When Expectations Exceed the Appraised Value
By Charlie Elliott, Jr., MAI, SRA

When loan originators take applications for loans, one of the most critical issues is whether the applicant is qualified. Not just qualified to get a loan but qualified to get the loan that the applicant is applying for.

In these days where larger homes are very popular and where creative financing is available, we frequently see borrowers attempting to get loans that that they barely qualify for or in some cases do not qualify for. We are not talking about less-than-perfect credit here, but simple cases of squeezing the equity to a point where it marginally exists or does not exist at all. In such cases, the accuracy and/or lack thereof becomes critical in the appraisal and, therefore, has the potential to become an issue with the loan that might not have existed otherwise. There are frequently times when my firm is contacted by a lender-client, calling into question the appraised value provided by the appraiser. It is apparent that some lender representatives do not completely understand the issue of appraisals as they relate to home mortgages, their purpose, how they are prepared and professional standards, only to mention a few.

Listed below are a few of the statements that are commonplace in our business, which may come as a surprise to those not familiar with what appraisers must deal with to be successful in their profession.

1. “We need $200,000 to make the loan. Your appraiser appraised the property for $190,000. Could you see if he could raise the value $10,000 so that we can make this loan?”

2. “I know that this is a modular house, but our bank does not require the appraiser to use modular comparables, even if the subject is modular. Could you see if he can find some site-built comparables that will get the value up?”

3. “The appraiser should have known better than to have appraised the property at $120,000 when the loan amount is $150,000.”

4. “We will never use your services again. Why would anyone want to pay $300 for an appraisal that came in low, which they could not use?”

So where do we start with this can of worms? First, let’s say that the appraiser is in a position where he or she depends upon the customer to supply orders to stay in business. In cases like those above, most appraisers will take care and use diplomacy in responding to comments such as those above. Other than that, the appraiser is bound to his or her professional standards, which fall outside, way outside, that which would allow the appraiser to accommodate a client under the above circumstances.

By reading the above quotes, one would get the idea that the job of the appraiser is to appraise properties for the amounts as specified by the client. One would have to question whether those making such statements understand the big picture of the property being used as collateral to secure loans and that the true value of the property is the foundation of the mortgage security process. There are two issues that raise their head here. The first is that of ethics, professional standards and regulations, and the other is whether the appraisal was properly prepared.

Suffice it to say that all four of the statements, made above, fall into the category of either being unethical and/or against regulations. Given the aggressive regulatory environment and the evermore-increasing concern about loan fraud, I would discourage any lender from making statements, such as the above, for their own protection. I am not trying to imply that many or most lenders would make such statements. Frankly it is a small minority of them, but it does frequently happen. Furthermore, I am of the opinion that such statements are often made, not out of ill intent, but out of a misunderstanding. It just may very well be that the client has good reason to question an appraisal if it does not meet his expectations or those of the owner. Mistakes do happen and, in such cases, the appraiser is not only ethically able, but also is obligated to correct them. Let’s examine them in the context of the circumstances in which they were made.

In all of the cases above, it may be true that the appraisal is short of meeting the client’s expectations, however, my question is usually why. Is it because the property is not worth the expected value or is it because there is a mistake in the appraisal? If the owner and the client have reason to question the appraisal, it is entirely possible that it was prepared improperly. They should not, however, base their premise on the need to make a loan; instead, it should be based on whether the appraisal was prepared correctly. This type of approach could be perceived as an attempt to unfairly pressure the appraiser to inflate an appraisal. In such situations, I encourage our clients to be specific as to why they think the appraisal may be prepared improperly. This, many times, is due to the appraiser’s lack of available market data or a simple oversight. If those involved have reason to believe that the property has a different value, the root of their concern must have come from some source that the appraiser would need to know about if he or she is expected to reconsider the appraised value. Examples may be that a similar house next door sold for much more, houses on the same street are selling for $10 per square foot more, the appraiser failed to acknowledge the existence of the garage or that the appraiser did not include a finished attic.

In conclusion, the lender must make a decision in considering whether to challenge an appraisal. If it is simply a case of needing a higher value to make a loan, the lender is out of bounds to suggest a change in an appraisal. Conversely, if it is a situation of whether there is reason to question the accuracy of the appraisal that is another issue. In the case of simply looking for a higher value, perhaps there will be other, more ethical solutions that concur with banking regulations, such as a smaller loan or other remedy that falls outside the realm of tampering with an appraisal.