Five Tips to Save You From Appraisal Hell

(MoneyWatch)  A real-estate appraisal story by Craig Karmin in today's Wall Street Journal mentions that real estate brokers are having trouble with some appraisals. I think it's a little odd that this story is running now, especially as it mentions "new" rules, which have been in place for well over a year. (I wrote a column, "The Appraisal Mess and How it's Hurting Home Sales," in June 2009.) But since some of the disruption from these rules -- collectively known as the Home Valuation Code of Conduct -- appears to be ongoing, let me give you a few tips for how to handle the appraisal process.

First, a little background: HVCC was part of a legal settlement between New York State Attorney General Andrew Cuomo, who has since declared himself a candidate for governor, and Fannie Mae and Freddie Mac, which provide liquidity in the mortgage markets. The idea was that some appraisers were willing to say that properties were worth infinity and beyond and that this contributed to the housing bubble. With new regulation, the reasoning went, appraisers would stop being so positive and unrealistic.

Well, when first implemented, the changes were a disaster. They strongly encouraged lenders to use out-of-town appraisers, who often came in not just with the lower numbers, but numbers that seemed to have no connection to property values.

The industry yowled (we're Realtors, we're good at it) and real estate agents were allowed to talk to appraisers again. This fixed a lot of the problems, because it allowed for a conversation about property values.

So if you'll be getting your property appraised, make sure your real estate agent follows these four steps:

1. When the bank assigns an appraiser, make sure the appraiser has experience in your area. In her book, Homebuyers Beware, mortgage expert Carolyn Warren advises asking the appraiser questions such as: "Where is your office?" and "What city/neighborhoods did you do most of your business in before HVCC?" She says that you can decline making an appointment if the appraiser doesn't know your area -- I don't know if that'll work but it's worth a try.

2. Meet the appraiser at the property. I was doing a New York City deal recently, and the buyer's agent asked: "When would be a good time to leave the appraiser keys to the apartment?" The answer to that question is never. If I am the listing agent, either I or my partner will meet the appraiser at the property, to preemptively introduce its best features ("you can see both baths have been renovated") and to answer questions ("When did they put the new roof on this building? Hmm, just two years ago.")

3. Provide the appraiser with a copy of the sales contract. Most appraisers are very good at what they do, and don't want or need any extra pressure to "hit your number" -- to come in at the exact sales price. However, emailing the appraiser a copy of the contract beforehand revealas complete deal terms that he or she might not have otherwise thought about -- for example, that the property is being sold with flat-screen TVs and sound system included.

4) Mention comps. Again, you don't want to cross the line and have your agent do the appraiser's job; there has been a definite change from the old days, when it was considered okay for an agent to hand an appraiser a typed sheet of comps to justify a property's value. However, it's okay for the agent to explain how the buyer and seller, who are two parties who are presumably reasonably informed about the local marketplace, got to their agreed-upon number. So I often say something like "we feel like this sale is very close to the recent sale at 5 East 14th Street, because the layout is very similar, although I feel like this apartment has better views."

5. Predict the appraised price. At one point my mom was a trial lawyer, and she drilled into me that if you're a trial lawyer, you don't ask a witness any question you don't know the answer to. Similarly, it's easy to step back from one particular purchase, look at what else has closed recently, and make a good stab at coming up with the number the appraiser is going to use. That way, if the appraisal comes up short and you have to throw in more cash at the end, you're prepared.

I just did this with a buyer client who was very particular -- I thought he overbid on an apartment and that the appraisal wouldn't match his purchase price.

His argument was that it was like buying a pair of expensive shoes at retail, that he was paying a lot of money for exactly what he wanted, and that if there was a gap of a few thousand dollars between his purchase price and the appraisal price, he could throw extra cash into the deal. The apartment in fact was appraised at under his purchase price, and he closed anyway, but things went smoothly because I'd warned him and his mortgage banker to expect that that might happen.

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