Real Estate Analysis and Commentary in Indianapolis


How to prevent a under-valued Real Property Appraisal.

At our firm we strive to help you make smarter Real Estate decisions. 

Home appraisals are conducted by a professional appraiser to give an estimate of the market value of a house or property. They are most often conducted at the behest of the lender.

In some instances, home appraisals can come in low because values have been declining in the neighborhood, improvements need to be made to the dwelling or the buyer has simply offered too much. A lower home appraisal can derail a potential sale when a lender won’t agree to provide the full amount of financing the buyer needs to close the deal.

Why home appraisals are important
Appraisals are important to mortgage lenders because it ensures that they did not approve a loan to a borrower for more money than the property is worth.
The appraisal also protects the buyer from overpaying for a property.

Home appraisals are important because they are used by a lender to help the borrower determine how much he/she can spend on a home and find out the current value of the property, says Rose Sklar of The Sklar Team with Coldwell Banker Realty in Weston, Florida.

Homeowners also seek appraisals to refinance their mortgage or obtain a home equity loan or a home equity line of credit. We in this profession often say,
“Generally, the loan-to-value ratio is determined by the lower of the appraised value or the purchase price for a purchase transaction,” In addition “For refinancing, the loan to value is determined by the appraised value. This ratio is very important from both a qualification and pricing standpoint.”

A low home appraisal may mean that it takes longer to sell your house, which can be problematic if you have started the process of buying another home. If you have immediate changes such as planning to move for a job or a divorce, the low appraisal can make it harder to sell the house at the price you had hoped to obtain.

A low appraisal may also mean the house could be on the market for a longer period. Buyers are sometimes deterred by homes that have been on the market for many months, perceiving that there are problems with the house or asking price.

What causes low appraisals
Many factors can figure in a low appraisal. Taking the time to repair leaky faucets or more major issues such as an old fence can boost the value of the home. Here is how you can combat some of the most common problems.

A home’s appearance matters
A dirty or ugly home will unfortunately affect your appraisal negatively, Graham says.

How prepare for an accurate valuation.  Before you list your property, consider having it professionally cleaned both inside and out and staged not only for prospective buyers, but for appraisers as well, he says. Don’t forget areas such as the attic, basement and garage, especially if they are unused. Clean up and mow the yard, touch up the paint and pack up nick nacks.

Changing market conditions
Appraisers use comparable houses known as “comps” in the general area to help determine the value of a property. Since market conditions change so rapidly, a recent sale or  “comp” that is more than 6 months or so old may no longer be relevant in the current market.

Do your research on how fast or slow values of homes change in the area. There might be times when sales slow such as the end of summer or winter when fewer people are looking to purchase a house.

A lack of recent sales of comparable properties in the area could dramatically affect the appraised value.

You might live in a neighborhood where homes are rarely sold or in a new part of town that is still being developed. If you live in a fairly new high rise and few condos have been sold to a second owner, that could impact an appraisal. Many times there are not enough closed sales in the area to choose from the area.

How to avoid: Check out the number of home sales in your area and what time of year most of them occur. If you can wait, try selling your house during those periods of the year.

Disconnect between the appraiser and the buyer A home may be worth that extra $5,000 because it’s in the buyer’s preferred school district or on the same street as a relative, but the appraiser does not take sentimental value into account.

Appraisers look at the comparable sales in the neighborhood and generally “bracket sales with a lower sale, a higher sale and a very similar sale and arrive at a number that meets all the stipulations of the lender.

Many professionals will generally react more favorably to a well-maintained home.

Look at the prices of homes sold within the past month that are similar in size and age to determine an expected range for your appraisal before it is conducted.

Fannie Mae reports that appraisals come in low less than 5 percent of the time and many of these low appraisals are renegotiated higher after an appeal. 

How often a home appraisal comes in low depends on the neighborhood and market conditions.

The majority of appraisals tend to come in at the right value. Some comp sales come in low in today’s market are often a result of other properties or units that have not been upgraded, causing low comparables that are in turn used by the appraiser. Always check your appraisal over and make sure that the comparable uses are fair and just.

There a some steps you take to head off a low appraisal. Some folks recommend that an agent of the homeowner be present or provide a list of updates/improvements. This will illustrate the upgrades and have copies of recent invoices/receipts that the homeowner can use to demonstrate the improvements that were completed.

An appraiser who is familiar with your market area is capable of considering all the pertinent factors that effect the neighborhood of the subject.

Consumers are allowed to challenge the appraisal and provide any additional comparatives for considerations.

Whenever the appraisal comes in below value, the buyer can also make up the difference in a greater down payment. A low appraisal does not always mean the lender will not provide a loan.

Homeowners can get a second appraisal when the first appraisal has substantial corrections needed.

There is a tremendous amount of due diligence on appraisers before engaging them as they are determining the value of collateral supporting the loan and are crucial to the lending process.

Feel to to refer us to any of your colleagues and acquaintances.

Best Wishes

CKCO Real Estate Appraisals
Toll Free 800-345-6307 Fax
8710 Bash St Ste #50-1908
Indianapolis,IN 46250-4077 

January 10th, 2020 5:27 PM

Is It Time to Dump Real Estate Appraisals?
If you’re looking for a villain-of-the-month club in real estate, you might want to speak with your nearby friendly appraiser. They’re getting a lot of grief these days, in large measure because by doing what they’re supposed to do, they’re annoying a lot of people. Sellers don’t like appraisers who value properties below contract prices, brokers often see them as “deal killers” who delay and deny commission checks, buyers don’t like the fees appraisers charge, and lenders can hardly talk with them for fear of violating rules that prohibit efforts to influence valuations.

To make matters worse, we’re selling a lot of houses but we’re not expanding appraiser ranks.  In many areas there’s an appraiser shortage, so to resolve the problem, several of the nation’s leading financial regulators ruled in May that temporary practice permits and waivers could be used to bulk up appraiser ranks, especially in rural areas where the lack of appraisers is seen as most acute.

In July, several federal regulators proposed simply doing away with appraisals for a large number of commercial transactions by raising the commercial real estate appraisal threshold from $250,000 to $400,000. This proposal, said Martin J. Gruenberg, Chairman of the Federal Deposit Insurance Corporation (FDIC), “will be a meaningful reduction in regulatory burden, particularly for rural banks who would be expected to originate many of these smaller transactions.”

“In addition,” said Gruenberg, “the proposal seeks comment on the threshold for residential real estate, and I look forward to the comments on that issue.”

Get it? The head of the FDIC is asking how we can solve the appraisal shortage by cutting back the need for residential valuations.

Appraisers, for their part, argue that they’re just doing their job, a job where pay increasingly lags skills, training, or experience.

Much of the problem comes down to money. Simply put, Miller (no relation), says appraisal management companies (AMCs)—firms that act as intermediaries between lenders and appraisers to assure that valuations are not influenced by lender pressures—are getting far more than their services are worth.

 “AMCs take half of the market rate appraisal fee to manage us. This administrative fee is earned by confirming we had a license, forcing us to interact daily with 19-year-olds—chewing gum checking on the status of their appraisal—subjecting us to expanding scope creep to validate their existence and run analytics on our appraisal opinions to keep us accurate. This relationship is done all in the name of compliance even though there is no regulation requiring banks to use AMCs.”
 “If appraisers were able to seek business directly from lenders, and appraisal fees were market based, there would be no ‘shortage’ of appraisers.”

3 Ways to Resolve the “Shortage” of Appraisers
Looking ahead, one can see three ways the appraiser “shortage” can be resolved.

First, we change the rules to require fewer residential appraisals, just as we see with the proposal to eliminate commercial appraisals for transactions of $400,000 or less. This approach assumes that lenders—and borrowers—will accept more price risk.

Second, we can dump AMCs, a move that will instantly increase the actual payments going to appraisers by 50%. With higher fees, we can expect more appraisers to return to residential evaluations and with more appraisers, we will then see fees fall.

Third, we can substitute electronic valuations for in-person appraisals. Lenders now use appraisal reviews to check the work of human appraisers, but such reviews are so complete they can often eliminate the need for appraisals. For example, electronic appraisals might work well in situations where fairly identical properties are being sold—the Model B in a subdivision with 1,000 like units. Where electronic valuations don’t work is with older neighborhoods where properties differ as well as in situations where homes have been poorly maintained and no appraiser goes inside. Appraising, at least to date, has more variables than electronic models can capture.

“Automated valuation technology has come a long way, but it’s still not a replacement for the appraisal process,” “Appraisals are still equal parts art and science, and they have value because they help lenders avoid funding more than they should, and prevent consumers from overpaying for a property.”

Like many professions in a changing economy, appraisers now face new challenges. Call if you want to know how much a home is worth? As long as each and every parcel of real estate remains unique, appraisers will have a lot of work ahead.

Posted by C. A. Klemme on January 10th, 2020 5:27 PMLeave a Comment

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