According to Kansas City real estate appraiser Thomas Linsin, real estate values are appreciating modestly across the area and are up from last year's values.
Yet, he says, some homeowners are finding out that new appraisals on homes they purchased in the last couple of years aren't appraising for as much as when they purchased, making their homes less valuable and ineligible for equity loans.
What gives? Linsin says he's noticed that the discrepancies appear to occur only on homes that were originally appraised using automated valuation models (AVMs.) AVMs have an inherent flaw -- they don't allow for "adjustments," a term Linsin says is crucial. A human appraiser can eyeball a roof and see if it needs replacing, or count the number of spaces for cars in the garage, whereas an AVM simply calculates the normal range for the neighborhood. And that's why AVMs and walk-in appraisals can be thousands of dollars apart.
AVMs are a quick way to satisfy a lender's requirement that a home's purchase price meet the appraisal price, but AVMs have a long way to go to meet the more exacting standards of the walk-through inspection, says Linsin.
"They're good for certain situations," says Linsin, "but they shouldn't be used for primary mortgages because that doesn't protect the buyer as well."
He explains that there are several grades of appraisals that banks use, the least expensive and quickest of which is the AVM at around $30. Banks purchase AVMs from other companies, such as First American, to use in appraising real estate, and seldom pass this fee on to the buyer. The next step is to involve a human appraiser, who's least expensive approach is to sift through comparables and courthouse data to determine a "desktop" market value. After that is the "drive-by," where the appraiser takes into account the condition of the exterior of the property. A "walk-in" appraisal allows the appraiser to see the condition of the interior of the home. A walk-in appraisal can be upwards of $350 and is always charged to the buyer.
Why would a bank use an AVM if the results are less accurate and a buyer may be willing to pay for a more complete appraisal?
"Because the bank is able to have the property valued and it met the bank's needs," says Linsin. "The bank is making the loan on the borrower's FICO score and income, and the borrower's ability to pay the loan the back, not on the collateral."
But that may be causing a headache for some buyers. When they return in a couple of years to get an equity loan, a lower valuation via a walk-in appraisal could stop the process.
"There's an issue where the most recent value sheds a bad light on the original value," says Linsin. "Apparently, the equity is dependent on the valuation."
Linsin sees the AVM problem as a problem not only for buyers but for buyer's agents, because the appraisal does nothing to protect the buyer from overpaying for the home.
"Many real estate contracts have an appraisal contingency that requires that the property appraise for at least the purchase price," says Linsin. "Presumably, an AVM meets this obligation. I also wonder if buyer's agents, who specifically represent the buyer in a transaction and are paid to look out for their best interest, are simply assuming that the bank will complete a full "walk-in appraisal" in order to ensure that their buyer is making a sound real estate investment when actually the bank is mostly interested in lending money to qualified buyers with the buyer's investment being a secondary concern."
Solution? Find out for your next buyer how the bank plans to appraise the property and have the buyer ask for a walk-in appraisal. Make sure that the appraiser does many appraisals in the neighborhood.
