Question: I was scheduled to close on a home on June 17, 2002 for $230,000. I was approved for a 97 percent loan in the amount of $223,100. At the last minute my lender declined the loan because they said that even though the property appraisal came in at $230,000, the report didn't have the recent sales of comparable homes to support the price. The appraiser used a "time adjustment" of $20,000 to justify the value. Apparently, the underwriter didn't like this and declined the loan. Since I can only afford three percent down, I can't buy the house unless they accept the appraiser. Now I'm searching around for another lender who can help me get a better appraisal. Any suggestions would be helpful.

Answer: Demand for homes has been very strong for the last two years. Especially in certain bigger communities such as Washington, D.C., Los Angeles and Phoenix, property values have skyrocketed. So far this trend doesn't appear to be waning.

The hot "seller's market" without a doubt poses a problem for appraisers. A licensed appraiser is hired to give an opinion of value of the property. The appraiser's opinion needs to be supported in the appraisal form, which should substantiate the value by examining recent sales of comparable homes in the area.

This is a great way to determine value if there isn't a frenzied demand for homes. America, by and large, is experiencing an imbalance of the supply and demand in residential real estate. In other words, there are too many buyers and not enough sellers. When this happens, prices will automatically be bid up.

Herein lies the problem for the appraiser: How can he validate a $230,000 sales price of a home when all the recently sold homes in the area sold for less than $220,000?

There are a couple of things he can do. First, he can make "adjustments" based on inferior and superior aspects of the home for sale. For example, let's say the house you are buying has a nice big deck off the kitchen. A similar home in the neighborhood that recently sold for $220,000 has no deck. The appraiser may make a $3,000 adjustment in the appraisal report. This would help substantiate a sales price of $230,000.

The problem we're running into today is that the sheer demand for homes is jacking up prices. There are no physical improvements to validate a higher value. Some appraisers have resorted to using "time adjustments" to support the value. A time adjustment takes into consideration that the property has naturally appreciated in value over time.

Most lenders will accept time adjustments within reason. They understand that assets such as real estate are bound to go up in value. But there's a very real worry that large time adjustments are merely a crutch to support a false value.

A time adjustments of one or two percent should be acceptable if it makes sense. In your case, a $20,000 adjustment for time is excessive. Your appraiser should have known that his report was likely to get kicked out of underwriting.

The question you need to answer is whether or not there are other reasonable comparable homes that can support a value of $230,000.

You are doing the right thing. Another lender will provide a new appraiser. You will then get a better handle on whether or not the home you're purchasing is deemed to be overpriced.

Published: June 19, 2002

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