You have all been there; that is if you have been in the mortgage business for longer than two or three transactions. You are shepherding a loan along the pathway to a closing for a client. The client has a job, you have qualified the client for income, you have pulled the client’s credit report, they have the proper downpayment and everything seems hunky-dory. Then, it happens … you get a call from the underwriting department, and you hear that dreaded statement. “It didn’t appraise,” which is colloquial for “The appraiser is of the opinion that the property is worth less than the estimated value that the loan was based upon.”
What is a self-respecting loan officer to do? First, there is always the possibility that the homeowner lied about what they paid for the property or that the tax card is in error. Then, there is the possibility that the market has tanked so much within the past year or two because of the rotten economy that the subject property has lost most of its value. But wait … there is one other possibility. The appraiser just may be flat-out wrong. Are they competent, do they know the market, were they in too much of a hurry, or was there data supporting a higher market value than that which the appraiser came up with?
I have been an appraiser, review appraiser, appraisal manager and the owner of an appraisal management company (AMC) for about three decades. There is little about real estate appraisals that I have not been subjected to. We have all seen challenging markets, I have made my share of mistakes, I have seen others make mistakes, and when there is a question about the accuracy of an appraisal, I have learned not to jump to conclusions one way or another.
When presented with an appraisal challenge from a client, it is almost always accompanied with an excess of emotion and precious little in the form of relevant facts. To the borrower, it is getting the proceeds from the loan. To the loan officer, it is closing the deal and paying this month’s rent. These, however, are not reasons to challenge the appraisal. This must be done with relevant facts, facts not about either of the players among the cast of characters, but about the property and the market.
I once heard a wise appraiser talking to a property owner. The owner had made the statement that there was something wrong with a certain appraisal. The appraiser calmly responded, “Sir, there is something wrong, but it is not wrong with the appraisal. There is something wrong with the property.”
If we are to properly evaluate the circumstances surrounding an appraisal within a transaction, we must get past the fact that we want the transaction to close. We must honestly say to ourselves, “What is the property actually worth?” This must come from the market and not from a preconceived notion that a property is worth “X” amount of dollars.
That being said, I am listing three things that we in our company commonly find wrong with appraisals, when the appraiser has made a mistake.
1. The subject is superior to the comparable sales used.
In today’s market, finding good comparable sales is tough. Do not be afraid to ask your Realtor or borrower if they are aware of any other higher-priced properties that may have recently sold near the subject, and may have not been considered as comparable sales.
2. Watch for unfavorable adjustments in the square-footage section of the appraisal.
This is especially troublesome when the subject property is smaller than most or all of the comparable sales. Frequently, the dollar-per-square-foot adjustment is much smaller than the depreciated value of the improvements. Ask the appraiser for paired sales to demonstrate the difference in value-per-square-foot.
3. Inquire about unique characteristics, processed by the subject, but not properly credited to the subject property in the appraisal.
Items frequently overlooked or undervalued are additional land, detached buildings, such as mother-in-law apartments, exceptional views and water frontage.
While every property and appraisal is unique unto itself, those variables listed above are among those that I have found most often to be responsible for undervalued properties. Sometimes, we will find that a property just is not worth more than the appraisal and, under such circumstances, it may be time to swallow our pride and move on. Yet at other times, there may be good cause to question the appraiser. I think that you will find that, in most cases, appraisers will be receptive to suggested areas of improvement in appraisals.
Appraisers lose when they are unwilling to consider the relevant facts presented about an appraisal. Their credibility is also the line, and few are willing to risk losing business because they make mistakes that they are unwilling to address.
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.
