Article Courtesy of WSJ.com
By RUTH SIMON
Record-low interest rates are a boon for home buyers and for homeowners seeking to refinance. But low appraisals are making it difficult or even impossible for some borrowers to take advantage.
Samara Glassman and her husband David knew their ranch house in Phoenix had fallen in value. But they were surprised by a September 2011 appraisal valuing the four-bedroom home at $385,000, down from the $604,000 they paid in 2008. The appraisal put the couple underwater on their $402,000 mortgage—and threatened to sink their plans to refinance.
When they examined the appraisal, they saw it was based on older homes a few blocks away that weren’t directly comparable, says Ms. Glassman, a real-estate agent. They got a second appraisal in January that placed a $500,000 value on the property. That number was high enough for them to refinance into a new mortgage that will save them an estimated $250,000 over the life of the loan.
After almost six years of falling home prices, such experiences have become common. About one-third of real-estate agents reported that low appraisals had resulted in the cancellation, delay or renegotiation of a purchase, according to an April survey by the National Association of Realtors.
Ron Phipps, a real-estate broker in Warwick, R.I., says about half of his sales run into appraisal problems at some point. Lenders report that “overly pessimistic appraisals caused by appraisers using distressed sales as ‘comparables'” are a key reason why deals are falling through, particularly in parts of the Southeastern U.S., says Michael Fratantoni, vice president of research at the Mortgage Bankers Association.
Part of the problem is that home prices have plummeted further than many people would like to believe. “Everybody thinks the value of their house hasn’t fallen nearly as much as every other house in their neighborhood,” says Greg McBride, a senior financial analyst at Bankrate.com. “But the three foreclosures in the neighborhood are relevant to the current market price of your home, like it or not.”
Appraisal changes enacted in the wake of the financial crisis were designed to eliminate improper pressure on appraisers that often led to inflated valuations during the housing boom. But critics say those changes resulted in unnecessarily conservative valuations and the greater use of appraisers with little knowledge of local market conditions.
Another problem: Accurate valuations can be difficult to come by when sales are thin and prices are just beginning to edge upward after prolonged declines. Many borrowers are “in a holding pattern for extended periods” because it’s difficult to find comparable sales to support the appraisal value, says Terry Moore, global managing director of Accenture Credit Services, which provides consulting and mortgage-processing services to banks.
There are steps you can take to improve your odds of getting a deal done. Mr. Phipps, the Rhode Island real-estate agent, advises borrowers to look at comparable sales from the last three to six months before seeking a mortgage. “Whether it’s a purchase or a refinance, you want to know what the range of values is,” he says.
Borrowers can’t pick their appraiser, but they can accompany the appraiser during the inspection, pointing out improvements that add to the home’s value. They also can provide the appraiser with comparable sales that can be used to support the valuation.
“It’s perfectly acceptable to have a list prepared for the appraiser of improvements that might not be obvious,” says Ken Chitester, a spokesman for the Appraisal Institute, a professional group. Data are “the lifeblood of the profession.”
Sometimes it makes sense to start over. Steve Walsh, the mortgage broker for the Glassmans, resubmitted the couple’s loan application to a different lender a few months after the original refinancing fell apart because of the low valuation.
Borrowers can request that the lender review the appraiser’s findings, though the chances of success are slim. If you think the value is unreasonably low, look first for factual errors, such as an erroneous number of bedrooms or miscalculated square footage.
To improve your odds of getting the appraisal overturned, you will need examples of recent comparable sales that weren’t considered by the appraiser, Mr. Chitester says. You also can ask the lender to order a second appraisal, which you might have to pay for. The average appraisal cost $406 last year, according to Bankrate.com.
At U.S. Bancorp, borrowers who are unhappy with the valuation can ask to have the appraisal reviewed. If the bank agrees the appraisal wasn’t good, it will order a new one. But borrowers can’t simply request a new appraisal because they didn’t like the initial valuation, says Dan Arrigoni, head of U.S. Bank Home Mortgage. “At our company, you have to have a reason to go for the second appraisal,” he says.
Citigroup, by contrast, sometimes asks for two or even three appraisals, with the bank picking up the added costs.
“We know we don’t influence appraisals at all,” says CitiMortgage president Sanjiv Das. “We also know that appraisal is an art form. I will take another opinion to satisfy the customer that two came in at the same level.”