Sara Benson Real Estate Expert and Consumer Advocate Delivers Advice

10 Steps to Relief from Low Appraisals

Posted in Chicago Real Estate by sarabensonexpert on August 17, 2010

Appraisal Form 1004

Since 2007, real estate values across the country have slipped dramatically.  Some experts believe that in addition to tighter lending regulations and the high rate of foreclosures, faulty appraisals have contributed to the erosion of property values.

One Las Vegas broker owner, Tim Kuptz of ReMax Advantage observes, “Appraisers are killing any recovery in sight. The concept of free trade is an illusion as appraisers—not the public—are setting the market.”  Mr. Kuptz’s sentiments are echoed by brokers nationwide.

As mentioned in a previous article, many experts point to faulty appraisals as a direct result of the poorly thought out Home Valuation Code of Conduct (HVCC) which was enacted in May 2009.  Subsequent to the implementation of the HVCC, experienced appraisers left the industry in droves because of the Code’s “sweat shop” treatment of appraisers.

Although virtually all state licensed or certified real estate appraisers are required to follow the government’s Uniform Standards of Professional Appraisal Practice (USPAP)–a minimum set of quality control standards set for the appraisal industry—many appraisals are now being made by unqualified and incompetent appraisers.

Residential properties are particularly vulnerable to faulty appraisals.  In April of 2010 an Illinois appraiser estimated the rental rate on a “fully-loaded” 3-bedroom, 2-bathroom condominium-quality apartment in Chicago’s Ukrainian Village neighborhood at $1,300 per month. The buyer needed an estimated rent of at least $1,400 per month to qualify for the loan. The appraiser refused to consider additional pertinent data and would not change his opinion. The loan was denied by the lender because the appraiser’s projected rental income was not sufficient to cover the borrower’s debt on the building.

The buyer subsequently switched lenders and received a new appraisal, but the second appraisal also came in low on the rental estimate—only $1,400 per month—however, this was just enough for the borrower to qualify.  After closing, and in less than two weeks on the market, the apartment rented for $1,700. The first appraiser was off by a whopping 31 percent, the second, by 21 percent.

It should also be noted the first appraiser was located 110 miles, a two-hour drive away from the property. The second appraiser was closer—40 miles, or a one-hour drive in traffic—from the property.  Because neither appraiser was familiar with the immediate rental market, both appraisals were erroneous.

In addition to paying $500 for the first bad appraisal, the buyer had to pay another $525 for the second appraisal.  Due to the delays, the borrower ultimately was charged increases in the FHA mortgage insurance premiums from 1.75% to 2.25% of the loan amount, and monthly insurance premiums increases from .50 to .55 percent of the mortgage.  The resultant total loan costs to the buyer for the first faulty appraisal was in excess of a whopping $4,250.

A check with the Illinois Department of Professional and Financial Regulation (IDPFR) revealed the first appraiser had been previously disciplined for no less than seven violations of USPAP competency provisions plus violation of ethics rules—yet as a result of the HVCC, was still performing grossly faulty appraisals.

Commercial properties also are vulnerable.  In June 2010, an appraisal on a Chicago commercial building came in nearly 10% less than the negotiated sales price.  Once again, the appraisal was prepared and signed off by not one, but two, incompetent appraisers. The first appraiser was only qualified to perform residential assignments, not commercial. The second appraiser had been previously disciplined and fined $20,000 by the IDPFR for violations of USPAP.

Gross errors and omissions contained in the report included: (1) incorrect property rights, (2) square footage was under estimated by 20%, (3) sales that did not exist were utilized, (4) “AS IS” foreclosure sales compared to new construction with full developer warranties, (5) 100% of the sales utilized were inferior and therefore, did not properly “bracket” the subject, (6) both Income and Cost Approaches were omitted where the Income Approach was extremely relevant, (7) pertinent and more comparable sales were entirely omitted and overlooked.

Given the current appraisal environment, consumers and practitioners need a defense. Most have no idea how to read an appraisal report, much less protest a bad one.  The Uniform Residential Appraisal Report (URAR) Fannie Mae Form 1040—is used to report appraised values to lenders on condominiums, single family homes, and two-to-four-unit small income properties.  A typical URAR is approximately 20 pages. Commercial appraisals, however, are typically prepared in a narrative style format and can easily reach one hundred pages in length.

So what is the best way to protest a bad appraisal?  By following these 10 steps, consumers and real estate agents alike will be able to refute a faulty appraisal.  The goal is a “Reconsideration of Value” that accurately reflects the current market.

Step 1: Check the appraiser’s qualifications. What category of license does s/he have? Is s/he qualified to perform the appraisal? Has s/he ever been disciplined or fined? Is s/he local or is s/he they driving over 100 miles to get to the property?  Ask the appraiser these questions, then double check the answers online in your state’s professional licensing division.

Step 2: Hire an expert local Realtor—not your cousin Vinnie—to conduct market research.  Realtors have the best access to data and can double check the appraiser’s comparable sales for accuracy. They also can provide fresh and pertinent data the appraiser may have overlooked.

Step 3: Examine the appraisal in detail. Is the data the appraiser reported correct?  Data is often reported incorrectly because of the appraiser’s haste or lack of attention to detail.

Step 4:  Take notes. Starting at the beginning of the report or grid, examine each line item. Point out in detail every error and omission. Add any pertinent data omitted from the report.

Step 5: Gather evidence.  Evidence should include photos, floor plans, plat of survey, assessor’s records, MLS copies of most recent comparable sales, pending sales, and sales that didn’t appear in the MLS (such as for-sale-by-owners;)  and most importantly, written statements from local real estate experts, brokers, agents and/or attorneys.

Step 6: Armed with supporting new data, exhibits and professional opinions—and the flaws contained in the appraisal—write a rebuttal report or ask your Realtor to do so. Title the report “Complete Field and Desk Review of Appraisal Dated _____________, 2010 for the Property Commonly known as __________________, City of _____________, County of ____________, State of __________________.”

Step 7: Clearly state both at the beginning and at the conclusion of the rebuttal report that if the flaws and discrepancies are not addressed and immediately corrected, all involved parties will have no recourse but to report the appraiser to the licensing board for further investigation. Attach all evidence gathered (in Step 5) as separate exhibits in the report.  If the report is prepared by the Realtor, have them attach their professional qualifications—and a copy of their state issued license as the final exhibit.

Step 8: Have the rebuttal report professionally bound.

Step 9: Make a list of all involved parties in the transaction. This will typically include the (1) loan officer, (2) loan underwriter, (3) bank president, (4) buyer’s attorney, (5) seller’s attorney, (6) buyer, (7) seller, (8) the appraisal management company, and (9) the appraiser.

Step 10: Copy all parties on the report—absolutely everyone.

If an appraisal is not true to the market, it in fact, runs counter to the very definition of Market Value as defined by USPAP.  It is a false opinion from a government licensed or certified “professional.”  False opinions—when stated in writing—that damage other parties—are actionable in a court of law.

The HVCC that led to such faulty appraisals was born out of a lawsuit and many real estate experts speculate the HVCC may end as a result of one as well.

A veteran real estate broker and appraiser, published author and national speaker on real estate issues, Sara Benson, CRB, ABR, is president of Benson Stanley Realty in Chicago. Email: Telephone: 312-337-4600


2 Responses

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  1. brittaj said, on April 26, 2011 at 10:04 pm

    Great article!

  2. said, on May 17, 2012 at 7:58 pm

    My husband and I are currently waiting to hear back on our rebuttal to a super low ball appraisal. After consulting with two real estate professionals in our area we were confident our home would appraise for at least $450k, the appraiser came back at $335k, yikes! Come to find out this gal has a reputation for being a low-baller and killing deals left and right. How is she still in business?

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