Recession Makes Real Estate Appraisals a Tougher Task

Real estate appraisals have always included an element of judgment--or guesswork. Today’s shaky property market is making it harder to come up with accurate appraisals as borrowers often square off with lenders about the “real” value of a property.

The biggest problem with appraisals today is the lack of comps, said Philip Lipp, president of Allwest Mortgage Co. in North Hollywood and president of the 3,000-member California Assn. of Mortgage Brokers. “Sometimes appraisers just scratch their heads and are unable to file comps,” he said.

“Comps” are the sale prices for comparable homes in the neighborhood. “Appraisers today have slim pickings. . . . Many of those comps are also stale or are from foreclosure sales.”

It’s harder, however, to assess value when it comes to appraising a property for the purposes of refinancing. “There is a certain margin of leeway on most of these appraisals,” Lipp said. “If the property is in better condition, the appraiser may be able to give it more value.

“We do everything in our power to best represent the borrower,” he said. “I get my own data sources and also ask borrowers to provide their input about the amenities. . . . We are trying to get the best possible value that we can.”

All this shouldn’t be misinterpreted to suggest that loan brokers are improperly trying to influence the appraisers they usually hire, Lipp said.

“The appraiser can only legitimately raise the value according to the available comps,” he said. “We wind up hurting ourselves in the long run with bad appraisals. It’s not likely that an inflated appraisal will pass the lender’s reviews.”

“I’m doing a lot more homework up front before I take a loan application,” said Ben Hunnicutt, president of Southland Financial Network Inc. in Woodland Hills. The first step is to call an appraiser and ask whether it’s feasible to “bring in” an appraisal within a certain range. If the answer is yes, Hunnicutt said, then he’ll go ahead and start looking for a loan to match with the borrower.

Hunnicutt said he makes it a point to inform the appraiser about anything that may help boost the value of a property.

“I may call the client and ask for an additional list of amenities that distinguish a property from other properties in the neighborhood that have been sold,” he said. “It’s not finagling, but there’s pressure for appraisers to be aggressive.”

Aggressive, perhaps--but only to a point. Lenders will do a so-called desk review of the appraisal when the borrower is retaining lots of equity. When the loan is a refi or the prospective borrower is low on equity, lenders may do their own field review of the appraisal and lower the market value accordingly.

It’s illegal to improperly influence an appraiser, said Shelly Klimusko, senior loan officer at Metrociti Mortgage Corp. in Encino. “Appraisers have to sign a statement in every appraisal that they haven’t been influenced by anyone,” she said. Still, there are ways to get appraisers to boost their appraisals of value.

“You always bring up the points that make the house more valuable,” Klimusko said. “We’ve had all-out yelling and screaming battles--in a business-like manner, of course--with appraisers. There are times that they’ll come back and change something and other times when they won’t.”

In one instance, Klimusko recalled, “I had a big argument with an appraiser one day about landscaping. The appraiser said that house isn’t landscaped, but it was in (the) process of being landscaped. My client wasn’t going to get the loan. . . . We had a heated argument and finally settled on a compromise.”

While it’s possible to argue about appraisals, the lenders have the final say. Appraisers that come up with inflated appraisals get taken off the list of approved appraisers at various institutions around town, Klimusko said. And lenders are routinely reducing appraisals by about 5% in areas where property has been declining--and that’s almost everywhere.

Appraiser John H. Monroe has been asked to raise his appraisals, but said he’s never done so.

“If you come in with a low appraisal, you inevitably get calls,” said Reseda-based Monroe, who is a past international president of the American Society of Appraisers. “The appraiser’s job is to be impartial, however. That’s why we have licensing and certification.”

“There will always be pressures put on you. You have to deal with those; it’s part of the business,” said John Robertson, a Woodland Hills appraiser with 33 years of experience. “Many appraisal procedures follow a scientific process, but the appraisal business is an art; it’s not a science. Every time you make an estimate, you make an error, no matter how good the estimate.”

This is a tough market to be doing residential appraisals, Robertson conceded. “The ideal is to have sales that occurred yesterday and next door as comparables.” Today’s appraisals don’t always have many recent sales as a basis for comparison, however. The result is that today’s appraisals are both less certain and have a shorter shelf life.

“When a market is changing rapidly, it would tend to diminish your confidence level in your answer,” Robertson said. “A number that’s six months old may not be right today.”

Indeed, changing property values are a way of life in the San Fernando Valley. The median price of a single-family house sold in the Valley in December was $190,000, down about 10% from a year earlier.

The business of appraisals has become much more professional in the last few years with new regulations, including the federal Uniform Standards of Professional Appraisal Practice, said Frank Virtue, owner of Frank Virtue & Associates in Ventura and an appraiser with 32 years of experience.

More documentation doesn’t mean that appraisals are more factual, however. “An appraisal is not a fact; it’s an opinion of value,” Virtue said.

Commercial properties are easier to evaluate, he said, because value is mostly based on the ability of the commercial property to generate income. “A house is very difficult to appraise because you have to read human nature, and there are a lot of variables,” he noted. A really beautiful house with an ugly kitchen may have a tough time selling to one type of buyer and an easy time selling to another.

And, finally, there’s the story a homeowner in the West Valley told me about when he recently refinanced and almost got stopped because the appraisal came in $15,000 below the minimum required by the lender. Some neighbors had recently sold their house and it had driven down the neighborhood “comps.” So this fellow’s mortgage broker got on the phone and magically the next day, the appraisal got bumped up $15,000.