(Home Buyers Beware)
Nothing can hurt a real estate transaction more than a home that doesn’
t appraise to the contract price. In this depreciating market, I have heard many colleagues bemoan the “low-ball” appraisal. For a listing agent, a low-ball appraisal doesn’t just mean the possibility of losing a home buyer because the lender would not finance the purchase at the contract price; it’s also a dilemma of disclosing the valuation to future potential home buyers.
Although low appraisals also happen in appreciating markets, this market is unique. Along with depreciated values, the new Home Valuation Code of Conduct (HVCC) has also impacted on residential real estate appraisals and transactions. The HVCC was created out of an agreement between Fannie Mae, Freddie Mac and the Federal Housing Finance Agency to increase the integrity of residential appraisals by prohibiting lenders (or third parties) from “influencing or attempting to influence the development, result, or review of an appraisal report” (www.freddiemac.com/singlefamily/pdf/hvcc_746.pdf). The HVCC went into effect on May 1st 2009, such that Fannie Mae and Freddie Mac would no longer purchase residential mortgages with appraisals that did not adhere to the Code.
Before the HVCC was enacted, it was not uncommon for real estate agents and/or loan officers to try to influence valuations by offering alternate comparables or other pertinent information. This type of communication may have been necessary in cases that involved unique properties or where the appraiser was missing important information. However, it is also this type of communication that attempted to influence the appraisers to increase valuations!
To address the issue of appraisal influence, the HVCC requires strict rules on appraiser selection and communication; lenders and real estate agents are not allowed to hire appraisers nor are they allowed to communicate with appraiser in such a way that may influence the appraisal process (www.fhfa.gov/webfiles/277/HVCC122308.pdf).
Some critics of the HVCC complain that lenders are using third party appraisal services which hire appraisers who are unfamiliar with the neighborhood or worse- hiring appraisers from out of state. A colleague, relaying a recent experience, told me that a low-ball appraisal that was provided for a client may have been due to one appraiser coming to a home in Bethesda for the “inspection,” while another appraiser from Texas completed the appraisal for a national lender.
Low-ball appraisals do not kill all transactions. In fact, many buyers and sellers come to agreement on a new price and settle without any other obstacle. However, there are transactions where the buyer and seller cannot agree on new price and the home is back on the market. This is where the listing agent has to decide what information to disclose about the previous appraisal. Although Article 1 of the Code of Ethics and Standards of Practice of the National Association of Realtors (NAR.org) pledges Realtors “to protect and promote the interests of their clients,” it also obligates Realtors to treating all parties honestly. Additionally, Article 2 of the code of Ethics prohibits Realtors from misrepresenting or concealing pertinent facts relating to a property or transaction.
In the current market environment, low-ball appraisals may be an increasing trend. Revealing or not revealing these low valuations to future potential home buyers may also become a source of future disputes.
This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of November 16, 2009. Copyright © 2009 Dan Krell