 

Used to be that home values were set by the buyers. In fact, the real value of anything is what someone is willing to pay for it. In the current market, however, this has changed. Values are now being set by an arbitrary appraiser. I use the word “arbitrary” because of the current lack of uniformity, both in procedures and outcome. And unfortunately, since the inception of HVCC, the quality of appraisals has taken a sharp downward turn.

 

That comes squarely under the category of, “I told you so…”

 

It’s no surprise that there has been intense pressure on appraisers resulting from the market melt-down. Since appraisers are hired to justify values, the finger has been pointed directly at them for allowing the previous market values to escalate to hitherto unknown heights. While it’s a boatload of hooey to blame it on appraisers, people have tried nonetheless. Just to set the record straight, greed got us here – greed from buyers trying to buy homes beyond their means and banks willing to lend them obscene amounts of money at ridiculous terms to do so.

 

So … take a solid dose of intense pressure on appraisers, fold in HVCC, factor in rising market prices, blend in appraisals being performed by out-of-area appraisers with no knowledge of local conditions, boundaries, neighborhoods and the like and ...

 

You have a recipe for low appraisals.

 

WAY low. I recently had an appraisal come in at 79% of the offering price. We were not offering a price that was pushed too high by multiple offers - we were offering at the same price as other recent, previous closings. The deal was killed and our buyer, after paying $400.00 for the insulting appraisal, was back out trying to find another home. With the current extremely limited inventory and escalating prices, that’s an almost impossible task. To add injury to insult, we just had another home appraise for $30,000.00 less than an identical home that had just closed a week prior.

 

There’s a basic fact to remember about appraisals: Banks will only lend to the appraised value.

 

If an appraisal comes in low, something has to happen to change the parameters of the transaction. If nothing changes, the deal is dead.

 

There are four possible solutions:

 

(1) Try to negotiate a lower price with the seller.

 

This is VERY unpopular, especially in the current seller’s market. Sellers are more likely to cancel the deal and put the home back on the market, hoping for (i) a buyer with more cash or (ii) a better appraisal the next time. Been there. Seen that.

 

(2) Come up with extra cash to make up the difference.

 

This option is very difficult for most buyers, especially FHA borrowers. And it comes with a bit of emotional baggage as well. “What if,” buyers say, “The appraiser is actually right? We don’t want to actually overpay, do we?”

 

(3) Challenge the appraisal.

 

Ask for a copy of the appraisal and carefully evaluate the comps (comparative properties used). If it looks inaccurate, you can challenge the appraisal (but it will take time and the success rate is not high). Many sellers are not interested in waiting around while you try to challenge the appraiser’s findings.

 

(4) Pay for another appraisal, hoping it will come in higher.

 

That will be another $400.00 please with no guarantee of a different result. It may actually come in lower.

 

There is a fifth option, but it’s brand new and no one really knows if it will actually make a difference: file a grievance or complaint about the appraiser. Truthfully, it may be too little too late: again, most sellers are not going to wait for the outcome.


Click here for more information on the grievance process.

Bottom line: If you can’t make it work, then you’re dead in the water. The deal is cooked and any money you’ve spent investigating the property is down the drain. And you’re out looking again. All the emotional equity you’ve invested goes from your heart to your gut, producing a significant Maalox moment. Instead of a new home, you’ve “missed it by THAT much.”

 

Actually, now that I think about it, it’s not a near miss at all. You’ve actually missed the target altogether.

And that really, really sucks. 


Click here to see a post dealing with seller implications for low appraisals.

*(This post is not designed to slam appraisers - I have good, close friends who are professional and competent appraisers. It is designed to bring attention to an issue that is affecting the current market in a very negative way.)

Comments

By Appraisal Intructor,  Tue Feb 9 2010, 07:17
The fact is, good appraisers are keeping folks from paying too much and that is part of their obligation as a licensed professional. All deals are not meant to happen and buyers rely on good appraisals to keep them from being taken by a system that pushes deals along to the closing table. Turning in appraisers who have cut your deal is a pathetic approach to fixing your problem and shopping for multple appraisals is even worse.
By Carl Medford,  Tue Feb 9 2010, 07:43
Appraisal Instructor:

As you point out, the key word is “good”. I’d use a different word: accomplished. HVCC has removed many of the accomplished appraisers from our market. They are not interested in doing appraisals for substantially less money than they used to get. In their place are a flood of out-of-area inexperienced individuals who do not understand local markets and conditions.

When an appraiser:

(i) Drives in from over an hour away to produce a report in a neighborhood in which they have no knowledge,
(ii) Is unaware of pertinent facts about the neighborhood and how it is differentiated from a neighborhood nearby (I know because I personally quizzed this specific individual),
(iii) Produces an appraisal that is $30,000 less than an identical unit (identical in condition, square footage, amenities and location) just a few doors down that closed a week prior to the appraiser’s assessment of the current property and was totally in keeping with other prior values in the community …

And as a result, the transaction is scrubbed and the buyer is out-of-pocket close to $1,000 in inspection AND appraisal fees …

Please explain to me:

(i) How this appraisal was good?
(ii) How it benefitted the buyer? (who did not get the home they wanted at a fair, established market price and were out close to a thousand dollars)
(iii) How it benefitted the seller (who must now disclose this appraisal to the next buyer)
(iv) Why we should not complain about an appraisal such as this?
(v) Why reporting this appraiser would be considered “pathetic”?
(vi) Why we would not want to get a second, more accurate appraisal?

I wish this was an isolated incident … unfortunately, it is VERY common in our area.
By John J Dutra,  Tue Feb 9 2010, 16:35
As a loan officer I must agree with Carl on this. While reporting an appraiser is certainly the last option I would take, how much longer can this go on? I had a great appraiser. He worked in the industry for years, was extremely honest (would not fudge or create value if it wasn't there), was timely and responsive - none of which I get now. He also would call me ahead of time and let me know if the appraisal would not come in at value - the sole purpose of which would be to save me the trouble of putting the deal together and save the buyer money. I truly do not know how this appraiser could take $445 to do an appraisal that (in their mind) had no way of coming in at value! They took this money from a young lady that had to do everything in her power to save money to afford the home - much less waste it on an appraisal such as this. It was wrong - and it should not have been done.
Values are biased already by foreclosures, they should not be dropped further by cash buyers coming directly from the auction. This is not a true value and should be discounted as such on any new appraisal done in the area. As it was, the appraiser discounted at least 10 other appraisals that came in at value or above and took 2 that were lower. Combine that with what I percieved to be a bias to come in $30k low and I do not consider that responsible. The new rules are hurting buyers - but they are also hurting good appraisers. Carl hit this one on the head.
By Appraisal Intructor,  Wed Feb 10 2010, 05:07
Perhaps I didn't have enough coffee yet and I did not mean to totally disagree because we can agree on this next point. There are bad AMCs. The system is leaving no time soon and as a broker of either real estate or loans there is something you must know. Many folks jumped into "being an AMC" because they recently saw an opportunity. I hear many similar stories as yours and many stem from poorly run operations. Before you enlist your trust in one, make sure it has geocoded sort ordering and enough appraisers to make it work . This is key because the smaller and newest ones don't. I am sypathetic to your story and know HVCC is effecting different areas in different ways but, I would look at the few AMCs who have been around BEFORE HVCC . They seem to have any such issues worked out and systems in place that would have caught a difference in value in two similar properties.
By Patti Hooker,  Mon Feb 15 2010, 20:20
Excellent article Carl, I couldn't agree more! I have a loan closing tomorrow after a lot of headaches HVCC created.

This is a refi combining 1st and 2nd mortgages, reducing his interest rate on both loans, thus lower his payments. But because of the significant decline in values, he had to come in with a lot of money, retirement money... and I'm seeing this more and more, unfortunately.

We have appraisers coming to our mountain community from Fresno and that makes a tremendous difference in their ability to "know the market" here.

And I believe that because of the HVCC compliance laws, most appraisers would rather err on the side of caution (and keep their license - who can blame them?), especially those unfamiliar with the particular area they've been assigned to.

Unique in our area is the fact this home was located in YLP, a community within the city, but whose values tend to be slighly lower than those outside YLP because of HOA dues and restrictions that others here don't have (such as not being able to hunt on your own property, etc.).

This home just happens to be one of the nicest, most luxurious homes in YLP on 8 acres with an incredible view. Problem being, not only aren't there a lot of comps, but the probability for that home to sell in today's market is given consideration during the appraisal process.

Add to that mesh now an out-of-town appraiser and you indeed have complications from the beginning. The appraisal came in so much lower than anticipated and I called a field review on it... a very rare occurrence. Remember, what this person has worked and saved for his retirement is now being used to get into a loan with lower interest and lower payments, which was his goal, but ...

The field review came in $20,000.00 higher than the original appraisal, thus he can keep the $20k in HIS retirement account!

Although field reviews are an entire blog of their own! It's almost like tossing a coin and hoping you win!

So many of these new laws, instituted to protect the consumer from predators within the business, it is, in numerous ways, causing them more harm than good!

Yes John, it's difficult to accept that those honest relationships we'd built for our client's benefit has had to be let go of, at least professionally.
By Jacob Varghese,  Fri Feb 26 2010, 08:18
Appraised value of Home: I like to use this quotation to define an appraised value:

"Beauty Lies in the eyes of the beholder"

It is almost highly impossible for 2 independent appraisers to come to the same value. That is my point here!! It is not as simple as adding 2+2 =4.

Living in Silicon Valley, I hope one day a software could be developed to think like a human and get a better approximation, I will not use the term value.

http://financiallandscaping.com
By Carl Medford,  Thu Mar 4 2010, 07:19
@ Appraisal Intructor:

Thanks for the clarification. The dilemma is not being able to choose …

@Patti:

Thanks for the input – totally agree.

@Jacob:

Appreciate your point. Most people do not realize that an appraisal is simply a professional “opinion” that is good only the day it is done. I’d love to see software as well, unfortunately, there are too many subjective factors.
.

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