It’s easier to work with an appraiser to make sure all the relevant information about a house and its market are included in a valuation than to challenge an appraisal after the fact.

But agents and brokers faced with deal-breaking low appraisals can mount a successful challenge — if they understand the valuation process and know what information to bring to the table.

That was the message for real estate professionals at a panel discussion, “The Low Appraisal: Recourses and Remedies,” at the National Association of Realtors convention in New Orleans.

“Anytime values do not meet expectations, someone’s going to be unhappy,” said Melanie McLane, a Pennsylvania-based Realtor, licensed appraiser and real estate instructor. “That’s sort of the nature of the real estate business — anytime clients’ expectations are not met, they’re unhappy.”

But if you’re going to make an appeal, McLane said, “You can’t just say, ‘I don’t like what you did.’ You’ve got to have some market data to support it.”

Only about 1 percent of home sales involve revaluations, said Debra Nikodym, a senior vice president at Rels Valuation in Bloomington, Minn. Nikodym said statistics from her own firm and consultations with her colleagues suggest that 20 percent of disputed appraisals in purchase transactions result in increased valuations. The average increase is 5.2 percent, and the increased valuations meet the sales price 76 percent of the time, Nikodym said.

Although appraisers are licensed according to a set of national standards and use increasingly sophisticated techniques, valuations can still be thrown off by oddball properties, rapidly changing or “microcosm” markets, and the omission of key data — whether accidental or intentional.

Nikodym, whose firm conducts appraisals and also acts as a liaison between lenders and appraisers to reconcile disagreements, recently saw a case where two appraisers valued the same property at $3.6 million and $2.5 million.

“A loan officer called and asked if the appraiser(s) reviewed and inspected the same house,” Nikodym said.

With some nontraditional types of housing — such as earth berm, log, or geodesic dome structures — it can be hard to find recent sales of comparable properties to use as a benchmark.

A property that has unusual features or is in a sparsely populated area may also have “thin comps,” meaning there are few recent sales of similar homes to compare it too.

“You know its going to be a bad day in appraising when you’re driving up the road and you’re thinking, ‘Oh my God, that can’t be the subject property,’ and it is,” McLane said. “And of course the owner says, ‘I built it myself.’ And you say, ‘Thank God you didn’t pay someone to do this for you.’ We’ve all seen that house.”

Sales that are too distant from the property being appraised, or homes that sold long ago, aren’t necessarily comparable. Appraisers look for “comps” that have similar gross living area, or GLA, and lot size to the subject home. A house that’s been remodeled isn’t a good comp for a house that has not, and a home that’s 20 years old shouldn’t be compared to one that’s newly constructed, panelists said.

Employee relocations or eminent domain proceedings often involve two or more appraisals, and the industry standard is for them to be within 10 percent of each other. The Employee Relocation Council requires two appraisals. If they are not within 5 percent of each other, a third appraisal is required, McLane said.

McLane said she loves doing ERC appraisal work because it is so exacting, requiring precise measurements and lots of interior photos. Having photos “spares you from having comments on the report like, ‘You cannot believe how ugly the decorating is,’ ” McLane said. “You just send them a picture and they understand how ugly the decorating is. The catch phrase that has always worked for me is, ‘The home is decorated to the owner’s personal taste.’ “

Agents should provide as much market data to an appraiser as they can at the time of inspection, McLane said. If there have been multiple offers on a property, with some over asking price, that’s important information for an appraiser to have. If, as a broker, you’re privy to pending sales information on similar homes, ask the principals if they will permit you to share it with the appraiser.

McLane will often call agents when checking comps to find out the circumstances of the sale. “Agents who are good at their jobs are such a wonderful source” of information, she said.

The value of concessions granted by the seller, such as an offer to pay closing costs, must be taken into determining the “cash equivalent” value of the house in an appraisal.

If the buyer and seller have both been represented by agents, often the best indicator of a property’s value is the sales agreement, said Joseph Traynor, of the Indianapolis, Ind.-based appraisal firm Traynor & Associates Inc.

“If both of the Realtors acted in their clients’ best interests then, most of the time, that (purchase agreement) is going to be the definition of market value,” Traynor said. “I hear complaints — people say, ‘All you guys do is justify value.’ We estimate value, but the purchase agreement is a big part of it. If those conditions of market value have been met, that probably is the value of the property at the time of sale.”

For that to be true, it’s important for a listing to have sufficient exposure to the market. Traynor said that during the boom years in hot markets such as Florida, homes would change hands as soon as they were listed, fueling the “extraordinary” price appreciation in some areas.

The appeal

Borrowers or sellers may appeal a low valuation because it makes a sale difficult or impossible to finance. Lenders may change the terms of a loan or question an appraisal if it seems too high, to ensure they have sufficient collateral if a loan defaults. Agents themselves may appeal an appraisal if it’s “death to the deal,” McLane said.

Once an appraiser puts their name on the line and sends an appraisal out the door, “it’s very hard for us to change that value, and it’s not because we’re stubborn or anything like that,” Traynor said. “It’s because if we just change our values arbitrarily on a constant basis, then our credibility pretty much goes out the window. When I sign my name to that number, I say I’ve done my work, I’ve done my analysis, and here’s what I think the value is.”

A successful appeal will provide information that was not included in the original appraisal, including additional comparable sales. Often when Rels Valuation cannot support an appraisal, the house may be worth the value claimed, but the facts in the report don’t support it, Nikodym.

The comps used in an appeal must be as good or better than the ones in the original sale in terms of location, compatibility and freshness.

McLane said she was once called in to review an appraisal where “the owner had an opinion of value, and managed to get the appraiser to drink the Kool-Aid.” The appraiser, McLane said, “went two counties away for comps” when there were “perfectly viable comps within the subdivision where the property was located. But if you went two counties away, you were able to bring the price up by about $100,000.”

“Make sure the comps are appropriate,” McLane advised. “Don’t embarrass yourself like that.”

If a property is in a very rural area, and the original appraiser had to go 10 miles away for comps, “then maybe your comps will have to be 10 miles” away, Nikodym added. “But if the appraiser has used sales that are all within two to three blocks, and you are going two miles away (for your appeal), what you are telling me is what this property is going to sell for two miles away from that neighborhood.”

If you want to use comps more current than appraisal being appealed, a new inspection will be required, Nikodym said.

For mortgages backed by the Veterans Administration, a lender can process the loan if an appraisal is appealed and revalued at within 5 percent of the original price. Revaluations between 5 percent and 10 percent must be forwarded to the original appraiser, and the VA must approve appeals of more than 10 percent.

An appeal of a valuation involving a Federal Housing Administration loan will require three new comparable properties.

Fannie Mae wants comps that are less than six months old, within one mile of the subject, and which require a net adjustment of less than 15 percent, Traynor said.

Spotting incompetence and fraud

Although differences over a property’s valuation can sometimes be attributed to different interpretations of the same facts, there are times when an appraisal is off the mark because of incompetence or fraud.

As a member of the Indiana Real Estate License Certification Board, Traynor reviews complaints against appraisers who have, whether through incompetence or fraud, done questionable work.

“Most of the time it starts with the neighborhood,” Traynor said. “We’ll find that the appraisers who start to get into trouble will have jumped across township lines, they’ll have jumped across major highways, they’ll have gone from subdivision A to subdivision B, which is a much better subdivision. Typically if the values are inflated, that’s where it starts.”

The failure to list a seller’s concessions in determining a property’s cash equivalent value can also land an appraiser before Traynor’s licensing board. While those and other mistake can be deliberate or unintentional. Traynor said fraud cases often involve an omission of recent sales of a property subject to appraisal, Traynor said.

“It’s not uncommon at all for us to see a house that’s been appraised for $70,000 or $80,000, and under part of the appraisal where it says ‘prior sales’ it says ‘not applicable’ or nothing,” Traynor said. “Yet when we go to the courthouse and pull the records, we find the same house sold for $20,000, and usually it’s within a week or two of the appraisal date we’re looking at.”

Without training, it’s difficult to know whether an appraisal is good or bad, Traynor said. While prosecutors often assume that the dollar value of an appraisal is the best indicator of fraud, Traynor said it’s more important to look at the process used in determining that value.

“The difference between a good and bad appraisal has very little to do with value, believe it or not,” he said.

Appraisers are licensed by states, using national standards developed by The Appraisal Foundation, where Traynor serves as a trustee. If an appraiser has not followed the Uniform Standards of Professional Appraisal Practice, or USPAP, “I guarantee they’re going to have some problem with their value as a result,” Traynor said. “If they fraudulently hit a value, there is no way they complied with USPAP.”

If you suspect an appraiser of incompetence or fraud, you should file a report with your local Realtor’s board, panelists said.

Just because an appraiser is licensed does not mean he or she is competent, Nikodym said. When a licensed appraiser agrees to take a job, USPAP requires that they have experience appraising that type of property — whether it is a single- or multifamily home or commercial property — and knowledge of the local market.

Appraisers should know the geographic area, current state of the market, price appreciation trends, the growth rate, employment, environmental issues, and quality of schools, Nikodym said.

While it’s best to use an appraiser who’s knowledgeable about the type of property to be valued and the local market, don’t expect to be able to pick your appraiser. Many lenders now assign work at random from a pool of approved appraisers, Nikodym said, to ensure that their work is not biased.

An agent who often handles sales of older homes complained to the panel that appraisers sometimes don’t take into account their historic value and improvements made by sellers when making adjustments to comparable properties.

Traynor said it’s important to find an appraiser who is knowledgeable about a city’s historic neighborhoods. Some areas will have more homes that have been renovated than others, which can affect property values for the entire area.

McLane said the key to adjustments is not necessarily how much money the seller put into improvements, but what they are worth to a buyer. An in-ground swimming pool may cost $25,000 to install, but will contribute less than that to a home’s value in the northeast, where a pool can’t be used year-round, she said.

The dollar value of a guest house and horse facilities in an area where those are not typical amenities may not be fully reflected in the sales price, Nikodym said. If a buyer is not looking for such features, they can actually reduce the value of the property.

With historic properties, there’s always the danger that buyers will take a dim view of improvements that don’t preserve the home’s character.

Agents should insist that appraisers list the specifics of any improvements, Nikodym said. Instead of describing a kitchen remodel as “total kitchen,” list the specifics of the project, including any appliances, she said.

Houston-based Realtor Ann Knoche told the panel that she thinks some appraisers are relying too much on the pictures of homes posted on the Internet in MLS listings.

“I’m going to tell you we do a pretty good job making an ugly house look good,” Knoche said. But, she said, “I’m not getting the phone calls from the appraisers anymore, because I think they are using the Internet too much.”

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