Blanche Evans is a writer/editor and CEO of evansEmedia. Formerly, she was a senior editor with Realty Times, where she was named by REALTOR® Magazine as one of the most influential people in the real estate industry.
Appraisal Discrepancies: What You Need to Know
Step in to find out how the bank appraised a property so that you can help buyers avoid a costly mistake.
February 1, 2007
Like in many parts of the country, real estate values are appreciating modestly in the Kansas City area, says appraiser Thomas Linsin, of Linsin & Associates real estate valuation firm in Leawood, Kan. On the whole, values are higher than they were last year at this time, he says.
Yet, some home owners are discovering that new appraisals on homes they purchased in the last few years are lower than when they bought the property. In other words, their homes are less valuable and are ineligible for equity loans.
What gives? Could this be an appraisal problem?
Linsin has noticed that discrepancies tend to occur on homes that were originally appraised using a computerized method known as AVM, or automated valuation model. AVMs are a quick way to satisfy a lender's requirement that a home's purchase price meets the appraisal price, but they have a long way to go to meet the more exacting standards of the walk-through inspection, Linsin says.
After all, a human appraiser can eyeball a roof and see if it needs replacing, or count the number of spaces for cars in the garage. An AVM, however, simply calculates the normal range for the neighborhood. Therefore, AVMs and walk-in appraisals can be thousands of dollars apart.
"[AVMs] are good for certain situations," Linsin says. "But they shouldn't be used for primary mortgages because that doesn't protect the buyer as well."
Different Methods, Different Results
Banks often use several grades of appraisals, with the least expensive and quickest being the AVM at around $30. Banks purchase AVMs from other companies, such as First American, to use in appraising real estate, seldom passing this fee on to the buyer.
The next step can be to involve a human appraiser, who's least expensive approach is to sift through comparables and courthouse data to determine a "desktop" market value. A more involved appraisal would be a "drive-by" appraisal, in which the appraiser takes into account the condition of the exterior of the property. And more involved yet: a walk-in appraisal, which allows the appraiser to see the condition of the interior of the home. A walk-in appraisal can be upwards of $350, which is always charged to the buyer.
So, if the results tend to be less accurate with an AVM, why would a bank use one, especially when a buyer may be willing to pay for a more complete appraisal? Because the property value from an AVM is usually good enough to fit the bank’s needs, Linsin says.
However, a too-high valuation can cause big headaches for buyers. Not only will they pay too much for a home, but when they return in a couple of years to get an equity loan, they could be blasted with a lower valuation via a walk-in appraisal.
A Problem for Buyer’s Agents
Linsin views AVMs as a problem for buyers and buyer's agents, who represent the buyer in a transaction and are paid to look out for their clients’ best interest. To be safe, tell buyers they should never assume the bank will complete a full walk-in appraisal before making a loan.
“The bank is mostly interested in lending money to qualified buyers — with the buyer's investment being a secondary concern," Linsin says.
Find out for your next buyer how the bank plans to appraise the property and encourage your client to request a walk-in appraisal. Also, make sure that the appraiser has experience in the neighborhood, which will help ensure your buyer gets a fair price.
(c) Copyright 2007Realty Times. Reprinted with permission.