In the exuberance of the mortgage boom, it was broadly accepted that home values were moving upward quickly. Were these swiftly rising home values justified? Home owners are beginning to feel the pain of inflated appraisals. In some cases it is even costing them their homes.
Housing Boom Inflated Appraisals
During the boom days of mortgage borrowers, real estate agents, and mortgage brokers paid little mind to the home appraisal process--unless the value was low. The mortgage bubble was fueled by cash-out refinancing and home equity lines of credit. These loans were contingent on home appraisals coming in with consistently rising home values. So, the focus of home appraisals shifted from objective third-party evaluations to "in the money" lending assessments. Borrowers got their cash, real estate agents got their sales, mortgage brokers got big commissions, and the appraiser got to stay on the call list.
Unfortunately, stories like Carl Petrone's, reported at Forbes.com, are becoming all too common. Carl, a retiree moving from New York to North Carolina, bought his new home on an inflated appraisal. All was fine until Carl's health took a turn for the worse forcing them to sell his North Carolina home. Much to his devastation, buyers offers and appraisals were showing his home to be worth nearly 15% less than what they bought it for--declining home values? No, deceived by a colluding appraiser and real estate agent (who owned the home he bought).
This is certainly a case of fraud and extreme, but the scenario is relevant to consumers in the current mortgage market.
Inflated Appraisals Short Homeowners
Many appraisals were inflated during the mortgage refinance boom--leaving troubled homeowners without options. A homeowner's equity is critical insurance. It gives opportunity to tap it for emergency funds, refinance into a less risky mortgages, or even sell a home for profit. However, if purchased or refinanced on an inflated appraisal many homeowners are finding themselves financially upside down, without options.
Evaluating a Home Appraisal
Appraisals are key to paying or financing the equitable value of a home. Doing a little research before accepting an appraisal is prudent. The following are some tips for evaluating appraisals:
- Compare other home sales and listings in the neighborhood. Today that is as easy as looking online at sites like Zillow.com or Trulia.com. Even better, take a stroll through the neighborhood and talk to neighbors and pull flyers from homes currently for sale.
- Study the comparables provided in the appraisal. Are they truly equivalent properties? Consider characteristics like square footage, age, bedrooms, and amenities. Also, ensure that the comparables are within a reasonable and relevant distance of your property.
- Investigate service providers. Review the appraiser's standing with State Appraisal Board as well as the State licensing of real estate agents and mortgage brokers.