A few weeks ago I ran into one of my favorite mortgage brokers at a local coffee shop. I would reveal his name but then all the other mortgage brokers in town will want equal publicity. We soon got to talking about the booming mortgage business.
He revealed, “Confidentially, Bob, I’ve never had such a good year, and 2004 isn’t over yet.” Then he told me his business is about 50-50 between home purchases and mortgage refinances.
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When mortgage interest rates rose a bit a few months ago, he said he and his wife were planning to take a long vacation, thinking the mortgage business would drop off. But then he revealed his business actually increased after the interest-rate spike, and then increased again when mortgage interest rates dropped, so he couldn’t afford to take a vacation and lose business.
Then he made a statement I wasn’t expecting. “If it wasn’t for those ‘darn’ appraisers the lenders tell me I have to hire, my business would be perfect.”
Just in case you are not aware, mortgage brokers are middlemen (“middlepersons” to be politically correct) between home loan borrowers and the actual lenders. Mortgage brokers handle the home loan application and paperwork but don’t lend their own funds. Many lenders let the mortgage broker select the appraiser; others require appraisers from their “approved list.”
My longtime mortgage friend then told me he has noticed more and more lenders now use automated appraisals on smaller mortgages. He said he loves those lenders who eliminate the uncertainty of a real appraiser.
ARE APPRAISERS OBSOLETE? In some neighborhoods of lower-priced or similar subdivision homes, mortgage lenders often use computerized appraisals to save costs.
For example, not too long ago I applied for my first Internet loan. It was for an adjustable home-equity credit line on my Minnesota “second home” condo at the prime rate to pay off a $15,000 mortgage at 9 percent interest. This experience was at wellsfargo.com (although I do not recommend this lender). My condo is in a complex of about 250 similar condos.
To my surprise, a few days later the lender’s representative phoned to tell me their computerized appraisal, confirmed by a drive-by appraisal, revealed my guesstimate of my condo’s value was too low and I could get a much larger credit line than I requested. Naturally, I accepted.
All this was accomplished without an actual appraisal. The drive-by appraiser was probably a trainee who is not even a licensed appraiser. His or her job is just to be certain the property actually exists. The balance of the appraisal was done by computers.
However, real, live appraisers are far from obsolete. Although their volume of full appraisals may be declining due to automated appraisals, most appraisers report increased numbers of appraisals. A major reason is the number of appraisers is decreasing as longtime appraisers retire and few new appraisers enter the business.
WHY APPRAISALS ARE THE WEAKEST MORTGAGE LOAN LINK. Over many years in real estate sales and investing, I have encountered so many professional appraisers I’ve lost count. Most were very competent. However, some were so inexperienced and unprofessional they were comical.
For example, I recall the worst licensed appraiser sent by a mortgage refinance lender showed up at my home on a hot day wearing a brown suit, tie, and tennis shoes. That was my tip-off he might be odd. However, he competently measured the exterior of my home and each room with his electronic measuring device.
After he finished his measurements and photographed the exterior, I handed him a list of my home’s features so he wouldn’t forget (many appraisers inspect three or four homes a day so it is difficult to remember each one). Then I handed him a list of recent sales prices of nearby homes in my vicinity. He refused to accept them saying, “I have all that information back at my office.”
But his appraisal report said my home was worth about $200,000 below its actual fair market value based on comparable nearby home sales prices. Needless to say, his mortgage lender wasted the approximate $350 appraisal fee paid by the lender.
After I talked by phone with the lender’s representative, they agreed to pay for a second appraisal from a different appraisal firm. The next appraisal was just about what I estimated my home was worth, based on comparable nearby home sales prices, so my refinanced mortgage was successfully completed.
APPRAISAL IS AN ART, NOT A SCIENCE. This personal example shows real estate appraisal is an art, not a science. Although computers might replace appraisers on residential valuations on similar homes in a subdivision, or condominiums in a large complex, the individual appraiser will never be obsolete.
The reason is appraisal is an art, not a science.
Even with the help of computerized sales price information, the appraiser must interpret that information to add or subtract value for the pros and cons of the subject property and the comparable nearby sales prices.
Because appraisal is a skill not easily learned, two or more appraisals of the same property will rarely be exactly the same. If the property is unique, the appraised values might vary by thousands of dollars. In my personal example above, the appraised value of my home varied by more than $200,000.
HOW TO GET AN ACCURATE APPRAISAL OF YOUR HOME. Now that you know how home appraised values are determined, based on comparable nearby home sales prices, you probably want to know how to get an accurate appraisal of your home’s market value. Here are some quick tips:
1–GET THE HOME INTO TIP-TOP CONDITION. If the appraisal purpose is a mortgage refinance, it’s easy to clean your home and remove the clutter. However, when you are a home buyer, there isn’t much you can do before purchase. Hopefully, the seller already cleaned, painted and fixed-up the home to make it look its best.
2–ALWAYS ACCOMPANY THE APPRAISER. I have learned it is best to accompany the appraiser to extol the home’s benefits and to hand the appraiser a list of comparable nearby home sales prices (perhaps supplied by your real estate agent).
Another reason to accompany the appraiser and obtain their business card with license number is some lazy appraisers sent an unlicensed assistant to inspect and photograph a home. If you discover the appraiser has done this, especially if you are asked to pay the appraiser’s fee of $300 or so on the spot, I suggest refusing to do so.
3–PROVIDE THE APPRAISER WITH A WRITTEN LIST OF YOUR HOME’S FEATURES AND RECENT COMPARABLE NEARBY HOME SALE PRICES. Appraiser notes and photos help them remember each home they inspect when they write their appraisal reports. But the home owner or the real estate agent can help greatly.
For example, one of the best real estate brokers I ever encountered (Larry Emerson, now with Re/Max in Colorado Springs, Colo.) told me one of the reasons he was so successful was he practically did the appraisal for the appraiser. In other words, he supplied the appraiser with the features of the house he sold and the details of the comparable neighborhood home sales prices for the appraiser’s use.
4–BE SURE YOU GET A COPY OF THE APPRAISAL. Technically, real estate appraisers are hired by the mortgage lender or the mortgage broker. But, in most situations, it is the home buyer or the home owner who pays for that appraisal.
Before the appraiser arrives, it should be agreed that the borrower paying for the appraisal will promptly receive an appraisal copy.
Many appraisers now refuse to accept personal checks from borrowers and demand cash before the appraisal is made. They know if their appraised value is below the amount expected by the home owner or buyer, that person will often stop payment on the check.
If you, the borrower, are not satisfied with the appraisal for which you paid, be sure to immediately phone the appraiser to discuss it. Perhaps the appraiser confused your home with a similar residence he appraised the same day. Emphasize specific errors, not generalities, and ask for a prompt corrected appraisal.
When the appraiser refuses to correct their appraisal, which has obvious errors, ask the mortgage lender for a prompt “review appraisal” by another appraiser to be paid by the lender.
As a last resort, if you sincerely feel the appraiser whose fee you paid made an erroneous appraisal based on factual information, the local Small Claims Court is the place to sue the appraiser for breach of contract to let the judge decide if your fee should be refunded.
SUMMARY: The appraisal is the weakest link in the home mortgage process. But the appraisal is vital to home mortgage approval. Appraisers are the lender’s inspectors.
If you are the home mortgage borrower, after you examine the appraisal report for which you paid, don’t hesitate to complain to the appraiser and the lender based on factual information, not just your opinion. If you find the licensed appraiser is incompetent, file a complaint with the state appraiser’s license office.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
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