“An educated customer is your best customer,” the saying goes.
As a mortgage broker, chances are you are intimately knowledgeable about the Appraisal Independence Requirement (AIR) as part of sound underwriting for financial institutions. And though you may be familiar with the provisions for gaining information to safely loan on a property, be careful not to take for granted that buyers are aware of the legislation or the purpose and process of the appraisal overall.
With interest rates at all-time lows, consumers continue to consider refinancing and buying as growing options. Low rates and competitive housing prices present an opportunity for mortgage brokers to address a happy client’s needs for financing more than once, potentially, over the course of several years. But with more people getting into the market, with varying levels of education about the home buying process, opportunities for misinformation, and therefore, dissatisfaction, can be high. Consumers are likely to be disappointed if they do not understand why their appraisal amount did not come in as expected, are not made aware of the need to pay for an appraisal again in certain circumstances, or simply do not understand the process and what to expect.
How can you set expectations on the appraisal process with borrowers? What myths and realities should every consumer be aware of? The following is a list of misconceptions in the industry that can be addressed early on—either directly in person with the client or through a checklist to educate them on the process.
Appraisers have been appraising properties at lower than market rates because of AIR.
Appraisers have been appraising properties lower because most markets are declining. Keep in mind that market value is the “most probable price that a typical buyer will pay when the property is exposed to the market for a reasonable amount of time.” Foreclosure sales, short sales and other distressed sellers have added low-cost inventory to the market for which every property must compete for buyers. Any buyer that could purchase the house next door in foreclosure for half the list price, would do so if given the opportunity. The appraiser’s job is to determine the most probable price, not support the existing sales contract price. The fact that appraisal values have been lower has everything to do with market trends and factors, and nothing to do with AIR.
The homeowner pay for the appraisal and therefore, owns the appraisal report.
If federal money is involved in the transaction – Fannie Mae, Freddie Mac, HUD, VA, or other programs – then by federal banking regulations, the lender must be the client of the appraiser. Another important fact to remember is that the person or entity who orders the appraisal is the client, not the person delivering the appraisal fee for the client.
Uniform Standards of Professional Appraisal Practice (USPAP) and federal banking regulations address the issues of client/appraiser relationship, confidentiality, and who will be the client if federal money is involved in the transaction. Once the client/appraiser relationship is established, the appraiser cannot discuss or provide copies of the report to anyone without the client’s permission. A copy of the appraisal report must be obtained from the client/broker, not the appraiser.
If a homeowner has an appraisal done with one lender, they should be able to use the same appraisal report with a different lender.
Other lenders cannot use the report for lending purposes until they establish the client/appraiser relationship. The appraiser will need to get permission (a release) from the original client and any/all subsequent clients before reappraising the property for the new lender. To avoid being misleading, the appraiser must disclose to future clients that she/he has previously appraised the property.
In addition, if the effective date of the appraisal has changed, the appraiser must research any new market conditions and update the existing appraisal report. In volatile market areas, this could mean drafting an entirely new appraisal.
Using foreclosures and short sales as comparables when appraising a home for refinance is not correct as houses not under duress are worth more than those that are being sold in duress.
If you could buy a box of Tide for $100 or buy a box of Tide for $10, which would you buy? This is the same logic that can be applied in the marketplace. When two homes in the same neighborhood are for sale and one under duress is selling for considerably less, the home that is listed higher is now overpriced for the market. Once the house under duress sells at the lower price, this now becomes the market value for competing homes in the area. Remember, appraisers’ use the principle of substitution by determining what other homes in the market area can be purchased for the same price.
The homeowner put $10,000 in improvements into the home so the appraisal should be at least $10,000 higher.
The cost of improvements does not necessarily equal the market value of those improvements. For example, adding another bedroom may have cost $10,000 but buyers in the market may only be willing to pay another $5,000 for homes that have an additional bedroom. You can view the Cost vs. Value Statistics for details on specifics improvements by market area.
AIR requires lenders to use Appraisal Management Companies.
Use of appraisal management companies is not required under AIR. Lenders may engage appraisers directly without the use of third parties.
The licensing of an appraiser ensures his or her competency.
Licensing does not necessarily ensure the competency of an appraiser. The Fannie Mae and Freddie Mac Selling Guides require lenders to review the appraiser’s education and experience. Specifically, the Fannie Mae Selling Guides state:
“A lender must not assume—simply based on the fact that an appraiser is state-licensed or state-certified—that the appraiser is qualified and knowledgeable about a market area or is aware of the appropriate market data sources for the area and will be able to obtain access to them. If an appraiser is not knowledgeable about a particular location, is not experienced in appraising a particular type of property, or is not familiar with (or does not have access to) the appropriate data sources, a lender should not give the appraiser assignments in that market area or for that particular type of property.”
Being up front with consumers and educating them about the process can help to alleviate concerns and confusion. Following are top tips consumers should know about appraisals:
- The person ordering the appraisal, not the person paying for the appraisal, owns the appraisal report.
- Research sales in the market area and consult with local realtors. Feel free to give the information to the appraiser and understand that the appraiser will always consider the data, but may use different data in the report if it is deemed to be more relevant or recent.
- Understand that appraisers cannot communicate values, fees, or discuss the appraisal with you at any time when the order was placed by your lender.
- Understand that if there are foreclosures and short sales in your market area, your home may compete with them for buyers in an open market, and they can affect the value of your home.
- Don’t expect the appraiser to give the exact same amount of dollar value to improvements in your home as what you spent on them.
- Do expect the appraiser to have competence in your market area and access to local MLS data.
- Do understand that a professional appraisal is a supportable opinion of value. It is not the feelings of the appraiser but rather a supportable prediction of what your home would sell for if offered on the marketplace for a reasonable amount of time.
- The inspection portion of a real estate appraisal is just one small portion of the appraisal process. Substantial work must be done before the appraiser inspects the property to research market information and neighborhood trends. Once the inspection is complete, the appraiser may spend hours analyzing the data to produce a credible report.
- Educate yourself on the components that determine value in your property. Homes tend to be an extension of personal tastes, but the appraiser’s responsibility is to determine which of those tastes translate into a higher market value for your property.
Dione Spiteri founded US Appraisal Group 10 years ago on the principle that everyone deserves to have a positive appraisal experience and to increase confidence in the appraisal management industry overall. Her firm, comprised of recognized appraisers with an intimate knowledge of the industry, its regulations and complexities, has made the Inc. 500 List for the second year running and recently was recognized as the 6th fastest growing real estate company in Chicago. Spiteri is also a member of the National Association of Independent Fee Appraisers, CAR and the Employee Relocation Council. For more, please visit www.usappraisalgroup.com