Appraisal Review: Is it a Blessing or a Curse?

If you are in the Real Estate Industry you have been involved in a transaction that has required an appraisal review. Appraisal reviews come in several different sizes and shapes. I think that it is important to know a few key terms before I go on. The following terms AVM, Desk Review, and Field Review are a few of the terms that you will most likely come across in the coming months.

AVM – Automated valuation of a property. This is derived from the best available data at the time the AVM is ran and does not take into account distressed sales or condition of the property.

Desk Review – The original appraisal is reviewed by another appraiser. They critique the original appraisal pull new data and much like the AVM do not take into account many of the items that may make a property unique or valuable. Many times the reviewer is not even native to the area that they are reviewing.From the information they gather they Agree or Disagree with the original value. If they disagree a new value in their best opinion is derived. This will be the value that the Lenders now based they decision off. (I must note I have never had a desk review come in higher than the original appraisal so my example assumes the value was less.)

Field Review – The highest form of a  review. A new appraiser actually goes out to the property and inspects it. They take the original appraisal, new data and information that they obtain from the inspection and come to a conclusion of value. Like a desk review they will agree or disagree and the value that they come up with supersedes any previous value given.

How and Why?

At this point you may be asking yourself if there is an appraisal in the file and the value is in line with the purchase price why then would we need a review? That is a very valuable question. First, HVCC (see previous post) changed the way that the world of appraisal operated. This was brought into play to reduce the risk of overvalued appraisals to protect both the Lender and the Consumer. Brokers had “undue influence” on the value based on a relationship with the appraiser. FHA is not part of the HVCC regulations at this point so Brokers can still order through an appraiser that they have a relationship with.Important update: FHA is now subject to HVCC. So when a loan is submitted and the underwriter is underwriting the loan they almost always (always in my book) run an AVM. If that AVM does not support the value of the appraisal that we have submitted they will ask for either a desk or a field review. The cost of a desk review is much less so many times this is what we opt for. Important Suggestion: If you have a property that is unique in nature, lacks comps, has to be seen to be appreciated skip the desk review and go straight for the Field Review. Yes it will cost more money but a low desk review plus a field review is both more expensive and time consuming. After all time is money. Another Option: In some cases the lender will allow you to order a second full appraisal which at least you could choose the appraiser and cut down on time. This is not always the case so ask first before assuming this can be done.

Side Note: Collateral is the most valuable asset to the lender so this will always be scrutinized the most.

Now that we have an idea of how the review process is triggered let’s take a look at an example:

Purchase Price: $200,000

Original Appraised Value: $200,000

Desk Review: 150,000

Field Review: $195,000

If the buyer is doing a standard FHA purchase they are putting 3.5% down. The value in this case is going to be based on the Field Review as it superseded both of the previous values. The new loan will then be based on $195,000.

Buyer Options:

1. Ask for a price Reduction to 195K based on the field review and send the review with it.
   
2. Pay the difference in Value and Original Purchase Price out of pocket; 5K
   

Given the two options I ask the question is Appraisal Review a Blessing or a Curse?

In my opinion, if the buyer gets the reduction in price and pays a Fair Market Value for the house then it is a blessing. Anytime you get something you want for less money it is a blessing. However, if the reduction is not granted then is my buyer overpaying for the property? Do they have the money to pay the difference? Are they in danger of losing the home?

These are only my thoughts.

What are your thoughts on Appraisal Review? If you have had an experience with it please feel free to share the experience.

Matt Freeman, an accomplished Mortgage Broker, is the author of this article. If you are interested in more information like this please take the time to opt in to receive updates. You can do this now California Home Strategies by simply entering your name and email. Thank you again for taking the time to read through this today.