Appraisal Red Flags
Appraisals are a key part of just about any residential real-estate deal, but the world of appraisals is not without its scandals. Phony appraisals are often a problem in mortgage-fraud
SAN FRANCISCO -- If you're a home buyer, you want to pay a fair price for the house. If you're a seller, you want to get the most you can. Both of you rely on an appraiser to get the home's value right.
Appraisals are a key part of just about any residential real-estate deal, but the world of appraisals is not without its scandals. Phony appraisals are often a problem in mortgage-fraud cases, where a group of scammers will pose as legitimate real-estate professionals, hiking up a property's price to turn a quick profit.
There's also the issue of inflated appraisals, where appraisers push up a home's value, often to appease lenders, mortgage brokers and real estate agents. That's a potential problem for buyers who may then end up owning a home worth less than they thought.
On top of those appraisal pitfalls, a slowing housing market makes even the legitimate appraiser's job harder. An easing market "is definitely more challenging for the appraiser," said Alan Hummel, past president of the Appraisal Institute, a membership association which provides education and certification programs.
In part, that's because appraisers compare sales data on neighboring houses to assess a home's worth. "As sales have slowed down, the availability of data is less than what we had before," Hummel said.
"A year ago I may have had 15 sales in one subdivision that I could compare to the property I'm appraising, and it was fairly easy to see where the trend is. This year it may only be three sales in that subdivision. It's more difficult for me to analyze less data," he said.
Another way appraisers measure value is by looking at how much it would cost to build that particular house, subtracting any physical depreciation. For those seeking an appraiser's services in this market, make sure the appraiser understands both the comparable sales approach as well as the cost method, Hummel said.
"As the market slows down, you need to make sure you hire an experienced, educated appraiser that understands this other methodology called the cost approach," Hummel said.
Of course, usually the lender hires the appraiser. But, whether you're a buyer or seller, you can scan the appraisal for these red flags:
Does the stated home value seem reasonable, given what you know about the neighborhood?
"The first red flag is, does this value seem reasonable," said Don Kelly, a spokesman for the Appraisal Institute. "If it seems high, that could be a problem."
Still, keep the local market in mind, Hummel warned. A first-time homeowner, new to the market, is probably not used to seeing a slowing market. "To be told that the property you bought two years ago is now worth something less, obviously they look at the appraiser and say you must be nuts," he said. Don't forget that "real estate is a commodity that ... goes through cycles."
When the appraiser cites comparable home sales, is he focusing on nearby houses?
"The homeowner looks and says, 'Wait. These comparable sales are six, eight, 10 miles away," Kelly said. "You want to find out why. There might be a reason but that's a red flag."
Also, Hummel said, make sure the homes used in the comparison are in the same school district. If not, find out why not.
Does the appraisers' description of the house match what you know? Does the square footage match your estimates?
"Is the room count wrong? That's a red flag," Kelly said. The appraisal said "this house has four bedrooms, but it's only got three, or they say it's got three baths and it's only got two."
Will the lender give you a copy of the appraisal?
You're entitled to a copy of the appraisal. If "the lender doesn't want to give you a copy of the appraisal, that would be a red flag," Kelly said.
Is the appraiser licensed and/or certified?
Make sure the appraiser is holding a current license or certification, Kelly said.
What to do now:
If you own a home that you think was appraised incorrectly, your next step depends on your situation, Hummel said.
First, "don't make the assumption that the previous appraisal was bad. There may have been changes in the market," he said. "Get a qualified appraiser [to find out] what is today's value."
Then, "if that first appraisal was so far off that it was fraudulent ... you can complain to the lender, because they got a bad appraiser," he said. You can also complain to the State's appraisal agency, as well as the Better Business Bureau and the Appraisal Institute if the appraiser is a member. And, the FBI investigates mortgage fraud now. See related story on mortgage fraud. See related story detailing a case of mortgage fraud.
If the appraisal was inflated slightly, and you're planning to stay in the house another, say, five or more years, "maybe the answer is you don't do anything about it," Kelly said, essentially waiting for the home's value to catch up to the appraisal.
Another possible option:
Refinance. "Maybe I take my lumps here. Pay some cash, get this thing back on track. Maybe you see that you've got an adjustable-rate mortgage coming due next year. You say, 'Well, we're going to have to do some adjusting here, but maybe I can work with the lender to make up the difference or do a deal on whatever the negotiated package for financing is. Maybe you can keep your payments so you can make them and live this thing out," Kelly said.
Andrea Coombes is a reporter for MarketWatch in San Francisco.