The centerpiece of every mortgage application is the appraisal. Lenders originate residential mortgages on the basis of either the sale price or the appraised value, whichever is lower. If the appraisal is too high, sellers worry that they should have asked for more money. Worse, if the appraisal is less than the agreed sale price, it can be a deal killer unless the seller is willing to take less or the buyer brings additional cash to closing.
But what if the appraisal is wrong — or at least a valuation you want to dispute? What if the comps don’t apply, the appraiser’s data is too old or the appraiser is not familiar with local trends? According to the National Association of Realtors, about 4 percent of all transactions fall through because of appraisal issues, roughly 200,000 sales per year.
As a practical matter, appraisals are hard to change. Appraisers — not without reason — are likely to stand by their valuations. The options in the case of a disappointing valuation are to ask for a second appraisal, or present the appraiser or lender with additional property information, comps and documents — and then plead for a revision, NAR reports.
Now an alternative is showing up, what might be called “value reviews,” or automated reports that use “big data” to examine appraisals line by line and show how the appraisal compares with expected norms. Never before has there been a way to gauge appraisal results, and with such reports some transactions that might have failed will now go through.
We’re in the process of downsizing and buying a Florida home. We were delighted when the appraisal showed that our property was valued at $232,000 — good news given that the sale price was $220,000.
Then the other shoe fell. Something we had never seen before — a “value review” — arrived from the lender by email, a one-page document that showed the “estimated value” of the property was $200,200.
Was the deal off? While we would be perfectly happy to pay less for the property, the odds were pretty good that the owner would not be equally thrilled. Thoughts of being in that “special” 4 percent of all transactions that fall out because of appraisal concerns began to dance in our heads.
Then we took a closer look at the review. It plainly said that it was not an “appraisal.” It also said that the value of the property might range from a low of $164,164 to a high of $236,236. If you add these figures together and divide by two, you get $200,200.
If the value review was not an “appraisal,” then what was it? Could it kill our deal?
Our loan officer said the value review was an “internal document” and that the loan would still be based on the appraisal results. Since the appraisal was well above the sale price, the appraised value was fine.
But if this was an internal review, then how come it was sent to us?
According to Francois (Frank) K. Gregoire, a Realtor and appraiser based in St. Petersburg and a former chairman of the Florida Real Estate Appraisal Board, we likely received the value review because of “the lender’s attempt/intent to comply with the Dodd-Frank Amendments to the Equal Credit Opportunity Act (ECOA).”
It turns out that ECOA requires lenders to automatically provide free copies of all appraisal reviews to borrowers, but that’s not all: The Consumer Financial Protection Bureau says lenders also have to provide “other written valuations promptly after they are completed, regardless of whether credit is extended, denied, incomplete or withdrawn.
“The new rule applies to all written valuations (not just appraisals) that you develop in connection with an application for covered transaction. It covers all first liens on dwellings, including closed-end mortgage loans and open-end loans.” (Note: parentheses theirs)
OK, so now we know why the value review arrived, but as they say on late-night television: “But wait, there’s more.”
It turns out that our little one-page value review was just the tip of the iceberg. After my exchange with our loan officer, she sent over the full report.
How full? The original property appraisal, including photos, ran 27 pages. The value review, with much smaller pictures, was 22 pages long.
‘Big data’ and appraisals
In the same way that buyers and sellers want appraisals to be on target, so do lenders. They’re looking for a realistic opinion of value, preferably a conservative opinion, because the lender’s goal is not just to make the loan, it’s to make loans with as little risk as possible.
The value review is a way to measure appraisal norms. In my case, the lender was looking for an appraised value that was no more than 20 above or 20 below the “estimated value” shown in the appraisal report. Since the estimated value was $200,200, an acceptable appraised value could range anywhere from $160,160 to a max of $240,240. With an appraisal of $232,000, our valuation was within the acceptable range.
Other lenders might look at the same estimated value and have a different range. Maybe they will only tolerate an appraised value that’s 15 percent above or below the estimated value.
Here’s another way to look at the numbers: We have an agreement to buy at $220,000 and the appraisal says the property actually has a fair market value of $232,000. That’s a difference of 5.45 percent. The lender might require that the purchase price and the appraised value must fall within a certain range to avoid red flags, say a difference of no more than 10 percent.