The home valuation code of contact

We wrote in a recent post how a mortgage appraisal for one of our listings came up $11,000 short of the contract price. Everyone involved with the transaction (buyer, seller, Realtors) was surprised by the appraisal - and for a few good reasons.

Two comparable properties from the same neighborhood were excluded from the appraisal, while two other properties located a mile away and in another city were for some reason included. This listing had received 3 offers in 4 weeks - in the wintertime before the onset of the peak buying season. Two of these offers were for $11,000 more than the appraised price. This home was priced to sell quickly and yet the mortgage appraisal came up $11,000 short.

We wrote a letter to the bank asking for a second appraisal. Our letter detailed all of the reasons why we felt the appraisal was inaccurate. It included neighborhood market data and details about each of the comparable properties included in the appraisal.

Under the new Home Valuation Code of Conduct, lending institutions are required to document all of the reasons why an initial appraisal is challenged and why a second appraisal is requested. The new code also prohibits interaction between loan production staff and the individuals who conduct the appraisals. To comply with this new code, this bank contracts with third party Appraisal Management Companies to coordinate its mortgage appraisals.

The bank believed our neighborhood market data supported a higher price, so it ordered a second appraisal through one of its Appraisal Management Companies. Then the Appraisal Management Company selected an appraiser from its pool of appraisers and scheduled the second appraisal. Once the second appraisal was completed and submitted to the bank, the underwriters compared the two appraisals side by side. The underwriting staff were required to review and comment on both appraiser's property selections, adjustments, and market analysis comments. Then the underwriters made their recommendation based on their review of both appraisals.

Eleven days later it was determined the second appraisal would be the one used for the loan package. Fortunately for the buyer and seller this appraisal supported the contract price. The sale of this home would proceed as planned.

I support a process that maintains independence between appraisers and loan production staff. But in a case like this, where the market data clearly contradicts an appraiser's opinion, the resolution process is both time-consuming and costly (requiring the purchase of a second appraisal). The sale of this home would have fallen apart had we not followed up with such a thorough appeal based on good data and a solid understanding of the neighborhood market.

Perhaps there isn't a better way to implement appraiser independence. Perhaps this is the best the process can be. Regardless, the example above is a sign of the times and we fully expect to encounter similar situations in the coming months.

Dan Miller, Keller Williams Realty and DaneCountyMarket.com