Is the Price Right?
Whether buying, selling, or refinancing, you need a smart appraiser who can accurately judge the value of a home. Here's how to make sure you get a fair deal.
The south-facing penthouse condo with views of Newbury Street went under agreement in February for $457,000, just after its first showing. The 663-square-foot unit in a Back Bay brownstone charmed with its renovated kitchen, marble bath, hardwood floors, decorative fireplace, and all-in-one washer-dryer. Large windows lining two walls made the condo appear spacious to would-be buyers and created enviable panoramas, especially when city lights illuminated the shopping district below.
But the question stood: Would an appraiser be as charmed as the buyer and agree the condo was worth $457,000, ensuring that the buyer's mortgage would be approved?
When Ed Elkins, an appraiser based in Sudbury who specializes in downtown Boston properties, visited the condo last month, it was an overcast day. A fresh coat of slush covered the front steps as he snapped pictures of the building's exterior. As soon as Elkins stepped inside, he surveyed the entry hall with its prominent staircase and stated the obvious: "No elevator." Walking up four flights of stairs, Elkins weighed how much the lack of an elevator subtracted from the overall property value. He figured 2.5 to 5 percent.
Elkins entered the unit and asked listing agent Betsy Herald about the monthly condo fee, roof condition, parking situation, and number of units in the building. He took more pictures, measured rooms, checked various details against information in the master deed, and drew a rough schematic of the property. "There's much more research, much more verification today," says Elkins. "We're looking at everything. Lenders are scrutinizing every appraisal. If it doesn't look 100 percent legit, they're questioning them. If someone bought something a year ago and we appraise it for more today, they want to know why.
"The goal is to get it right. I have an obligation to the lender to get it right, not to hurt anybody, not to help anybody, just get the right number." (Elkins cannot disclose his final number on the Back Bay property, but after the appraisal, Herald believed the sale would go through.)
Drive-by appraisals are gone. So are the days of cozy relationships between lenders and appraisers, when the necessary property value would magically appear with a wink and a nod. The current economic crisis and past risky mortgage practices have changed the way appraisers do business. Appraisals now typically involve more work under tighter deadlines, for the same fee. Single-sentence descriptions of market conditions sufficed during the boom in 2005. Today, a description can read like a treatise, documenting everything from average list prices to absorption rates (a gauge of supply and demand). More comparable home sales are also required.
For better or worse, appraisers stand on the front lines of both the real estate crisis and the credit crunch. And everyone -- buyers, sellers, refinancing homeowners, lenders -- is paying more attention to what appraisers do and how they do it. "In the last year, I've had buyers asking if they need to attend appraisals. More are calling to see if their appraisal came in," says Herald, a realtor with The Charles Realty in Boston. "All buyers are nervous right now, wondering if they paid the right price. The appraisal is their validation that they did."
While the appraisal process can be worrisome, you are far from helpless. Whether you're buying, selling, or refinancing, you should get involved in the process -- it's the only way to know that the property is appraised at a fair amount. And with nationwide rules for appraisals set to change next month, knowing your role is more important than ever.
When a Midwestern lender asked for a soil sample as part of an appraisal, Herald, the realtor, laughed. The property in question was a condominium on an upper floor of luxury high-rise Tremont on the Common. Herald called the lender and jokingly said, "If you want me to dig up the Boston Common and put it in a baggie, I'll send it your way." Ultimately, a local appraiser stepped in and explained the situation to the lender.
"The local expertise is so important," says Herald, who specializes in Boston properties. "You have to know what you're dealing with. I'm not selling farms in Kansas. The appraiser's job is to bring knowledge to the bank. They're an educator to the mortgage company."
And, just as a Midwestern lender may lack a grasp of the Boston landscape, an appraiser from Worcester may not really know much about, say, the South End. A folder filled with comps and copious notes does not always indicate expertise, especially in a city and suburbs where dramatically different markets may be separated by blocks. When buying or refinancing, work with a local lender or mortgage broker, if possible. If you go with an out-of-state lender for a better rate, request that the lender hire an appraiser who specializes in your community.
Next, whether refinancing, selling, or buying, make sure you (or your realtor) meet the appraiser at the home and that you are ready to point out the special features that will affect value. These features can include such things as custom molding, top-of-the-line appliances, and a prestigious school within walking distance or a convenient subway stop. "I want to hear about the details they feel matter," says Jon Steinberg, owner of Marlborough-based Abelis Appraisals. "It's not that what people say about the details will change my opinion of value, but there might be one nugget in there. People fall in love with certain aspects of homes. Sometimes those aspects are in the details. . . . I don't make the numbers. The market does. And the buyers and homeowners are the market. I have to listen to the market."
If you're the homeowner, make sure the details you value are not obscured by such distractions as peeling paint or piles of old newspapers. Appraisers don't go through homes with white gloves, but before they show up, it would be wise to de-clutter, make beds, and do whatever will make your home look as tidy and well maintained as possible. Condition ratings play an important role in every appraisal and offer homeowners the most direct way to affect valuation. Since appraisers are trained to view each property as buyers would, a home in good condition with up-to-date amenities and nothing in need of repair is worth more than a comparable home in average condition with work to be done.
Educate yourself on the other homes in your neighborhood. Call a real estate broker or go online to check for comparable sales. Visit the open house around the corner. Learn if there are special circumstances behind a home put under agreement nearby, especially if the numbers appear out of line with other comparable properties. Did a divorce or death in the family affect the owner's motivation to sell? If so, tell the appraiser. Well-prepared homeowners can be their own best advocates. "Anybody who calls up [a lender] to refinance and hasn't done their research, it doesn't make any sense at all," says Edward Sullivan Jr., a vice president and agent at the Newbury Street office of Coldwell Banker. "Consumers are empowered when you look at all the tools that are out there."
On May 1, the new Home Valuation Code of Conduct will change the way appraisers work. The code resulted from a settlement between New York Attorney General Andrew Cuomo, the Federal Housing Finance Agency,
Under the new guidelines, appraisal management companies (AMCs) will act as middlemen between mortgage companies and appraisers and hold greater influence over the entire process. "We think it's going to hurt the quality," says Peter Vadala, president of the Massachusetts Board of Real Estate Appraisers. "These AMCs put pressure on the appraisers to do two things: Do an appraisal cheap and do an appraisal quickly."
The National Association of Mortgage Brokers filed a lawsuit against the Federal Housing Finance Agency in late February, arguing that proper contact among mortgage brokers, lenders, and appraisers helps ensure high-quality, cost-effective, efficient appraisals. Appraisal firms like Newton-based Lipof Real Estate Services make a similar case. "The essence of the [new code of conduct] was doing good," says company president Rick Lipof. "It was to take the pressure and intimidation off the appraisers." But for appraisal management companies, he says, "the goal isn't to find the most competent appraiser to make sure the value is right. The companies look for the appraiser who can turn it around in a day for the cheapest price. What do you think you get for that? You get what you pay for."
Reviewing upgrades to his Colonial in East Boston's Orient Heights, Michael Imperato sounds like an avid watcher of home improvement shows on HGTV. Since purchasing the Moore Street house for $84,096 at a bank auction in 1996, Imperato rarely has turned down an opportunity to make cosmetic changes and undertake renovations. The exhaustive list is, well, exhausting. In the last five years, Imperato has installed a new deck, hardwood floors, gas fireplace, architectural shingle roof, vinyl siding, and bluestone front steps.
When it came time to refinance last month, Imperato wanted to make sure his appraiser knew about every change big and small, inside and out. He didn't expect a dollar-for-dollar return on his investments. He just wanted all the aesthetic and structural changes taken into account. "With property values decreasing and not knowing what the banks are going to do, I wanted to make sure everything I'd done within the past five years was noted," says Imperato. "I wanted to make sure I got full value for my house, an honest appraisal. When the appraiser was going down the stairs, I was right behind him. I asked, 'Do you mind if I come with you? I'll explain the house.' Also, I felt he was working for me, and I wanted him to know everything. He told me, 'I don't mind. As a matter of fact, a lot of homeowners don't realize that you're doing exactly what they should be doing.' "
When it comes to upgrades, the appraiser's information is often only as accurate as what the homeowner provides. In general, appraisers don't need receipts, but they appreciate honest, full disclosure. A competent appraiser will note all changes. If the lender sees the value has rapidly increased, those notes help appraisers defend their opinion of value. "Any help you can give the appraiser is help," says Elkins. "We're only human. We do make mistakes. We do miss things."
While it seems like common sense for owners to tour properties with appraisers, appraisers are often left on their own. When Imperato refinanced his home for the first time in 2002, he says, "I stood silent and let the appraiser walk around." Imperato never mentioned the new heating system, never pointed out an existing deck. The appraisal came back lower than Imperato expected. He didn't want to make that mistake twice, especially since he hopes his house is worth $220,000 this time around. Logistically, refinancing owners have it easiest when it comes to accompanying the appraiser, but sellers shouldn't excuse themselves from the process. If worried about an appraisal, sellers should be present or enlist their realtor as a proxy.
"People should give input," says Imperato. "Communicate. Don't feel like you're being a pest. Your house is an investment. Don't just sit back, especially in this declining housing market. You should take action. Things you think might not be a big deal may be a big deal."
Westwood-based appraiser Lorrie Beaumont has proved that homeowners can take action even after the appraisal is submitted to the lender. Recently, one of Beaumont's relatives wanted to refinance the loan he used to purchase a Westwood house for $425,000 in 2005 and asked Beaumont what she estimated the current value to be. Since the property was near Beaumont's neighborhood, it appeared an easy question to answer. With 28 years of experience covering Middlesex and Norfolk counties and firsthand knowledge of the local market, Beaumont remembers saying: "My guess is it will come in at what you paid for it, maybe slightly less. It would be gravy if it came in for more, but don't expect it." The appraisal came back at $380,000. And Beaumont had one angry relative on her hands.
Something was wrong. Beaumont figured the comparable home sales used in the appraisal were inappropriate. Property values in Westwood had not declined that much.
Beaumont surmised what comparables were most likely used. There was a house in her neighborhood and one around the corner from the subject property for starters. She learned that the house in her neighborhood sold twice and fell through twice, failing home inspections because of structural issues with the garage. Beaumont called a local broker about the house around the corner from her relative and discovered that one bedroom, 150 square feet, lacked heating. Additional "functional obsolescence" issues were evident with other bedrooms.
Beaumont's relative went back to the bank. He was asked why it was a bad appraisal and if he could produce better comparables. He did more than that. "[My relative] did this whole dissertation on everything I told him about the comparables that were probably included in the report," says Beaumont, a past president of the Massachusetts Board of Real Estate Appraisers. "He told the bank what comparables should have been used and the reasons why. Then the bank came back to him and said OK. He ended up getting his loan. They sent another appraiser out. The other appraiser pretty much agreed that the value should have been a little bit higher. It worked out perfect for him. It doesn't happen that way for everybody."
But that shouldn't stop homeowners (or buyers, for that matter) from investigating an unexpectedly low appraisal. While homeowners typically view their property as more valuable than it actually is, they can call real estate brokers, scan listings, and attend open houses to develop a more realistic opinion.
Analyzing and finding new comparable sales might be the most difficult part of disputing an appraisal. Fannie Mae and Freddie Mac prefer that comparables be within 1 mile of the subject property and that they were sold within the previous six months. Many banks impose tighter restrictions, frequently looking for similar homes sold no more than three months ago. With sales down, it can be hard for appraisers to meet those standards, never mind the average homeowner. The varied and often older New England housing stock also presents problems. In Florida and Texas, a wide swath of homes may be built in only three different styles. That is not the case here.
"Owners are going to see some sales that may not look like theirs [on appraisals]," says Lipof. "They need to look at the sales comparison grid and at the type of adjustments that were made. If they think the appraiser missed the perfect sale, they need to put that in writing."
Lipof says that if appraisers are presented with information that indicates good comparable sales were missed, he would hope that they're "big enough" to acknowledge the mistake. He adds: "A good appraiser will change a value if they get something wrong. They're not frowned upon, because it's not an exact science."
True, but Elkins notes that cases where competent appraisers miss appropriate comparable sales are rare, occurring maybe two to three times per year. Even when homeowners persuade appraisers that they should look at new comparables, there may not be a good enough case for a value change. Still, when it comes to the appraisal process, it never hurts for everyone to do his homework. n
Shira Springer is a Globe reporter who writes about sports. Her last story for the Globe Magazine was about mortgage refinancing tips. E-mail her at firstname.lastname@example.org.