The purpose of an appraisal is to protect the investment of the lender’s investors. Actually the lender bundles the loans and sells them on the secondary money market and often they are resold which is why the buyer must purchase an Alta Lender’s policy which assures that the lender is always in first lien holder position. This is why you may purchase a property and the check for the loan is made out to xyz company; eight years later, you receive notice it is to be made out to 123 company and then even later, you write your check to abc company. The mortgage notes have been sold. But I digress.
If you have a loan on the property, usually you must have an appraisal. The appraisal is nothing more than an opinion of value. Hopefully that is what your Realtor® has provided you; an opinion of value substantiated by homes of similar age, quality, size and amenities within a reasonable range. The Realtor® is very aware of the fact the property has to appraise. It does no one any good to put a high price on a property, receive a contract for that high price, and then have the property not appraise.
So what happens then? One of three things. Let’s say the property is priced at $275,000. The appraisal comes in at $260,000. The buyer is putting 10% down or $27,500 and carrying a loan for $247,500. Scenario One: The buyer can come in with the additional $15,000, the difference between the $275,000 and the $260,000 and put $42,500 down. But why would a buyer pay $15,000 more for a property than it is worth?
Scenario Two: The seller can lower the price to $260,000 on the basis that the property, according to the appraiser, is not worth $275,000.
Or Scenario Three: The seller and the buyer can meet someplace in the middle and each give up something, the seller can come down $7500 and the buyer can put down an additional $7500. It’s a re negotiation.
Or the seller’s agent can “fight the appraisal” but will generally loose, especially if it is a VA appraisal.
I had a property which sold immediately for $162,000 with a VA loan. The appraisal came in at $156,000. The seller went down $2,000, the buyer came up $2,000 but there was no meeting of the minds. We cancelled the contract, and put the property back on the market but indicated we would not accept VA financing. The VA appraisal stays with the property for six months and I did not want to constrain my seller to the $156,000 appraisal.
Within 48 hour, I had another contract, also for $162,000 but with a conventional loan. The appraisal was done within a week and a half of the first appraisal, and came in at, you guessed it, $162,000. And ironically, that same first buyer came back with another back up offer but of course the second buyer closed on the property within three weeks.
The lesson to buyers is simple. If you have a property you want, be prepared if the appraisal comes in low. Your agent should give you comps to support the price you are offering. Your agent may also know how other agents price: some price high, some price on target, and some give you about 3% to negotiate – often to account for the 3% concessions buyers often request.
The lesson to sellers is equally as simple. Your agent should price the property with supporting comps in a realistic range based on properties in the neighborhood of like kind which have sold. These are the same comps the appraiser will be using. Don’t fall for the old argument, price high, you can always come down. Generally that is a recipe for not selling your home, or a series of price reductions which will net you less than the price your agent originally suggested. Remember, the property has to appraise!

   Tucson real estate sales, although improving, now is also adversely impacted by the Home Valuation Code of Conduct (HVCC), a de facto regulation promulgated by Andrew Cuomo, Attorney General of the state of New York in conjunction with Freddie Mac and Fannie Mae.  Loans which are not Fannie Mae or Freddie Mac loans are not governed by the HVCC.

   The intent originally was to insure appraisals are done in accordance with independent safeguards, that appraisers were not coerced to hit a value specified by the lender or loan officer.  The HVCC lays out ten areas of concern Cuomo had regarding lenders and appraisers.  But rather than independent appraisers, Appraisal Management Companies (AMC) have surfaced and are a profit center for large banks which underwrite many of the Fannie Mae and Freddie Mac loans.  Appraisals must be ordered and “The Code requires the lender or any third party specifically authorized by the lender to select, retain, and provide for all compensation to the appraiser”1

   As a result, many independent appraisers and small appraisal companies can not longer afford to remain in business unless they join one of the AMC pools.   Lenders, erring on the side of caution, may no longer use these small independent companies because they are not an AMC. 

   Additionally, the cost of an appraisal has escalated.  There is another level of management involved with the AMC.   Appraisals used to cost between $325 and $375; now they are $400 plus.  Ironically, the appraiser, the person with the expertise, is now paid at least $100 less than pre-AMC.   The differential goes to the AMC.

    Appraisers new to the market join the pools to beef their resume and gain experience.   Lenders request the appraisal from an AMC approved by the entitity subsequently underwriting the loan.   Appraisals may be done by people who do not know the area,

      Appraisers have guidelines and take some of  their comps from within a mile of the  property.  Tucson properties have been appraised by out of area appraisers and these appraisals may come in unusually low.  In a one mile segment, one 1/2 mile area may have custom built homes valued at $800,000 whereas the other 1/2 mile segment may have tract homes valued at $250,000.   Each property may be 3,000 square feet but looking at paper, the appraiser does not know the difference.  This skewing would occur  with automated valuation models which are not prohibited by the code. (http://en.wikipedia.org/wiki/Automated_Valuation_Model)

         As a Realtor representing my client, I often spoke with the appraiser and provided my comps with other pertinent  information.   If I represented a property and knew the comps showed two distressed properties, I made sure the appraiser understood.   Perhaps I knew a property had been flooded or there had been a fire, this information materially impacts the value of that home…it should not materially impact the value of the home I am trying to sell.   Understanding the area or the history of the area and properties is part of the knowledge base used to make good decisions.  

 1- Fannie Mae guidelines FM 0109 page 2 2009

Resources:

Home Valuation Code of Conduct 

http://www.freddiemac.com/singlefamily/pdf/122308_valuationcodeofconduct.pdf 

http://www.appraisalinstitute.org/ano/current.aspx?volume=10&numbr=11/12

https://www.efanniemae.com/sf/guides/ssg/relatedsellinginfo/appcode/pdf/appraisalguidance.pdf

http://www.freddiemac.com/singlefamily/hvcc_faq.html

http://www.fhfa.gov/webfiles/277/HVCC122308.pdf

http://narblog1.realtors.org/mvtype/president/2009/06/all_is_not_quiet_on_the_midwes.html

  http://narblog1.realtors.org/mvtype/appraisalinsight/cuomo_agreement/

http://appraiseractive.blogspot.com/2009/07/hvcc-update-nar-president-charles.html