So the Federal Government changed the process for how appraisals are done when you go to get a loan.  The Lender cannot specifically choose the appraiser and cannot have direct contact with the appraiser.  The problem with this is often times the appraisers that end up being used don’t live anywhere near the area, are not familiar with the area, and much less, have no idea about the properties in that area.  How can one generate an accurate opinion of value this way?  Quite simply they can’t. How scary is it?  Very.  If the appraisal comes in inaccurately then it could kill an owners chance of refinancing to save himself from future foreclosure.

Want to have appraisal values that are all over the place, sometimes varying between two appraisers by as much as $50,000, then you keep this current system.  Luckily changes are being made.

Here is an example of how bad it is:

An owner in my building asked me to help them with showing value to the appraiser when they went to refinance their unit.  I agreed to discuss the comps and make sure the appraiser understood the true value of the unit.

To start with the building is one of the best buildings in the neighborhood.  There are no other buildings near it.  It is a stand-alone building, surrounded only by residential buildings, while other buildings in the area are packed side by side in a cluster area of 20 buildings.  This building has secure entry, plenty of street parking for a second car, and is elevated in the area so that it has unobstructed ocean, Waikiki, and Diamond Head views.  It sits at the base of Diamond Head with full-blown Diamond Head views from sitting on your couch.

The other buildings in the neighborhood have no views, many are walk-ups, packed in on top of each other, have no street room for additional cars or for friends who are coming to visit, and don’t have secure entry.

There is a value difference from this building to the rest in the area.

As for the  unit in question, it had been fully remodeled within the last year.  The kitchen had been redesigned to be more functional and up to date, to include all new appliances, island bar-top seating, custom cherry cabinets, granite counter-tops with a full granite back-splash, stainless steel appliances (range upgraded from 24″ to standard 30″ range (part of redesign)).  Interior walls had been smoothed over (was hollow block tile), new Merbau wood floors, Berber carpet, new tiled floors, mirrored closet doors, closet organizing systems, all new light fixtures, ceiling fans, custom baseboards, etc.  This unit is also a corner end unit that has an end window in the master bedroom that you can view Waikiki, ocean views, and sunset views directly while lying in bed.

I felt the value was right at $430K, give or take some depending on how aggressive the appraiser would be. (Most go conservative in this market).  The one drawback is the fact that other building’s comps in the neighborhood are lower.

When I met with the appraiser at the unit he said he was from Ewa Beach, on the other side of the island, and I explained, “that I was the Board President and that I am also a Realtor, thanks for coming out, would it be OK if I explained some of the differences with this building and other buildings in the neighborhood?”  He said, “No. I am not allowed to speak with him about value.” (Many appraisers do not understand the new rules which allow me to speak with him about comps, but not Lenders)  I did not want to anger the appraiser and take a chance of the appraiser sticking it to the owner that had requested my assistance, so I politely obliged and left.

Appraised value = $375K.  Boy, did the owner hit the ceiling when he received his valuation. This means no refinance for the owner.

At the same time the neighbor was refinancing.  Same floor, right next door.  This unit is an interior unit with no end window, so no sunset/Waikiki/ocean views.  You don’t have to be a rocket scientist to know that view = value.  This unit was remodeled 8 years ago with off the shelf Home Depot cabinets, and laminate counter-tops, ceramic tile floors.  It had been totally gutted as well, but 8 years of wear and tear and renters showed. 

The owner asked that I speak with the appraiser as well.  I gladly did and the appraiser was from the area and knew the buildings.  This appraiser was open and wanted my input as she had not seen all of the comparable units, as I had.  I explained the differences.

Appraised value = $410k two weeks after the other units appraisal.

This is absolutely amazing.  The first unit is a super unit by probably $30K and the appraisal was $35K less than the neighbor’s.  These are very common situations that occur everyday right now.  I go out two to three times a week to preview properties.  Appraisers do not so they don’t often have a good understanding of the nuances of different buildings and units.  They typically determine values by comparing the information that is on the MLS profile sheet of comparable properties.  This is the same sheet that you as a buyer look at when looking at properties online.  How many times have you read an MLS profile sheet, gotten excited about a property, and when you go to preview the propertty it is a huge disappointment as the description and information about the unit was misleading along with the pictures? Remember that huge ocean view in the  photos that was only visible by leaning over the railing and around the side of the building? 

So why do I bring this up?  During the housing melt-down policies and procedures were changed to make sure the melt-down doesn’t happen again.  The appraisal process was one of those procedures.  It is very flawed, and the National Association of Realtors has addressed it with the Federal Government.  The following is from the NAR President:

I am writing to you with an important update on NAR’s efforts to address ongoing problems with recent changes to appraisal rules.  As a direct result of my recent meetings with the New York Attorney General’s office, the Federal Housing Finance Agency, and Fannie Mae, both Freddie Mac and Fannie Mae this week issued new guidance to all lenders on the Home Valuation Code of Conduct. The alert clarifies two very important points that we raised in our meetings with officials.  First, it states that lenders should use appraisers who have clear experience in the geographic area.  Second, it clarifies that appraisers are not prohibited from talking to real estate agents.

HVCC Notice

In addition to this guidance, both Fannie Mae and Freddie Mac recently posted extensive Qs and As on their respective web sites, based on information that NAR provided when the code was first adopted in May.  

Fannie Mae

Freddie Mac

We have posted links to all of this information at www.Realtor.org/HVCC.

We aren’t fully there in correcting these problems but we are getting there.  Do you have a nightmare appraisal story? How about a field review story?  That is a topic for another time.