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Published by OREP, E&O Insurance Experts | October 10, 2013

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There are actually two reasons why you see appraisers these days going from being very generous in their values to being ultra conservative.

Why Appraisals Are Coming In Low
by Phillip Spool, ASA

Here’s why it is not unusual to sell a house for more than what the appraiser values it at.

For many years appraisers complained that mortgage brokers were interfering with their conclusion of value, pushing the appraiser to come up with a higher number.  On May 1, 2009, appraisers got their wish with the creation of the Home Valuation Code of Conduct (HVCC), requiring all lending institutions to go through an intermediary to order appraisals.  This means that mortgage brokers are no longer allowed to order an appraisal and banks have to have someone within the bank, not associated with the lending department, order the appraisal or go through an intermediary.

Most banks decided it was easier to go through an intermediary and thus the rise of appraisal management companies (AMCs).  Ironically, what the appraiser believed would be total appraisal independence turned into a total nightmare.  Almost immediately, appraiser fees were cut in half.  The AMCs were charging the banks around $500 and pocketing around $225 to $250 for their fee.  Many of the good appraisers were unhappy with this fee reduction and either left the appraisal industry or no longer did appraisals for lending institutions.

This resulted in AMCs maintaining appraisers who were happy with $250 to $275 and willing to complete an appraisal report within a 48 hour turnaround time.  With the reduction of good appraisers, AMCs were contracting appraisers who were either not properly trained or were located in areas far away from their assignment.  But this is not the main reason why appraisals began coming in low, low enough in many cases, to either cause a sale to fall apart or force the buyer to come up with additional funds to close.

There are actually two reasons why you see appraisers these days going from being very generous in their values to being ultra conservative.

Reason # 1:  Those appraisers who are still in business are very concerned about either being sued by the lender for a loan that went into default or worried that the lender, buyer or seller will file a complaint with the Division of Real Estate, saying that the appraisal is not supported- even though lenders were giving 100% loans, NINJA loans (no income, no job, no assets) and participating in other reckless lending practices. 

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Lenders require appraisers to have errors and omissions insurance, so suing has become an easy way for lenders to recoup money lost in a default. Ironically, virtually none of the mortgage brokers were sued.  A complaint against the mortgage broker had to be filed with the Division of Financial Services and not the Division of Real Estate.  Besides, most mortgage brokers did not have E&O insurance.  Appraisers are now very concerned with the possibility of a loan going into default.  In addition, the new Dodd Frank Bill passed by Congress makes it mandatory for lenders and AMCs to turn an appraiser in to the state regulatory agency if they believe the appraiser prepared a faulty appraisal report, for whatever reason.  In Florida, in 2009 and 2010, there were approximately 2,000 complaints filed against appraisers.  In 2011, there were approximately 1,000 complaints filed.  It is unknown how many appraisers were sued during this time as statistics are not kept on lawsuits and most settle before they go to trial.

Reason # 2:  The AMCs and/or banks have their own set of guidelines, besides those set forth for appraisers in the Uniform Standards of Professional Appraisal Practice (USPAP).  And if the loan is going to be sold through FannieMae, then the appraiser has another set of guidelines to abide by.  But it is the AMC and bank guidelines that are most troublesome to appraisers.

Some guidelines restrict the appraiser into using only sales within the past three months and either within the neighborhood or within a one-mile radius.  This is fine when there are an abundance of qualified sales.  “Qualified” sales are those that are not foreclosures or short sales, not to say these should be ignored.  They should be considered but if there are enough sales of “qualified” transactions, then those are the ones to use.  In some instances, like areas with a majority of foreclosures, like Homestead, Florida, the appraiser has no choice but to use sales of a foreclosed property or short sale.  But the appraiser must consider the property’s physical condition when using a foreclosed property as a comparable.

Going back to the guidelines from AMCs or banks, the appraiser must follow their requirements but by doing so, they might be excluding sales that occurred within the past six to twelve months and therefore might be overlooking a property that is very similar to the subject. The appraiser also might be overlooking a sale that is just outside one mile in a similar, substitute neighborhood that is very similar to the subject.  Being very restrictive in choosing sales based on guidelines that are too narrow can result in a value that does not support the contract price of a property.  By the way, Fannie Mae or FHA do not have a "one mile" guideline, only some lending institutions or AMCs.

Appraisers should also be aware that if the area they are appraising has a shortage of supply and a pent-up demand, such as Pinecrest and Coral Gables (Florida), people are willing to pay more to buy that house or condominium unit, as choices are limited.

Banks want to make loans and what is interesting now is that when AMC appraisers come in lower than the contract price, the banks are pressuring the AMCs to get their appraisers to make the loans go through.  Now appraisers are being pressured by the AMCs, when in the past they were pressured by mortgage brokers.  What appraisers were complaining about in the past has now come around to a full circle.

So when you get upset at an appraiser for coming in with a value lower than the contract price, consider their restrictions.  Even with a cash deal, the appraiser might be so accustomed to using the restrictive guidelines set by the AMC, that they fail to realize that perhaps there are sales that can legitimately support the contract price. 

If you are working for a buyer, don’t necessarily assume the appraiser is correct in his/her value.  One has to look at the comparables the appraiser used.  Go by those houses, check the MLS sheets on those houses and see for yourself if they are inferior, superior or comparable.  I always encourage agents to supply a list of comparable sales to me to support the purchase price.  In some cases, the agents know there is no support and should state that to the buyer and seller.

About the Author
Phil Spool, ASA, has been appraising in Miami-Dade County Florida since 1973. He is a State-Certified General Appraiser, Vice-President of the Greater Miami Chapter of the American Society of Appraisers and has published numerous articles in Working RE Magazine, a national appraisal journal.  He can be reached at

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