When appraisals go wrong.

Author:Fall, William

MOST OF US SEEM TO FORGET MURPHY'S LAW ON A REGULAR BASIS--but it sure has a home in the mortgage industry, where anything that can go wrong, will.

Surely with constantly changing guidelines, new rules and regulations, there are more different ways a real estate sale can go sideways than there are words in this column.

Certainly a borrower's inability to secure financing to buy a home is the No. 1 reason deals fall apart. But a very close second is problems involving the appraisal. In fact, according to the National Association of Realtors[R] (NAR), Chicago, more than one out of every five home sales is delayed or canceled before closing because of an appraisal issue.

Just within the appraisal process, there are many different ways things can go wrong. Yet most, if not all, are preventable in some measure by either lenders or appraisers--or both. Three in particular stand out and bear mentioning.

Lack of expertise

In general, the qualifications to become an appraiser are as high as they have ever been. So is lack of expertise really an issue? It is--and one needs only to take a closer look at the realities of today's appraiser workforce to understand how it is possible.

The average appraiser is in his or her mid- to late 50s, and every year we see fewer and fewer people entering the profession. A growing number of markets are already experiencing severe closing delays of a week or more because the demand for appraisers is far exceeding the supply.

In my opinion, correcting this issue requires creating an alternative path to an appraisal career that includes fewer impediments to entry while maintaining high standards. The current reality is that when a market is experiencing a shortage of appraisers, it increases the risk that a lender will be assigned an appraiser who is working outside his or her market area.

Often an appraiser who lacks local market expertise will err on the side of caution by submitting a lower opinion of value than the negotiated purchase price. This increases the chances of a contract falling apart--in fact, in 2012, 11 percent of Realtors reported that a low appraisal caused sales to be delayed and 15 percent said contracts had to be renegotiated because of a low appraisal.

To counter this risk, some lenders are choosing to work with appraisal companies or partners that will certify an appraiser's geographic competency before the assignment.

It's important to point out how important human expertise remains in the...

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