Appraisals can be the ultimate deal breaker.

For homebuyers reliant on mortgage financing, appraisals are required to inform the lender of the home’s fair market value (FMV) before the lender approves the mortgage. When the appraisal falls below the agreed-to purchase price, it can cause the deal to fail — dead on appraisal (DOA).

These types of appraisal stakes are highest when home prices are rising. When home values are increasing quickly, appraisals tend to fall behind, as comparable properties reflect yesterday’s home sales rather than the present market value, which is higher than it was even a few weeks earlier.

Appraisers can try to keep up by including pending sales or market conditions adjustments, but it’s easy to fall behind when prices are rising significantly each month (see: the extreme pricing environment of 2020-2021).

When an appraiser reports a value lower than the purchase price agreed to by the buyer and seller, the next steps for the transaction are to:

  • agree on a new, lower price (unacceptable for the seller, who may as well re-list at a higher price, since they have the benefit of upward market momentum);
  • make up the difference in cash between the appraised value and the agreed-to price (sometimes impossible, especially when a buyer is already operating at their threshold);
  • rebut the appraisal (though, this is not a guarantee, as it only works when appraisal report details are missing or incorrect); or
  • kill the deal.

Thus, under-valued appraisals tend to cause the most harm to buyers in a rising market, a fact well-known by real estate agents and brokers practicing at any point in the past decade.

However, the pricing trends real estate professionals have come to expect are reversing course in the second half of 2022, with California home prices barely rising on a monthly basis in May 2022. Considered alongside slowing home sales volume and skyrocketing mortgage interest rates, the outlook for future pricing is bleak.

When prices take a dive later in 2022, appraisers — who have come to accept the rising market of the past two years — will need to make an immediate adjustment of price expectations.

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The appraisal stakes are longer when prices are falling

The last time prices declined over a sustained period was during the post-Millennium Boom crash, concentrated during 2007-2009. Until 2009, appraisers were not yet required to be overseen by appraisal management companies (AMCs) and thus worked more closely with financially invested parties (e.g. lenders, buyers and sellers).

In 2007, Fannie Mae issued directions to appraisers on how to handle a declining market. While AMCs now handle much of the oversight addressed in the notice, the advice remains true. For example, during a declining market, Fannie Mae suggests appraisers:

  • include an objective assessment of the market direction in the neighborhood within which the subject property is located, considering factors like:
    • recent price changes;
    • average days-on-market; and
    • the supply of homes; and
  • adjust for recent sales which have included excessive seller concessions, which cause home prices to appear higher than their actual FMV.

Unlike a below-market appraisal which can kill a deal, an above-market appraisal is unlikely to cause trouble for the buyers or sellers — at the time of the home sale. After the sale closes escrow, it’s a different story for the new homeowners.

Appraisers who ignore negative home price trends will end up over-valuing the property, causing the buyer to overpay and fall underwater immediately upon closing the sale. This also harms the lender, who is now on the hook for a mortgage encumbered by negative equity.

Therefore, it comes down to the appraiser to complete their appraisal report accurately and thoroughly.

Complaint process for appraisals

When an interested party believes the appraiser has not filed an objective and complete appraisal report, they may file a complaint with the Bureau of Real Estate Appraisers (BREA).

The BREA recently updated its complaint process. Users are now required to create an account before filing a complaint at the BREA’s complaint page.

Most complaints about licensed appraisers are submitted by lenders, AMCs and government agencies. On the other hand, individual appraisers file nearly all AMC complaints.

To determine whether the complaint warrants an enforcement action, the BREA’s Enforcement Unit establishes whether minimum appraisal standards were met under:

  • the Uniform Standards of Professional Appraisal Practice (USPAP);
  • the Real Estate Appraisers’ Licensing and Certification Law; and
  • California appraiser law. [Calif. Code of Regulations Title 10 Chapter 6.5]

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Securing your practice against appraiser complaints

Real estate professionals: For the past decade, we have heard about your experience with appraisals coming in low. Have you started to see the opposite occur in your local market, with more appraisals coming in above the agreed-to price? Share your experiences in the comments below!