The Problem With Appraisals

Image Source: http://401kcalculator.org // Flickr User 401(K) 2012

One might assume the actual transaction part of selling a home would be relatively straightforward.  The buyer and seller have agreed on a price, the inspection didn't scare anyone off, the the title is clean.  Let's get it done! 

This would be the case, if it were not for the lesser considered "second sale" that occurs during a home transaction process - the sale to the bank through the bank's appraisal.

The Bank Appraisal: What it is, and Why it's a Challenge

A bank appraisal is used to determine the value of a property. While a buyer may have agreed to pay $300,000 for a property, the bank could easily come back with a suggestion that the property is worth $285,000. The process is designed to protect the bank from getting stuck with a property that is worth less than they have loaned against it during the mortgage process. A bad appraisal causes great suspicion on the buyer's side, ultimately causing strain on the sale itself.

Appraisals in this current market are a challenge. Supply is very low and demand is very high. Home values are increasing rapidly in turn. With jumping prices, it is difficult for appraisers to find sufficient comparable sales - similar houses in the neighborhood that have recently closed - to validate the price of your home.

Low Appraisals Abound in 2015, Contracts Falling Through

In turn, the KCM blog recently reported a rise in unexpectedly low appraisals on properties. Mortgage News Daily recently published an article, indicating:

“…a sudden increase in appraisals reflecting market values well below what had been expected. In some cases the low appraisals had merely required the restructuring of the loan, in others they killed the deal.”

The NAR supports this concerning statement, revealing that 8% of contracts that fell through in the last month were due to appraisal issues alone.

The culprit? It could very well be Fannie Mae's new Collateral Underwriter.

The New Fannie Mae Collateral Underwriter

The Collateral Underwriter (CU), which went live on January 26th of this year, provides a risk score on individual appraisals that lead to the ranking of appraisals by risk profile. This allows lenders to identify appraisals with a heightened risk of quality issues, overvaluation, and compliance violations.

Mortgage News Daily surveyed their members, asking why there has been a sudden increase in "short" appraisals, and interestingly enough:

“Almost everyone we spoke to mentioned Fannie Mae's new Collateral Underwriter (CU).”

Additionally, a mortgage professional in Mortgage News Daily believes that CU has caused appraisers to become overly cautious with their appraised values:

"My personal opinion is that appraisers are being overly conservative in choosing comps because of CU. If CU questions the comps, adjustments, etc., the appraiser would have to do a lot of extra work to justify them. I had anticipated that CU would cause delays because of this extra work, but it seems that appraisers are one step ahead and are being ultra conservative, thus avoiding the extra work in the first place. I haven't spoken to an appraiser about it; this is just my interpretation of what I am seeing." 

However, senior vice president of single-family business capabilities with Fannie Mae disagrees, believing that CU is not specifically a problem for appraisers, claiming:

 “From an appraiser perspective, one of the lender's responsibilities has always been to review the quality of an appraiser, and they have been using various methods to do that forever. I don’t think appraisers will find this tool to be disruptive.”

The Bottom Line for Home Sellers?

Though opinions remain split on the matter, home sellers must remain aware of the challenges of home appraisals in the market, recognizing every sale as a double sale - one to the buyer, and one to the bank. This secondary sale could be more challenging with the first. Work with a real estate professional to price your home right from the beginning, and ask your agent how they can help improve the appraisal process.

Questions? Concerns? Reach out to us. We'd love to help.

Real Group Real Estate

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