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.
Checking the appraisal, and the appraiser
While a residential appraiser is required to physically inspect the interior of the property — that’s one reason you see so many photos in an appraisal — the value review was done with data and math. Nobody actually stepped inside the home; instead, the review was derived from public data points such as recent real estate sales and property tax records.
While the home’s market price is obviously central to the appraisal process, the value review does not stop there. It rummages through the appraisal looking for every possible deviance and abnormality and then presents a red-flag summary.
For instance, the value review answers such questions as:
Is the appraiser’s license valid as of the appraisal date? Is the legal description right? Does the square-foot measurement match public records? Are the buyer and seller different — in other words, is the transaction an arm’s-length sale? What is the 12-month listing history of the property? Do foreclosure sales equal more than 15 percent of all local transactions? Are photos of comps included in the appraisal?
My particular appraisal raised several issues such as comps that were more than six months old and a signature that could not be electronically detected. Such items are not necessarily “errors,” but since they were flagged lenders can instantly see if the matter is worth a second look.
Alternatively, I was greatly pleased with the value report. It said the home was 54 years old, but because of upgrades and maintenance it had an effective age of 20 years. It also said in so many words that the appraiser had done a very good job valuing the property.
How does the value review know all of this stuff? The data points come from public records such as assessments, building permits and deeds, plus one can imagine that each new appraisal adds more data to the mix. The result is that the system literally becomes more accurate every time it’s used.
That said, in some ways, the reviews lack a certain element of utility.
For instance, my review explains that the property has been the subject of a FEMA alert for severe storms, tornadoes, straight-line winds and flooding. However, it leaves out two massively important pieces of data:
First, the FEMA report is too broad and too general to determine if a particular property will flood. Our home is a few minutes from the beach — alert, alert — but sits on a virtual mountain, 69.33 feet above sea level, according to Draft Logic.
Second, the area was just subjected to one of the worst rainstorms ever recorded in the U.S., a 24-inch downpour in a 24-hour period. If the value review is going to include FEMA warnings, then it should also include a check with insurance companies. In our case, a check would show that there were no claims for the property we’re buying. It’s high, dry and built like a fort.
The value review also omits information that buyers might find useful such as the distance to the nearest nuclear power plants — think of the “exclusion zones” created after meltdowns at Chernobyl and Fukushima Dai-ichi. I checked with online sources and found that our new home is 136 miles from the nearest nuclear power plant, a very comforting distance.
Value reviews are going to become more common, a way to check appraisal accuracy and completeness and also a tool that can teach borrowers much about the property they’re financing. It’s an example of big data being used to protect both consumers and lenders, and for this buyer that’s a very comforting idea.
RealtyTrac contributor Peter G. Miller is a syndicated newspaper columnist, the author of six real estate books all published originally with Harper & Row, and a licensed real estate broker in the state of Maryland. He operates the real estate news and information site, OurBroker.com.