About two months ago, one of my staff appraisers purchased a home, went through a reputable national lender and then waited for the loan to be approved. They paid list price and there were two higher offers submitted as backups.

The lender hired and sent their approved appraiser to complete the assignment. The appraiser inspected the 3 story 3,000 square foot house that needed a lot of TLC, completed the appraisal and delivered it to the lender.

That’s when the trouble began

The appraiser came in at about 11% below the purchase price (even though there were 2 backup offers and the property sold in about a week). As it turns out, the appraiser missed about 17% of the house during the inspection. The square footage was significantly different than the amount in public record and the floor plan appeared to be of a different house. The lender provided a copy of the report to my employee. All comps used were verified by my employee and were found to be generally accurate so the issue was really the selection of inappropriate (non-comparable) sales due to the incorrectly calculated size of the house.

My employee and his wife had to agonize through this situation for about 2 months before the lender decided to began to deal with the issue.

The appraisal department of the lender, hoping to keep their “Chinese Wall” in place to keep the appraisal review separate from the loan reps, finally contacted the original appraiser with the flawed report and requested that he review the inaccuracies. Not surprisingly, he said all was in order and he was not going to look at the report any further.

Here’s the problem

The lender’s policy was to average the two appraisals together. This means that the flawed appraisal would be averaged with a second (hopefully) accurate appraisal. This would make sense if the complaint was simply a difference of opinion. However, in this case, the issue was not over a value opinion. The original appraiser missed part of the house he was appraising.

While the lender should not automatically assume that any borrower’s complaints are valid, they should have the ability to get a handle on the major issues without a lengthy delay.

Averaging good and bad appraisals to arrive at a value is unreasonable since the flawed report should not be considered at all. The lower of the sales price and the appraised value were going to be used for this loan, so the borrower is still penalized for the original appraisal.

My employee never lost his cool and kept hammering away at the fact that the good and bad appraisals are being averaged and he kept hoping someone would hear him. I called someone I know, who knew someone at the lender, who knew someone, but ultimately, we do not know if this made any difference.

To give my employee proper credit, he never raised his voice or got personal with the lender. He relentlessly stated the facts orally and in writing, and documented everything. He was resigned to the fact that his seller would get cold feet and one of the other 2 backup offers would take the property.

And the good news

Out of the blue, the lender called and threw out the original appraisal. The mortgage was approved.

Raises the question of fairness

Unlike my appraiser, how can a person who does not understand appraiserspeak and not have access to confirmed data get a fair deal? In this example, the borrowers were appraisers and understood what data to present to the lender and how to interact with them.

Would typical borrowers have the same ability to research and argue the flaws of a report? I doubt it. In the lender’s efforts to separate the sales and underwriting function of a loan, sometimes the chasm is too far between underwriting and sales.

The questions we have are: what took the lender so long to deal with this unfortunate situation and what made them change their minds?

In the end, the lender did the right thing and for that, we can all be thankful. However, my employee plans to file a complaint against the appraiser with the Department of State for negligence after the loan closes and will demand a refund of the appraisal fee simply on principal. We can only hope that the lender will rethink their procedures for approving, reviewing and removing appraisers, so that no one else has to go through this again.


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4 Responses to “Averaging The Good And The Bad Appraisals: Everyone Loses, But The Loan Closes”

  1. Lea says:

    One more…

    in the last line. ….so this no one else has to go through this again. It should be … so that no one…

    Lea

  2. Cheryl says:

    Wouldn’t a spread of, say, more that 10% between the two appraisals be a clue for the lender that there is a problem with one or the other appraisal? Seems like the lender would want to actively pursue the discrepancy in order to both make the loan, which benefits everyone and to protect themselves.

  3. John Cicero says:

    I say, whenever there is a spread of more than 10% between any two appraisals, it should be legally required that lenders send the appraisals to the state board (and/or The Appraisal Institute) for screening.

  4. M. Messier says:

    More than a 10% variance between appraisals can be expected in many markets characterized by; an older housing stock; high dollar/custom; view amenities; intangibles. In such case I would be worried if the variance was less than 10%, perhaps suggesting collusion rather than an independent opinion of value.