Strict rules lower appraisals, hit home on real estate deals
Brittany and Thomas Radomski's first attempt to buy a house crashed because the appraisal came in $8,000 below the price they negotiated with the seller.
The seller refused to lower the sales price, so they looked for another house in the Stanton Heights neighborhood. They found one just a few blocks away, where the price and the appraisal were close enough for the deal to go through.
“We had been living in an apartment in North Oakland and wanted to own a home,” Brittany Radomski said.
That situation is occurring not only in the Pittsburgh market, but nationally as well.
The National Association of Realtors estimates that about about one-third of all deals are canceled, delayed or renegotiated to a lower price because of low appraisals, based on a survey of its members. Of that amount, 11 percent of sales agreements were canceled.
In Western Pennsylvania, appraiser David King doesn't believe the percentage of lost sales is that high, but local figures aren't available.
“We didn't have the high increases or decreases in house sales prices that occurred nationwide, thus there seems to be an appropriate source of comparables here that appraisers can find within a year of a pending sale,” said King, of appraisal firm Nicklas King McConahy & Co. in Cranberry.
Robert Gelman, senior appraiser and director of marketing for Ditto Inc., a Pittsburgh appraisal company, said, “Losing one-third of house sales because of a low appraisal isn't happening here.”
For Brian and Cristy Murray, the outcome was better when the appraisal on a house they wanted in Slippery Rock came in $18,000 lower than the $213,000 price they had agreed upon.
The seller agreed to accept the appraisal price of $195,000, said their real estate agent, Kristina Callen of Prudential Preferred Realty.
Real estate broker Eugene (Sonny) Bringol Jr. said the Radomskis' experience is typical of many clients seeking a mortgage from his Victorian Mortgage Inc. in Bridgeville.
But for many buyers, when an appraisal comes in low, they end up without a mortgage and a new home. “The appraisal they receive, which is part of the lender's requirements for granting a mortgage, often comes in below the price they are paying for the home, knocking them out of the market,” he said.
Appraisers don't believe the problem rests with their appraisals.
“Appraisers don't set the market; rather, they reflect what's happening in the market,” said Ken Chitester, a spokesman for the Appraisal Institute, the nation's largest professional association of real estate appraisers.
“It's nonsense to blame appraisers for a depressed housing market. And it's important to remember that appraisals are not intended to confirm a sales price — they're intended to help lenders make wise decisions. Appraisers are independent third-party experts, paid a fee and have no reason to be biased as they develop reliable, credible opinions of value,” he said.
“Appraisers are under severe regulations concerning appraisals on residential properties,” said Bringol, who is president of the Mortgage Bankers Association of Southwestern Pennsylvania.
Strict regulations on appraisals were put into effect with passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act in 2010, in the wake of the mortgage and credit crisis that caused the Great Recession. Liberal appraisals were blamed for helping unqualified borrowers purchase homes and inflating home prices nationwide.
Under regulations now in effect, comparables (similar houses) used by appraisers must be located within one-half mile of the home being sold and must have been sold within the previous six months, Bringol said.
Situations that confront appraisers include home improvements.
The market doesn't recognize the full increased value of a home in which a new bathroom, kitchen or even an inground swimming pool has been installed, said Dennis Cestra, vice president of Howard Hanna Appraisal Services.
“Spend $80,000 on a new kitchen in a house bought for $150,000, and the value isn't $230,000, but a lot less,” he said.
“Seller concessions” are another factor when, for example, the seller agrees to pay all or part of the closing costs, but inflates the sale price to cover that amount.
“Often in these cases, the appraisal is lower than the price and, as an added problem for the home buyer, he or she is faced with a higher mortgage payment and higher real estate taxes, based on the sales price,” he said.
R. Robert Barone of Barone & Sons Inc. in Whitehall said appraisers have another method of determining the value of the home.
“If the house sold for $100,000, and $6,000 was paid in closing costs, the appraiser considers the sales price to be $94,000,” he said.
Most lenders are using appraisal management companies that assign appraisers on a rotating basis to conduct an appraisal.
Under the Dodd-Frank Act, lenders are not permitted to assign a specific appraiser as they did in the past. The end result is that the lack of local knowledge of a neighborhood or community by the assigned appraiser can create issues, he said.
Sam Spatter is a staff writer for Trib Total Media. He can be reached at 412-320-7843 or firstname.lastname@example.org.