Appraisal—a word that strikes fear into many home sellers, borrowers, and real estate agents. It can give loan origination professionals a few heart palpitations, too.
Appraisals have always been necessary to protect the lender from disbursing more mortgage than the value of the property. After the crash of 2008, the regulatory environment tightened, throwing up an even higher firewall between the lender’s role and the appraiser’s job than before. Appraisal management companies (AMCs) became more vital to the process, and lenders’ compliance costs inevitably increased.
Of course, borrowers are usually still responsible for the cost of the appraisal, whether they are purchasing a house or refinancing, and become understandably infuriated if the appraisal comes in too low and more wrenches are thrown into the mortgage process.
Lenders can’t directly contract appraisers, but they can help borrowers and sellers with strategies to ensure the appraisal value comes in at or over the final asking price. Cindy Nasser, chief operating officer at industry-leading AMC and Calyx partner PCV Murcor, delivered a great webinar we sponsored on strengthening the appraisal process. What follows is her advice and additional expert tips.
1. Don’t buy into the AMC myths
Lenders go through AMCs, yet sometimes misunderstand the role this third party plays in the loan origination process. These myths create distrust and can even slow down appraisals when everyone’s goal is to get to the closing table.
Some misconceptions, as explained by Nasser, include:
- Dodd-Frank created AMCs: The sweeping federal Consumer Protection Act, passed after the Great Recession, firmed up appraisal guidelines. However, it didn’t create AMCs, which had been used for decades previous to the law.
- AMCs provide no service value: Revenue doesn’t necessarily mean profit, and an AMC’s role is to enhance the process involved in the completion and delivery of an appraisal report.
- AMCs underbid: Ultimately, clients—especially mortgage lenders—control fees that end up in appraisers’ pockets. Experienced AMCs choose appraisers based on performance, not cost.
- AMCs impose unrealistic requirements on appraisers: AMCs work for the client’s interests, not the appraiser’s. Scope and quality control are set by the client; the AMC’s job is to find appraisers to match those requirements.
The appraisal process must be as independent as possible, from the loan originator to the appraiser. A quality AMC helps ensure autonomy and adds value to each side.
2. Set clear expectations
An appraisal can be confusing for borrowers, who may not understand why it’s necessary or how it differs from a home inspection. Clearly communicating the process from the borrower’s point of view early on can avoid headaches and misunderstandings later. Explain everything the property owner must do and the information they should offer (e.g., additions, upgrades, unique features, comparable neighborhood properties) to ensure a smooth and accurate appraisal. More importantly, don’t promise a value on a home before the actual appraisal. False expectations can create false hopes and real anger when the appraisal doesn’t come through at a previously suggested price.
3. Understand the property
Knowing as much as you can about the property before the appraisal is ordered can smooth the process at a time when everyone is waiting on results. For example, a property in a more rural area could possibly be more expensive or take longer to complete. Knowing how one property compares to others also goes a long way toward better understanding the appraisal value that is handed back. The loan itself may come with appraisal requirements, particularly if it’s an FHA loan. The more information you can bring to the appraisal before it’s actually conducted, the better.
4. Counsel the borrower
Borrowers refinancing their homes, as well as real estate agents representing sellers, must approach the appraisal as if they are preparing the house for sale. Counseling clients on what they should do in advance of the process can improve appraisal value and avert any time-wasting surprises. Some bits of advice include:
- Clean the house.
- Make minor repairs.
- Be sure to give appraisers access to all areas of the home … but then stay out of their way.
- Compile a list of improvements, repairs, and additions from the past five years—include permits and receipts, if necessary.
- Spruce up outside areas.
- Make sure walls and floors are organized and visible; don’t try hiding imperfections behind art and rugs.
High-quality appraisers are fair and experienced, so trying to fool or sweet-talk them likely won’t work. The best advice you can give borrowers is to thoroughly prepare for the appraisal and let it play out with minimal interference. If a party disagrees or would like to challenge the appraisal, most AMCs have a process for this to be accomplished. However, thorough preparation will decrease the likelihood of an appeal being necessary.
5. Order appraisals through your LOS
For lenders, the appraisal is yet another element of the loan origination process. A way to make appraisals somewhat simpler is to order them through loan origination software, which the more robust solutions offer. A good LOS provider works with trusted AMCs that deliver superior service at fair prices. When the appraisal is completed, the report is automatically added to the client’s file in the system, so loan professionals have the information they need at their fingertips. Having this LOS feature eliminates extra steps before, during, and after the appraisal and allows you to maintain focus on the client and the loan rather than annoying busywork.