Appraisal can complicate selling, refinancing a home

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Joanna Zimring Towne thought refinancing her Altadena home would be simple.

When Zimring Towne and husband Andrew Towne, a 48-year-old television lighting technician, bought the two-bedroom home for $535,000 in 2006, the appraiser valued it at about $600,000.

During the November 2011 inspection, Towne walked around the property with the appraiser. The couple were being charged $500 by the management company that employed the appraiser, but they considered it a minor sacrifice, hoping to reduce their mortgage rate to 3.25% from 6.9%.

Then the valuation report arrived a few days later, and hope turned to anger.

“The appraiser spent about 10 minutes in the house, didn’t take photos and gave us an appraisal of $350,000,” said Zimring Towne, 37, director of the career services center at Los Angeles’ Pierce College. Not taken into account, she said, was that “in this area, we have tremendous [price] variability within a mile radius.”

The appraisal process has become a headache for homeowners looking to secure historically low interest rates and buyers and sellers hoping to reach property deals.

More than a third of real estate agents say they’ve recently seen lower-than-expected appraisals hold back home sales, even though buyers and sellers had reached agreement on price, according to a survey by the National Assn. of Realtors.

Of the agents surveyed, 11% said a contract was canceled and 9% said a contract was delayed because of a low valuation, the association said. And 15% said they had a contract renegotiated to a lower sale price because of a low appraisal valuation.

“The combined issues of stringent mortgage lending requirements and appraisal frictions are hampering otherwise qualified buyers from purchasing a home in a timely fashion and in some cases are preventing them from buying at all,” Lawrence Yun, the Realtors group’s chief economist, said in a statement accompanying the survey results.

The Realtors group and others say sometimes problems arise because appraisers, employed by large appraisal management companies, may not have sufficient experience in a neighborhood.

In addition, real estate agents say, a low valuation can occur when an appraiser doesn’t take a home’s condition into account, hasn’t kept up with market values or compares the property to homes that really aren’t similar in a market complicated by foreclosures, short sales and other distressed properties. Often, lenders are being cautious to avoid some of the valuation mistakes made during the housing-bubble years.

Whatever the reason, appraisal horror stories are easy to find.

Leo Nordine of Nordine Realtors has been unable to refinance his 3,500-square-foot Hermosa Beach home because he can’t get the property appraised for a high enough value.

“I have had offers of $4.5 million. It appraised for $2.5 [million] in September. Tear-down lots on my street sell for more than that,” he said.

“I have been in the business for 25 years. I know everyone. I have perfect credit. And I can’t even refinance my house,” the 59-year-old real estate broker said. “If I have no control, the average guy who doesn’t know anything about real estate has no control either.”

Rosemary Kubeck-Shumski, 47, a mortgage loan advisor and branch manager for Real Property Finance Inc. in Redondo Beach, recalled a four-unit Torrance investment property that was appraised to be worth $350,000 less than expected in June 2010.

Kubeck-Shumski, who has been in the business since 1991, said, “I could tell the guy did not go to the property. He pulled photos from the Multiple Listing Service.”

After showing comparative values on local listings and providing original photos, Kubeck-Shumski got the appraisal bumped up to $975,000 from $635,000.

Miguel Soler, 38, an agent with Re/Max in Valencia, said that when a property has multiple offers, the homeowner should ask the appraiser to note the number of bids in the report. “This shows that the market is appreciating and the amount of interest in the property,” he said.

The opinion of the appraiser doesn’t always determine the sale price. In June, a Valencia listing that appraised at $640,000 sold for $690,000, Soler recalled. In this case, he said, the lender capped the loan and the buyer came up with the extra $50,000.

Even with good information, complex appraisals can be tricky territory for the most seasoned appraisers, said Mark Backonen, chief executive of Class Appraisals Group, a leading appraisal management company based in Troy, Mich.

“For the most part, everyone is trying to make the best decisions and do the best work they can. But when you have areas with a high number of foreclosures and banks dumping properties, it causes all kinds of problems,” he said.

“If there are no similar homes next to the subject property, the entire theory of appraising goes out the window.”

Backonen said that of the 10,000 appraisals his company conducts each month, about 3% are disputed. Of that 3%, a third are corrected and two-thirds are upheld.

In the 1980s, after the savings and loan crisis, the Uniform Standards of Professional Appraisal Practice were adopted. They require an appraiser to be competent, independent and objective.

Industry watchdogs called for regulation in 2009 after accusations emerged of ethics violations and inflated values resulting from a too-cozy relationship between loan originators and appraisers. The Home Valuation Code of Conduct was created to prevent collusion by making appraisal management companies, not individual banks or lenders, responsible for selecting appraisers to value homes.

Now, the Consumer Financial Protection Bureau is pushing for more transparency in the mortgage process, full appraisal reports and valuation data, information on the appraiser who recorded the report and disclosure of cost-splitting of appraisal fees, which range from $250 to $1,000. Backonen said Class Appraisals keeps approximately 10% to 15% of the fee.

For those with the appraisal blues, new guidelines and standards can’t come soon enough.

In Altadena, the Townes are remodeling their kitchen and hope to try again for a better valuation.

“It is hard to justify putting a $20,000 kitchen into a house that — unless we can refinance — we will never come close to breaking even on,” Zimring Towne said.