If we could somehow collect and reinvest all of the resources wasted on potential loans that do not close due to unrealistic property value exercitations, we would be wealthy individuals. This is especially true in today’s environment of underwriter skepticism and the tightening of standards due to the recent mortgage meltdown. We are not talking about appraiser mistakes that do occur from time to time. We are talking about circumstances where the property value simply is not there.
Wouldn’t it be nice if we had a list of red flags to watch for to help prevent wasting our time and expenses on deals that are dead upon the arrival of the borrower’s application? Due to the art involved in appraisals, there is no surefire way of knowing the value that the appraiser will come up with prior to simply pulling the trigger and finding out. There are, however, danger signs, and by being familiar with these signals, there are preventative actions we can take in most cases. Below are questions designed to detect some of these signals:
1. Do the property tax records reflect a value below that which must be met by an appraisal of the property?
2. Is the house well maintained?
3. Has the property been sold lately? If so, did the sales price reflect a value lower than that which must be reflected in an appraisal in order to make the loan?
4. Has the property been appraised within the past couple of years? If so, when, and what was the estimated value?
5. Has the local market experienced more foreclosures than usual?
6. Is the economy in the area stable? Is unemployment relatively high, or are there plant closings near the subject property?
The above signs are not within themselves offered to be foolproof. As an appraiser and one who deals with appraisals and appraisers on a regular basis, I would be the first to say that there are differences in appraisal-value estimates, strictly due to the different opinions of the appraisers. Said in another way, a given property on a given day may have a materially different estimated value, depending upon the appraisers involved. That does not mean that either appraiser is biased or less competent than another.
Sometimes, it is just a matter of how one professional views a given market, as opposed to how another views it or the experiences that one appraiser has had, versus those of another. It should be noted, however, that when there are glaring red flags, most appraisers will have similar opinions on a given property.
Therefore, while a loan officer cannot expect to do a perfect job in reading how a particular appraiser will view a given property, it is possible to sort out many unqualified loan applicants prior to the investment of large amounts of time and emotional energy, only to find that most any appraiser would have nixed the deal.
For those seeking to take the pre-qualification process a step further, there are also helpful collateral-assessment tools that mortgage professionals can use to supplement their knowledge of a given market prior to making the commitment go through the application process. These tools include the automated valuation model (AVM) and access to local Multiple Listing Service (MLS) comparable sales data. With these tools, the mortgage professional can get a rough preview of the comparable sales data, which will be used by the appraiser to develop the appraisal.
The customer can also be a resource in assisting with the preliminary evaluation of their collateral. A good question to start with is: “What has sold in your neighborhood that will support your opinion of the value?”
In summary, mortgage professionals owe it to themselves to perform a certain amount of due diligence prior to making the commitment to carry an applicant through the formal application process. Savvy loan officers, in some cases, will spot problems early on in the process and save themselves time and emotional energy. Even though, typically, the lender officer does not spend a lot of out-of-pocket money on a failed application, time is often wasted, and time is money. Simply passing on potential borrowers with insufficient collateral and servicing those with the proper collateral can be best for the lender and the borrower.
Charlie W. Elliott Jr., MAI, SRA, is president of Elliott & Company Appraisers, a national real estate appraisal company. He can be reached at (800) 854-5889, e-mail firstname.lastname@example.org or visit his company’s Web site, www.appraisalsanywhere.com.
“Wouldn’t it be nice if we had a list of red flags to watch for to help prevent wasting our time and expenses on deals that are dead upon the arrival of the borrower’s application?”