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Home appraisal issues could derail your dreams

Michele Lerner | Improvement Center Columnist | December 3, 2012

Bad appraisals are hampering buyers from purchasing homes, according to a recent survey by the National Association of Realtors (NAR) of more than 3,000 of its members. The survey showed that 11 percent of Realtors said a contract has to be cancelled because of a too-low appraisal, 9 percent said a contract was delayed by an appraisal problem and 15 percent said they had to renegotiate a contract because of an appraisal issue.

There are multiple causes for appraisal issues, including the glut of foreclosures and short sales in many housing markets. Appraisers must look at comparable homes for sale to determine the market value of any listing. Comparable homes should be nearby recent sales of similar size and condition to the home being evaluated, but in markets with few sales prices comparables can be hard to find. According to NAR, some appraisers are required to find 8 to 10 properties for comparables which means the likelihood is high that they will have to include a foreclosure or short sale or simply a home in poor condition.

Other appraisal issues

In addition to the sometimes necessary inclusion of a foreclosure, appraisals can be impacted by non-local appraisers with little market knowledge. Leslie Hutchison, a Realtor with Falls Properties in Falls Church, Va., received a full-price offer of $635,000 on a single family home on a lot that was assessed $80,000 more than other nearby homes because of its size. She says the appraiser valued the home at $600,000 and refused to adjust the price for the extra land because it was less than one acre's difference. It turns out the appraiser was from a more rural area of Virginia and had no understanding of the value that even a few square feet of land can add in a suburb like Falls Church which is just outside Washington, D.C. Other issues with appraisals according to the surveyed Realtors include a lack of familiarity with market conditions such as rising prices, bidding wars and low inventory that are increasing prices above even recent sales.

NAR says the problem isn't the appraisers themselves but the process for appraisals that was introduced with the Home Valuation Code of Conduct in 2009, which was designed to keep lenders from influencing appraisals and pressuring appraisers to raise home values. An unintended consequence of that regulation is that lenders more frequently use an appraisal management company or AMC for home valuations. Frequently the AMC hires appraisers based on the lowest bid, often a less experienced appraiser without significant market knowledge.

Given the price fluctuations in most housing markets and the lack of experienced appraisers, it's not surprising that so many appraisals are inaccurate.

Impact of a bad appraisal

While a too-low appraisal clearly has a negative impact on a sales transaction and can even require the renegotiation or cancellation of a sale, a bad appraisal can also stop you from refinancing your home or taking out a home equity loan. If you plan to improve your home value while refinancing, a low appraisal could make that project more difficult because you will have less home equity to borrow against.

Consumer rights for appraisals

While appraisers are hired by a mortgage lender to establish the value of a home, buyers and sellers and homeowners can express their concern if they believe an appraisal is wrong. In some cases, a second appraisal can be requested from the lender. As a homeowner you can prepare materials to show an appraiser about home improvements you have done or information about nearby comparable homes the appraiser might not know about that could impact the value of your home.

Whether you are buying, selling or refinancing, you should be proactive to make sure your home gets the value it deserves.

About the Author

Michele Lerner, author of "HOMEBUYING: Tough Times, First Time, Any Time", has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT's REIT magazine and numerous Realtor associations.