Cover story: Low appraisal blocks loan; what to do?

When Leslie Hutchison, a Realtor with Fall Properties in Falls Church, listed a single-family home in Falls Church that included a parklike lot on a cul-de-sac, the land assessment was $80,000 higher than for three comparable homes because of the property’s oversized lot.

The home sold with a full-price offer of $635,000 the day after it was listed. When the appraiser for the sale arrived from Fredericksburg, Va., he valued the home at $600,000 and refused to add value for the additional land and the property’s location. He told Ms. Hutchison that he does not adjust for land unless the difference is more than an acre.

“This is an example of a buyer being caught short by an appraiser from an area who does not know our current local market,” Ms. Hutchison said. “I can understand that in Fredericksburg a land adjustment would be made only on an acre or more, but certainly not inside the Beltway. I’ve seen appraisers come from Delaware, Pennsylvania and remote areas of Virginia and even from Florida who do not know our market.”

Realtors and lenders have been complaining of nonlocal appraisers and other issues with appraisals since Fannie Mae and Freddie Mac introduced the Home Valuation Code of Conduct (HVCC) rules in May 2009 in order to keep appraisals from being inflated.

“There have been huge servicing issues on appraisals for a couple of years now,” said John Heithaus, chief marketing officer at the local real estate technology developer and multiple-listing service Metropolitan Regional Information Systems (MRIS).

“One big issue is that out-of-town appraisers have been allowed to work in the area,” he said. “You have to live and breathe this market to understand it. Real estate has always been local, but now it is hyperlocal, with differences within the area between Reston and outlying areas or Rockville and Baltimore.”

Mr. Heithaus said another issue is that the rules have changed for appraisers, including restrictions on which comparable homes can be used and the range of values that can be adjusted.

Carlton Mitchell, an appraiser and principal of the Carlton Group in Silver Spring, said appraisers can easily obtain a license to work in other states, and many of them have come into the D.C. area to work because this market is more active than some other real estate markets.

“Not only are some of these appraisers lacking in local knowledge, but many of them are less experienced and are cutting corners when they make an appraisal,” Mr. Mitchell said. “Sometimes I am hired to do an appraisal review and I am appalled at the lack of logic in defining which comps to use.

“For instance, in a post-World War II neighborhood in Montgomery County, you’ll find homes in four or five different styles, some with additions and some without them,” he said. “The appraisers sometimes won’t define whether they are using homes in the same style and looking only at the homes with additions versus those without them.”

Another issue for appraisers is the downward pressure on prices from short sales and foreclosures.

“An appraiser has to consider all market activity, but the question is whether a foreclosure is an outlier or a valid indication of the local market,” Mr. Heithaus said. “The National Association of Realtors estimates that about 40 percent of all listings nationally are foreclosures, but in our market, the average is about 20 or 25 percent. Some pockets have a much higher number of foreclosures, and some have a lower number.”

The appraisal is important because a lender cannot lend a buyer more than the home’s appraised value, even if the contract price is higher. That leaves the buyer and the seller with several options.

“If the appraisal comes in below the contract price, the buyer can void the contract, the seller can reduce the price, the buyer can bring cash to make up the difference between the loan amount and the contract price, or the buyer and seller will have to meet somewhere in the middle and renegotiate the contract,” Ms. Hutchison said.

In the case of her Falls Church listing at $635,000, the buyer opted to cancel the loan and apply for a loan with a new lender. The buyer then had to pay for another appraisal made by an appraiser chosen by the new lender.

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