Appraisal Rule Changes May Affect Home Values
A few years ago, home appraisers gained business directly from bank loan officers, mortgage brokers and real estate agents. They could select appraisers based on their expertise and familiarity with a certain market.
In May 2009, the Home Valuation Code of Conduct took effect and set guidelines on how appraisals should be done. That changed the process for appraising residential real estate drastically.
Now, to ensure 100 percent independence from the bank, appraisers are hired by people not directly involved in the loan process or appraisal management companies (AMC’s). The appraisers negotiate rates with the AMC’s and get paid a set fee. The loan officer must work through a third party in the selection of the appraiser and in all communication with the appraiser. These appraisers are selected at random and may not be as familiar with a particular area and market as homeowners would like.
The code expired late last year, but the basic principles have become the industry standard and are expected to continue under the Dodd-Frank act, which takes effect this spring.
Appraisers have to account for several things when preparing a report. They review a home’s sales history, evaluate the purchase agreement and find at least three comparable sales. Depending how the property is classified, the comparable properties may need to be sold in the past ~90 days within a mile from the home and have similar square footage.
The requirements will be similar under the Dodd-Frank act. The same independence between appraisers and those with a vested interest in the loan will exist, but those involved in the transaction will be allowed to ask the appraisers to fix errors in their reports and consider additional comparable properties. Appraisers also will have to show they are familiar with the area they’re appraising.
Because Fannie Mae and Freddie Mac have strict guidelines on the age of the comparable sales, it’s likely some of those properties could include foreclosures or other distressed sales. Frequently foreclosures and distressed sales are actually sold at a reduced price, which in turn put downward pressure on potential comparable sales.
Consumers have a few options if an appraisal comes in lower than expected:
- Before the appraisal, ask your real estate agent to pull comparable sales so you have an idea what the appraiser will find.
- Ask the seller to lower the asking price to lower the gap between the appraised value and selling price.
- Ask the buyer to make up the difference in cash.
It’s important to know about the new appraisal rules before buying or selling a home so you’re not caught off guard by the process. Knowing what to expect will help you be better prepared.