By: Brian Forbes
As printed in the April 2012 issue of The Reverse Review.
You know the situation: You have your application ready to go to the lender. The only thing you need is the appraisal report and your file can be submitted. The appraisal report comes back, you go through it and the value isn’t even close to what you expected.
Now you have to break the bad news to your borrowers. Plus, you’re sure that the appraiser didn’t give this evaluation a fair shake. After all, your borrowers have done so many improvements to their property, and you even had a real estate agent run listings and comps and found the value to be much higher. Since you can’t contact the appraiser directly to question him about his valuation, you contact the AMC and tell them that you are questioning the value and want to appeal the appraisal. How does an appeal request actually work? Can an appraiser change the value of an appraisal report? How can you improve your chances of getting the appraiser to seriously consider a modification?
Generally speaking, the appeal process in the appraisal business is not intended for changing value simply because the borrower or broker may be dissatisfied with the outcome. The appeal process is intended to address actual errors in the reporting of data or in the selection of suitable comparables in the report, resulting in an inaccurate value opinion or major underwriting conditions. But there are occasions when an appraiser doesn’t have access to information regarding one or more usable comparables and therefore wasn’t able to include them in the report. If these comparables would make a difference, then the appeal process allows the client the opportunity to get this vital information to the appraiser for review and perhaps even reconsideration.
In order to appeal an appraisal report, you must complete an appeal request form that can be provided by your AMC and include any comparable data that might call the appraisal into question. Once the form is received by the AMC’s appeal department, the appraiser is forwarded the form and supporting documentation with a request from the AMC to address the issues outlined in the appeal and respond. Most appraisers will respond to the appeal with notes in an addendum to the original report and resubmit.
An appraiser can change the value in an appraisal under certain circumstances, but it isn’t done very often. The fact is that most appraisers do a competent job the first time around, though you may not believe it at first. You have to remember that the appraiser may go through as many as dozens of comps before they complete an inspection of the property. In most cases, when you appeal and send additional comps for consideration, the appraiser has already reviewed them but decided they were not appropriate at the time. Appraisers will use comparables that give an “apples to apples” comparison of the subject property and relate to current market conditions. Comps they use tend to be the closest in distance to the subject property, the closest in room count and gross living area, and the most recent in terms of dates sold.
Because the appraisal process continues to become increasingly regulated, there are changes that drastically affect appraisers’ decisions in terms of what comparables they use in their reports, as well as the adjustment formulas and percentages they will make on comparables. For example, if there are a large number of foreclosures or REOs within a subject’s market area, the appraiser must use them, even if there may be comps of higher value located that are farther away in distance or a little older (please see “Ask the Appraiser” in The Reverse Review, March 2012, page 27).
In most appraisal complaints, a borrower claims that the reports don’t take into consideration all of the improvements made on their home, and that the assessed value is higher than the appraisal report. Borrowers and brokers need to understand that an appraisal for lending purposes is not based on the cost approach in the same way that appraisals for assessment or insurance purposes may be.
The sole reason that a lender requires a market approach appraisal is to give him an idea of what your borrower’s property could reasonably sell for if it had to be taken back and sold on the market today. The appraisal is a snapshot of what your borrower’s house is worth in relation and response to the surrounding market.
There are several things you can do to increase your chances for a successful outcome of an appraisal appeal. The most important thing is to complete thorough research from the very beginning, even before an appraiser is assigned. If you have access to MLS data, you can easily use the database to find information on recent comps. If you don’t have this resource, you may use sites on the Web, such as Zillow or Realtor.com, and focus on the recent sales information. When using these sites, be sure to ignore any indication of actual value. Remember to look at the big picture when you do your research. When you select comps, don’t just select ones that obviously fit your goal.
Also, be sure to leave your emotions out of any communication. More often than not, appeal requests will be received with harsh language, name calling and in general, critical comments about the appraiser and how he performed the inspection or put together his report. The old adage “You can catch more flies with honey than with vinegar” certainly applies here. A well-spoken, courteous request for review will motivate your appraiser to take a compassionate second look at the report.
By being professional in your appeal request and researching recent sales early on, you may be in a better position to set reasonable expectations for your borrower and for yourself. If you prepare properly, you will have comps ready to submit for consideration in the event that the appraisal is much lower than you expected.
Most appraisers will give careful and thoughtful consideration to additional comps and other evidence of market valuation during the appeal process. In general, the appraiser will do his absolute best to turn out a quality product the first time around and is often aware that there may be market information that he has missed.