You just sold your home and you are so excited.  After years of a difficult and sometimes impossible housing market, things are finally improving.  You hired your Realtor, fixed up the old place, put the sign in front and Wham! You sold it.  Everything looks great; the buyer has good credit and they’re pre-approved.  The inspection is done and there’s nothing earth shattering on it so you are really over the moon… that is until the appraiser comes.  You know the appraiser right?  They’re the person in charge with validating your sales price.  What?  You mean a buyer and seller can’t just agree on a price and make the deal you ask?  Sure they can, but if there is going to be financing, the bank wants to know that the value of the property they are lending is what you have agreed to sell it for.

If a borrower is putting a lot of money down, more than 20%, then the issues with the bank largely go away, because even if the appraisal and the sales price differ, there is plenty of extra buyer money put in the cover a shortfall on value… a shortfall on value huh?  Why would there be a shortfall on value?  Let’s say that you paid $520,000 for a home and there was another home down the street, perhaps much larger that also sold for $520,000.  Yours was nicer of course, maybe it was even a one story so it had a greater desirability because you can’t do stairs at your age any longer or maybe you’re just planning for the future.  The home down the street is considered a “Comp” or comparable sale.  The appraiser will use that home to establish the “value” of your home.  This is not market value, it is lender value.  Market value is whatever a willing buyer and willing seller agree to without the presence of duress – Real Estate Principles – it’s the first thing you learn.  But market value is not at issue, what is, is the bank’s risk tolerance. The bank wants to maintain a minimum of a 80/20 ratio of loan to value.  Therefore, if you were putting 20% down on our $520,000 example, you are putting down$104K leaving a loan amount of $416,000, a loan to value of 80%.  However if that bank appraises that property at $500,000 and you bought it for $520K, you are short $20K and have to bridge the gap somehow.  The loan to value is either going to be greater than 80%   This means higher borrower costs by virtue of lender required default insurance, also known as PMI. Why? because $400K is 80% of $500K not $416K as before at $520, so you would have to put your $100K down, plus the additional $20K to get to $520K – make sense?  That means you need $120K plus closing costs not the original $104K.  In other words because the appraiser failed to make value, you have to come up with an additional $16,000 because the bank is only going to loan you $400K when you actually need $416K.

I tell my sellers that there are four scenarios that happen when an appraisal comes in light (low); the seller comes down in price , the buyer comes up with additional cash, the parties meet somewhere in the middle or the deal falls apart.  Can you appeal the appraisal?  Yes, however it’s about as hard to get an appraisal changed as it is to escape North Korea.  Why?  To answer this, you have to understand the new role of the appraiser.  When the market dumped and fingers were pointing in every direction looking for fault, the most defenseless group was the appraisers.  They didn’t have a big Washington lobby like the Association of Realtors; they weren’t big Wall Street investment houses or nationally chartered lenders, rather just a rag tag group of hard working folks who took the blame for appraising homes at ever higher valuations.  Are there examples of fraud and deception? Sure, but that crown fits a lot of heads.  But being that they had no advocate, Washington went after appraisers with a vengeance and the end result was a requirement that a third party “Management Company” be created to be a liaison between the lender and the appraiser, so that it was a blind assignment for the appraiser, that is, without any connection to the mortgage lender.  What do you think happens when you add a middle man to the process?  That’s right higher cost to the consumer; lower fee paid to the appraiser and now big profits for the management company.   And guess who owns the management companies?  That’s right, the lenders.  So when Wells Fargo needs an appraisal for a loan, they call RELS, their appraisal management company.  This is why consumers now pay more for an appraisal and good appraisers are leaving the business and why it’s next to impossible to win an appeal.

The significance of this incestuous relationship is that as the market improves like it is now, there are buyers willing to pay just a little bit more than a previous buyer for a similar property.  But the banks don’t give a hoot; they only care about their risk and if the value can’t come in and the deal falls apart, so what?  To the family who loses their dream home over an appraisal, well that’s just tough nuts.  This just happened to one of my buyers and he’s going to lose the house to someone else with more cash on hand to pay the difference.  This story is really unfortunate but with an improving market comes new problems and new bumps in the road.  The good news is that at least the market is improving and we are having a conversation about the problems of juxtaposing rising values with older comps, and that is a silver lining indeed.