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


Consumers May Soon See Relief From Faulty Appraisals

Posted in Real Estate by sarabensonexpert on August 10, 2010

Appraised $500,000 Low

Foreclosures and tight money have undermined the national housing recovery for years. But in May 2009, a new Home Valuation Code of Conduct (HVCC) began a silent but powerful wave of faulty and inaccurately low appraisals which continue to flood the real estate market in 2010.

Not a law and not approved by Congress, the HVCC is a “settlement agreement” between New York’s Attorney General Andrew Cuomo’s office and the nation’s largest mortgage finance companies, Fannie Mae and Freddie Mac.

Simply defined, the HVCC is a set of “guidelines” for banks that sell their mortgages to the government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac.  Because the GSE giants now purchase only those loans that comply with the HVCC, the nation’s entire real estate market has been negatively influenced.

The HVCC supposedly was designed to protect consumers: it prevents banks from using their “preferred appraisers” and requires them to use, instead, generic “appraisal management companies.”   But the HVCC was poorly conceived. Its deleterious effects have caused (1) many qualified and experienced appraisers to leave the business, (2) appraisals to be performed by out-of area and unqualified appraisers, and (3) increased buyer’s closing costs.  The huge negative impact on the national real estate industry has served to encourage erosion of real estate values with severe consequences to both buyers and sellers.

A recent nationwide study of more than 100 real estate agents and brokers has charged that under the HVCC guidelines, the appraisal business has hit a new low for lack of quality, accuracy and professionalism.

Tim Kuptz, Broker Owner of ReMax Advantage in Las Vegas observes, “Las Vegas has had stable prices for twelve months now. The stability has been documented in trade publications and MLS statistics, and yet we are getting lowball values from appraisers.”  In 12 straight deals, Mr. Kuptz’s partner recently experienced appraised values coming in below contract prices at an average of 8.1% lower.

Kuptz noted with less than three month’s supply in inventory and despite multiple offers, “Appraisers are killing any real estate recovery in sight.”

What prompted the dramatic change in the appraisal industry? A lawsuit against a lender claiming “fraudulent, deceptive and illegal business practices” by allegedly permitting real estate appraisers to be influenced to increase real estate property values in order to inflate home prices.

Dave Biggers, Chairman of appraisal software giant, a la mode, inc., explains the HVCC originated when New York Attorney General Cuomo filed suit against the lender, Washington Mutual and the appraisal management company, eAppraiseIT. The lawsuit eventually escalated into an investigation of Fannie and Freddie directly.

According to Biggers, in order to stop the investigation into their practices, the GSE signed a settlement agreement with Attorney General Cuomo, agreeing to create new rules which would be embodied in the HVCC. At the last minute, the Office of Federal Housing Enterprise Oversight joined in and signed the settlement, which granted it federal rule status.  The HVCC became status quo for real estate appraisers and lenders.

The primary aim of the HVCC was a good one—to safeguard consumers against inflated home appraisals. A secondary goal was to insulate appraisers from pressure to hit a predetermined number by eliminating the relationships between mortgage brokers or real estate agents and appraisers. In order to achieve that goal, a third party middleman was introduced—a strong-arm “appraisal management company” (AMC) that demanded all appraisers conducting business with Fannie or Freddie hand over their client lists—and take a cut in pay.

While attempting to eliminate unethical practices, the HVCC caused a virtual maelstrom in the real estate industry.  In response to the implementation of the HVCC, one expert veteran appraiser states, “All of the experienced appraisers I know left the profession when they were told they had to surrender their client base of 20 years. Rather than take a 50% pay cut, intelligent appraisers have chosen to leave the profession to the newly licensed appraisers.”

Even if the HVCC were repealed tomorrow, the damage has been done.  Appraisers with 20 or more years of experience will never reenter the business. Once again the borrower will pay the price. “First the borrower is forced to pay 50% more for appraisals. Now they are guaranteed the worst quality appraisals on earth.”

Another New York 45-year old appraiser was so enraged by the HVCC he was arrested last December for threatening to kill Attorney General Cuomo.  His initial bond was set at $500 million.

Illogically, the HVCC mandates run counter to the absolute necessity of appraisers to interact with real estate agents. Appraisers must rely on agents and brokers for accurate verification of the very data they use to complete their appraisal reports.  The HVCC’s “do not touch” hands-off status of the newly “independent” appraiser virtually ensured failure.  One appraiser recently told a Chicago real estate broker, “You can’t talk to me. Do not call me.”

Many educated, well-counseled and motivated buyers and sellers have suddenly found their long awaited appraisal now comes in low—often much lower than the negotiated sales price.

Frequently, healthy owner-occupied homes with full warranties are compared—“comped”—to stripped naked, vacant and abandoned “as is” foreclosures or other distressed sales. Frustrated consumers have little recourse when the loan is denied.

Hope for relief from the HVCC debacle is on the horizon. On July 21, 2010, President Barack Obama signed the Dodd-Frank Act. The purpose of the new legislation is to reform the financial markets. Under the Dodd-Frank Act, the HVCC is officially set for elimination in 90 days. In its stead a new set of “appraisal independence standards” will be created by The Federal Housing Finance Agency.

The standards are expected to be written before September 30, 2010.  The good news is nothing in the standards will prohibit a person with an interest in the transaction from asking the appraiser to consider additional information, provide further detail or correct errors in the appraisal.  The bad news is the outcome is uncertain.

Part Two of this article will feature a step-by-step approach on how to get relief from a low appraisal.

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

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