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Low appraisal can throw wrench into home sale

Published: Thursday, June 14, 2012

Updated: Thursday, June 14, 2012 10:06

Lenders hire appraisers to make sure the home, the collateral for the mortgage, is worth enough to cover the value of the mortgage if the homeowner can't pay.

Appraisers typically value homes based on comparisons with at least three recent sales of similar homes nearby, though some lenders require comparisons with at least four, according to Doug Cowie, an appraiser based in Waldwick, N.J. Appraisers also look at pending sales and homes on the market, and factor in whether home prices are trending up or down. They make adjustments based on a property's condition, location and size, compared with the homes it's being measured against.

The shrinking number of home sales during the housing bust made appraisals more difficult, because in some cases there were few or no recent comparable sales that appraisers could evaluate, said Gumbinger of HSH.com.

Appraisers can consider foreclosed properties and short sales, in which the lender accepts less than is owed on the mortgage, if those are relevant, according to the Appraisal Institute. Some real estate agents question the inclusion of distressed sales, which tend to sell at discounts of 25 percent or more, according to research. But in neighborhoods where distressed sales make up a significant part of the market, most experts say they should be considered in an appraisal.

Lenders typically pay $225 to $400 for an appraisal, Cowie said.

Appraisals became a point of controversy a few years ago when federal regulators tightened the rules on hiring appraisers. The aim was to remove conflicts of interest that arose during the housing boom, for example, when mortgage brokers hired appraisers who provided generous valuations to support inflated mortgage amounts.

One result was that appraisers are now hired by appraisal management companies or banks' appraisal departments, rather than directly by the people writing the loan. Many appraisers say that appraisal management companies cut the fees that appraisers receive, leading many experienced appraisers to refuse to work with them, according to Chitester.

And some real estate agents have complained that the management companies sometimes hired lower-priced appraisers from outside the area who were not familiar with local prices.

Even though the appraisal comes late in the sale process, several real estate agents said they bring it up when they first meet with sellers to discuss the listing price.

"I definitely have based my market analyses for prospective sellers primarily on the criteria that an independent mortgage appraiser would use," said Barbara Ostroth, a Coldwell Banker agent in Oradell, N.J.

"I try my hardest to explain to the seller that if they price their house too high, not only won't it sell, but it won't get appraised" at that price, said Ellen Weiner, a Weichert agent in Clifton, N.J.

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