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Appraisals – Fair and Fraud

Appraisals. Really the “make or break” on home sales which are financed. Cash transactions are wide open but the only way a lender judges the value of a property is through the use of the many qualified and experienced appraisers throughout the country. Here are a few things I’ve learned that you really need to know.

Appraisers can make mistakes but it’s very difficult to make a mistake when there is a “comp” very near by which has sold in the last few months.

I just got off the phone with a Mr. Grier here in the Atlanta area who offered to beat the tar out of my associate because the appraiser brought his value in $15k lower than he had accepted an offer on his property. I’m not sure how that would help Mr. Grier inflate the value of his property but the thought of my associate running around the office like the guy in the yellow shirt on the Capital One commercial has amused me.

Mr. Grier is not alone, many of us do not understand what the difference is between “higher value” and “more marketable”. By the time he got me on the line (the old, “I want your manager” doesn’t normally do the trick but I bit!) he was ready to fight and pretty much started out that way. Here are a couple of misconceptions suffered by Mr. Grier that we should all take note of:

1. A property almost identical in size to Mr. Grier’s and within a few hundred feet sold in the last few months for $123k (Mr. Grier had accepted an offer for $149k). Comparative sales are the biggest indicator of current value. Two other properties similar in size and age had sold, on the same street, in the last 12 months for less than $134k.
2. Basements don’t count for much. According to most of the appraisers here in the area who are not on any “unnacceptible appraiser” lists unfinished basements count for about $5 per square foot and finished basements count for $10 per square foot. Definition of basement? If one wall of the area is touching dirt, it’s “subterranean” and counts in the basement category. Mr. Grier’s 525 square feet of finished basement are worth about $5250.
3. Garages with garage doors still in place can never count as heated living space. Value? About $5 per square foot. Mr. Grier’s 350 square feet of garage are worth about $1750.
4. While decks are beautiful, purposeful, and increase the usefulness of the property they do very little, if any, to the overall value. Mr. Grier’s $1200 investment is worth about $0.
5. Outbuildings are great for storing mowers, garden tools, lawn chairs, and grills but they add nothing to the value of the home. Marketability? Yes. Value? No.
6. Paint and carpet do nothing to increase the appraised value. Even new siding and a new roof don’t increase the value … once again, they increase the saleability but not the value. At least not significantly.
7. The insurance appraisal for replacement value on your property is about as related to a mortgage appraisal as a duck is to poison ivy.
8. Tax assessments hold about the same relationship to mortgage value as the above example.
9. Even if you recently took a home equity line and the home equity lender did an appraisal they did not do a mortgage appraisal and almost certainly did not do an investment property appraisal. Home equity loan appraisals at best are drive by’s where the appraiser rarely even gets out of the car. Many times they are simply a quick online appraisal.
10. Yelling at the appraiser and telling him or her they are idiots has never, in my experience, promoted the situation.
11. Yelling at the Loan Office is about as helpful as yelling at a rock.
12. Yelling at the broker … well. That usually doesn’t do much either.

Okay. So I’m a little fumed at Mr. Grier who claims to know more than his GMAC listing agent, Keith, more than the appraiser with thousands of appraisals under his belt, the loan office with 4 years of experience and myself with thousands of closings under my belt. But that’s enough venting. Let’s get on with what appraisals are and some suggestions to increase your value.

From the mouth of every appraiser I’ve queried the best way to increase value is to increase the number of bedrooms and bathrooms and actual heated living space. Room additions are usually quick and relatively affordable. Upgrading a 3/1 into a 4/2 and adding the 400 or so necessary square feet is obvious.

If your garage is above ground (remember only one wall has to be under dirt – and that means inches) you can convert it but there is one huge qualification: Does it have garage doors? If yes, it’s a garage and not heated living space.

Here’s another tip about appraisers: If the field appraiser, the one hired by the buyer, turns in a bad appraisal he will be caught. Almost all lenders, myself included, do what is called a desk review or a review appraisal. If the values don’t match with the nationally used appraisal investigation network data, the appraisal will be denied and the appraiser runs the risk of being added to a dissapproved list with that lender. This is bad and no intelligent appraiser is going to risk this.

Recently a huge move to automated fraud detection has come to the forefront of the mortgage lending industry. Almost every lender, myself included on small private loans, subscribes to services more powerful than the FBI’s network of information only a few years ago.

This anti-fraud database contains information about the applicant, the property, the appraiser, the seller, the agent, and the mortgage broker/lender. If there is a pattern of abuse the system will flag the loan. If the appraisal seems out of line for the area, likewise. All loan submissions are reviewed more now than ever before.

Bottom line is the seller doesn’t set the value of the property. The listing agent (helps but) doesn’t set the value of the property. The loan officer doesn’t set the value of the property. Weighing in at more than any other factor the recent sales of similar properties, especially in a subdivision like Mr. Grier’s property, sets the value of the property.

Before you do any work to your property to increase the value contact a licensed appraiser from your area and ask them what you can do to increase the value of your property. Most of them will do so for a small fee and you’ll be ahead of the curve, not behind the 8 ball. Right Mr. Grier?

The person or company actually writing the check for the transaction is not the seller, the buyer, the real estate agents, the mortgage broker, the loan officer, the closing attorney, or the appraiser. The person or company actually writing the check is the lender. They are the only one with a major stake in the transaction and you can bet they, we, are going to protect their investment from the number one form of fraud in the nation: inflated values on appraisals.

So, Mr. Grier, maybe you should offer to beat the tar out of your neighbors who, from your wealth of knowledge and superiority on the subject, obviously undersold their properties and cost you thousands of dollars of potential income.

Related Links:
http://iami.org/narea.htm
http://www.mortgagedaily.com/MortgageFraud.asp
http://www.mortgage-investments.com/originate_private_mortgage_or_deed_of_trust/mortgage_fraud.htm