How can the value of a home go up when a home appraisal uses trailing information to substantiate that value? This becomes even more of an issue when the last 6 to 12 months of home sales reflect lower prices. Hmmm…
In past years new home construction was the tide that raised all boats. When there is a new home subdivision in a community the seller/builder sets a price for the homes on the available lots. Buyers visit the site and order homes. Many times the buyers add extras and options to the homes. This allows the appraisal values to climb. This elevates existing home values because the appraisers have comps (Similar homes that have sold for more money).
The issue that exists in Berks County is the lack of available building lots and approved subdivisions. The economics of the last 6 years put many builders out of business and Banks were not loaning money for land development. No new home construction…No rising tide.
The other appraisal dilemma was created by the Fed. Why is that not surprising. After the free-for-all home market, when 2 bedroom row homes were appraising for $120,000, the Fed overreacted and created specific rules on how the lenders communicated with Appraisers. They decided that there should be NO communication.
Now what you have is a situation where the Lenders use an Appraisal Management Company (AMC) to locate appraisers to do the appraisal. The AMC sends out an email to many appraisers. The first to respond gets the job. These appraisers take the business at around $250.00 per job. This is about half the amount most appraisers get to do a conventional home appraisal.
What takes place next is obvious. The well qualified local appraisers pass on these because they will not work for half pay. These well qualified appraisers are able to substantiate differences in value, condition of market, quality of construction, Etc…They are busier because they dominantly do work for local lenders who do not use the AMC’s. Local lenders tend to pay more for the work and draw from a pool of 5 or 6 local appraisers that they deal with on a regular basis. This creates a trust of opinion between the appraiser and the lenders underwriters.
Larger Home Lending Companies tend to lean towards using the AMC’s. Try appealing a low home appraisal to an appraiser who just got paid half to do their job. Will they put any extra work into the appraisal? They may not attempt to, or do not know how to support value adjustments and make a case with the Lenders Underwriter. If this is the case you (buyer and/or seller) are left to deal with the issue of a home that did not appraise.
My advice to home buyers I represent is to ask the home lender they choose how the appraisal is ordered. Also ask for a copy of it when completed. Even though the buyer pays for the appraisal, it is the property of the lender. Read the small print.
My advice to buyers and sellers I represent is to include an Appraisal Contingency to all agreements of sale if a mortgage is needed to purchase the home. This sets a time limit to get the appraisal ordered and completed. If there are issues with the appraisal it can be displayed to all parties contractually and early in the transaction. It is not nice to have the home not appraise. It is even worse in the 11th hour of a deal.
Appraising a home is far from an exact science. It is simply an educated opinion of value. The appraisal is a critical part of most transactions. The more educated the appraiser the better the opinion.
For more on this subject and how a home’s square footage affects an appraisal visit my web site at and read the article The Berks County Home Square Footage Mystery.
Special thanks go out to Steve Jamison of Jamison Appraisal Services.
Jeffrey C. Hogue