In the Eye of the Appraiser: With Cautious Banks and New Rules, a House's Valuation is No Longer a Sure Thing.
Saturday, October 3, 2009
Clients preparing to sell their home receive a warning from real estate agent Jeff Brier. The appraisal, an afterthought during the housing boom, has turned into a sticking point in many deals.
Brier often talks about appraisals like horror stories. Earlier this year, a District townhouse appraised for more than $30,000 less than the sales price, and the seller walked away from the deal. There was the Dupont Circle home that appraised for $15,000 more than the sales price, but the lender balked anyway because the property was near a school and on a wide, busy street, and the lender was concerned that the location might threaten its value.
Another time, the appraiser forgot to factor a property's parking space and private roof terrace into the estimate. After the oversight was identified, the appraiser increased the estimate by $10,000, but even that was not enough to reflect the true value of those items, Brier said. "A parking space alone can be $30,000. That does not take into account the roof terrace," he said.
That time, at least, the buyer didn't flinch and came up with more money to make the deal work.
The housing market has shown signs of improvement, but home sales can still be challenging to complete. Deals can turn on whether the home receives a sufficient appraisal. The lender financing the deal hires an appraiser to estimate the market value of the property, examining the condition of the home and comparing it with similar properties in the neighborhood, known as comps. An appraisal, a professional estimate of the market value of a home, is supposed to protect buyers from paying too much -- and protect lenders from extending too much credit.
But coming up with an estimate has become more complicated in the middle of a housing crisis. A high concentration of foreclosed homes in a neighborhood can distort the appraisal, real estate agents say. Foreclosures often sell at a discount and may be damaged after the homeowner leaves. Banks have also become more cautious about ensuring that the sales price reflects the market value, agents say.
The appraisal process is "much more difficult," said Laura Fall, principal broker at Fall Properties in Arlington. "They have gone to the extreme of conservatism, and we are now in an emerging market with brisker sales," she said. "It will likely iron out and balance out, but there is pain in the process of a market correction."
Further complicating the process are new rules governing appraisals.
"There is more realism in the market, and the appraisers are reflecting that," said Jim Amorin, president of the Appraisal Institute, a trade association.
Brier, a partner in the Martin & Jeff Group with Coldwell Banker in the District, now meets with an appraiser before the appraiser begins developing an estimate. During the meetings, Brier points to the home's unique features, such as design elements and high-end finishes, that might not be obvious. Working relationships with appraisers are important and remain strong, he said.
"We're not trying to influence them; we're just trying to get a true appraisal," Brier said.
For the home buyer or seller, a snag in the appraisal can lead to delays, raise costs or even kill the deal. (The cost of the appraisal is included in the buyer's closing costs.) If the appraisal falls below the sales price, the lender may refuse to finance the deal or may require the buyer to come up with the difference. The seller is forced to justify the sales price or lower it -- or risk losing the deal altogether.