In the past, loan officers and often buyers or real estate agents selected the appraiser that would provide the appraisal for home loans. Today, under the Home Valuation Code of Conduct (HVCC) adopted by Fannie Mae and Freddie Mac, the way appraisers are selected has changed. While HVCC only applies to conventional loans, most lenders are using this process for all of their loans including FHA.
The intent of the HVCC was to provide appraiser independence to promote more realistic appraised values. The results, however, have not been what were expected. Potential purchasers and borrowers have had to pay higher appraisal fees, wait longer to get the appraisal completed and often had less competent appraisers doing the appraisal.
So as professionals what can we do to avoid "Appraisal Shock"?
1. Prepare the client by explaining the market has slowed, that overall values have declined, that lenders are tougher on appraisals and that there could be a problem.
2. When listing a home or advising a client about price be sure the living area, which is often the basis of the selling price, is correct. Differences in the living area listed and the living area calculated by the appraiser is often the problem when an appraisal does not support the contract price.
3. When establishing either an asking or selling price be sure to educate the client about what homes are really comparable. Explain that differences in lot size, age, condition, quality, room count and all other major amenities affect the value. Prepare a CMA showing past sales and current listings or suggest an appraisal. Using average price/square foot or even the price/square foot of selected homes can often under price or over price a home.
4. When offering or asking for seller concessions in a contract, understand that is the current market and under stricter appraisal review standards it is almost impossible to support a value that is above the list or asking price.
The next segment of this series will discuss how choosing the right lender get improve your chances of getting a better appraiser and appraisal