By Elizabeth Razzi
Sunday, March 9, 2008

Everyone has the same question about homes now: What is one really worth? Professional real estate appraisers are paid to come up with a reliable answer -- one good enough to take to the bank, you might say. But they aren't finding the task much easier than the rest of us.

Appraisers are looking for signs that values are headed lower. Lenders need to know if a home worth $400,000 today might be on its way to a value of only $360,000. They want assurance that borrowers will have enough cash invested in the home to keep them from walking out on the debt.

"There is higher scrutiny because the market is going down," said James Loizou, co-owner of Suburban Appraisers & Consultants in Fairfax. Loan underwriters, the people who pass judgment on your loan application, are being more demanding. They want information on comparable home sales, homes still on the market, those under contract, closed sales, foreclosures and incentives offered by home builders. They may even want info about homes that didn't sell and were taken off the market.

"Frankly, those are fair questions," Loizou said. "It just makes more work."

Rick Eul, a vice president at Bank of America's Annandale office, said lenders and appraisers are taking the same approach they adopted during the boom, when prices on closed sales lagged behind those on newer contracts. "You're looking at what's on the market today and at what's listed. That affects the appraisal, also," he said.

If there are foreclosures nearby, or home builders offering deep discounts, or desperate sellers setting their asking prices 10 percent lower than the most recent closed sale, your appraised value will be lower. One problem is that some neighborhoods haven't had many sales over the past six months or so. When that happens, appraisers have to look for something similar in other neighborhoods. For example, Loizou said, if the neighborhood is near Metro, he might search for comparable homes that sold recently near a different Metro station.

If your appraisal comes in surprisingly low, verify that the comparables the appraiser used are truly comparable to your home. "If you have other comparables, we can have the appraiser look at it," Eul said.

Speak with your loan officer, not with the appraiser. The lender hires the appraiser, even though the borrower pays the fee, typically at closing. (Some lenders, including Bank of America, have borrowers pay for it indirectly as an upfront loan-application fee.)

Make sure the lender didn't order a money-saving shortcut, such as a "drive-by" appraisal. As the name implies, the appraiser drives by and takes a few curbside photos to prove that the house is, indeed, the two-story brick Colonial and has not burned down since the last time someone checked.

Loizou said his company is not being asked to do many drive-bys these days, given the demand for extra detail. "They're falling in disfavor, and with good reason," he said. Drive-bys, for example, can't take into account a $30,000 kitchen remodeling that makes one home more valuable than comparable ones.

There is an even less-detailed review of value, the automated valuation, which is performed by computers drawing information from a database. Such quick, cheap alternatives might be adequate if there's lots of room for error, as would be the case with the refinance of a mortgage that covers 60 percent of a home's value. But many people -- especially buyers -- don't have that kind of equity, and an appraisal that's slightly off could kill the deal.

Some lenders will start with an automated valuation and then move to more detailed appraisals if the values aren't high enough to approve the loan. Ask your loan officer which type of appraisal was performed. There's no reason you should have to pay $300 to $350 for an appraisal if a computer did the job for only $15 to $35.

Virginia just made it easier to find out about the type of appraisal that was done on your home. Last week, Gov. Tim Kaine signed into law requirements that mortgage settlement statements note any fee charged to the borrower for an automated valuation or anything else done by someone who is not a licensed appraiser.

Despite the extra scrutiny designed to reveal falling prices, there is pressure on appraisers not to kill too many deals, in part because most appraisers are paid after the deal goes to closing. Lenders also may take away business from appraisers who kill too many deals.

A new appraisal-standards plan announced last week by Fannie Mae and Freddie Mac could help insulate appraisers from such pressure. Because they account for a large part of the mortgage market, Fannie and Freddie, which buy loans that meet their standards and repackage them as securities for sale on Wall Street, influence practices across the industry. The rules would affect mortgages taken out after Jan. 1, 2009.

The proposed standards simply call for fair play. It's not fair for lenders to withhold payment for appraisals they don't like. It's not fair to kick an appraiser out of the game if he doesn't play along.

Lenders would have to set up a phone hotline and e-mail address to field complaints from appraisers, consumers and others. Consumers also would be entitled to receive a copy of the appraisal at least three days before closing, without extra charge.

Appraisers should be free from pressure to hit a preordained target value. But consumers also should make sure the pendulum doesn't swing too far toward caution, anticipating price declines that have not yet happened. You deserve credit for every penny of market value that remains in your home.

E-mail Elizabeth Razzi atrazzie@washpost.com.