Appraisals Continue to Affect Closings

As if obtaining a mortgage loan wasn’t difficult enough, it turns out there was one more obstacle which has to be overcome: the appraisal. Thanks to new federal regulations, appraisals have now become a nail-biting experience. The best advice for both buyers and sellers is to avoid obtaining one altogether.

Unfortunately, all lenders will stipulate that an appraisal must be performed in order for the mortgage to be originated. During the inflation of the housing bubble, this was hardly an onerous requirement. Given that appraisal is inherently more art than science, it was easy enough for appraisers to adjust their comparison tables and deliver a value that was in line with what the buyer and seller had agreed upon. In fact, many appraisers reported receiving pressure from lenders to deliver a value (so that the sale would close), thereby minimizing the importance of their role in the process.

In some ways, this changed as a result of the Dodd-Frank financial reform bill and the related Home Valuation Code of Conduct (HVCC). Among other things, the independence of appraisers (such that they would be immune from third party pressure) was stipulated. This led to the creation of Appraisal Management Companies (AMCs), which has unfortunately led to a decrease in quality: “They mostly care about getting the appraisal done quickly and cheaply, not necessarily well. And they take a good chunk of the appraiser’s fee—often more than half—with the result that appraisers say they can no longer make a living; competent people are fleeing the profession.”

Moreover, appraisers still report being pressured from lenders – this time to deliver lower appraisals – “from lenders who want to make sure they have enough equity to cover them even if home prices fall further. As if this were not enough, a preponderance of short sales and foreclosures in some areas is making it difficult for appraisers to find comparable properties, and is putting downward pressure on both home values and appraisals. The news has been filled with horror stories of second and third appraisals that came in 10% (or more lower) than the first appraisal, making it difficult to complete the sale. According to the National Association of Realtors, “One in 10 member agents said they’d had a contract canceled as a result of a low appraisal, 13 percent said they’d had a contract delayed, and 16 percent said they’d had a contract negotiated to a lower sales price as a result of a low appraisal.”

In short, it’s probably best to avoid having an appraisal performed if you can help it. If the buyer and seller can agree on a price, it’s pointless to request the opinion of an appraisers unless it is ordered by the lender as a precondition to mortgage financing. If, on the other hand, you are stuck with an unpalatable appraisal, you should challenge the valuation and/or request a home inspection. If the appraiser isn’t willing to bend, you might be forced to find another appraiser.