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Home appraisals turn into a hazard
When Steve and Kristina Solloway decided to refinance their North Raleigh home this year, they assumed the process would be fairly straightforward. The Solloways were hoping to take advantage of historically low interest rates, and the equity they had put in to the home, by consolidating their two home loans into one fixed-rate mortgage. But when the appraisal on their house, which they purchased in 2002, came in $25,000 less than anticipated, they realized they didn't have as much equity in their home as they had thought. Instead of getting one traditional mortgage, the Solloways were forced to use a more costly refinancing package that left them partially exposed to fluctuating interest rates. "For us, the big question mark was the appraisal, and we never thought it would come in that low," said Steve Solloway, 38. Until two years ago, determining the market value of a home was something people in the Triangle didn't fret over. Today, it has become a potential minefield for those looking to buy, sell or refinance a home. The uncertainty is a byproduct of the bursting of the housing bubble, which has increased scrutiny on the appraisal process at a time when appraisers have less information to work with. The appraisal is supposed to give the lender assurance that it has the true value of the property before committing to a loan amount. In order to put a value on the property, an appraiser will look at recent sales of similar properties in the surrounding area. These are called comparable sales, or comps. Until recently, most Triangle appraisers had only worked in a market where home values were on the rise and comps plentiful. "We've never had a dip," said Gordon Tefft, owner of Residential Appraisers in Raleigh, who has been in the business for 22 years. "It was rarely ever declining unless it was something freaky." The recent decline in home sales means that appraisers have fewer comps to choose from and that some of the sales that have occurred may have involved properties that were sold at a discount by people under financial duress. Third-quarter home sales in the Triangle totaled 6,780, down 39 percent from the third quarter of 2006, according to Market Opportunity Research Enterprises, a Rocky Mount group that tracks Triangle housing trends. The average price of homes sold during the quarter was $234,826, down 10 percent from the third quarter in 2007. In the case of the Solloways, there were no recent sales in The Pointe at Lemuel, their North Raleigh subdivision, which has a number of houses up for sale but has not been plagued by foreclosures. The lack of recent sales in The Pointe forced the appraiser to expand the search and use sales in the adjacent neighborhoods of Harps Mill Woods Run and Durant Trails. Vic Knight, owner of Chapel Hill Appraisals and a member of the N.C. Real Estate Commission, said the lack of an active market has made writing appraisal reports more challenging. "There's a lot less information out there to choose from," he said. "A lot of times the information that is there to offer is even more complicated." Banks get skeptical Further complicating matters is the fact that banks, after years of lax lending standards, are closely scrutinizing appraisals, looking for any hint that a property may be overvalued. This is leading to appraisals coming in $5,000 under the contract price, something that rarely happened before the housing meltdown. "Appraisers are being very conservative because the lenders are definitely crossing their t's and dotting their i's," said Chris Shelton, a mortgage banker for SunTrust. "It's kind of a snowball effect." Chris and Kristen Wu recently saw firsthand how cautious lenders have become. The Wus reached an agreement with a seller to purchase their first home in the Cambridge subdivision in North Raleigh for $305,000. The appraisal came in right at the purchase price. But six days before they were to close, the bank ordered up another appraisal. It didn't like the comps used in the first one. "Some of them were over six months old is what they were saying," said Dennis Franken, a real estate agent with Ammons Pittman GMAC Real Estate who represented the Wus. When the second appraisal came back, it was $20,000 less than the first. The Wus, who had just broken their lease, had no place to live if they didn't close on the home by the middle of October. "Twenty thousand less, that's a lot for the seller to swallow," said Chris Wu, 31. "We were very concerned that she would come back and just say no." The seller agreed to the lower price, and the Wus were able to close on schedule. "We ultimately were very lucky and were able to save $20,000," Chris Wu said. 'Take a deep breath' Todd Barbour, vice president of Meridian Residential, a Cary mortgage broker, said that over the past 12 months, he's had more listing agents calling to inquire about the status of an appraisal than ever before. "Once that appraisal is done, they take a deep breath," he said. Barbour, who represented the Solloways in their refinancing, said there's always been a degree of subjectivity to an appraisal. But he said new federal regulations for appraisals have had the unintended consequence of devaluing the work of the appraiser at a time when it's more important than ever. Anti-fraud measure The regulations, called the home valuation code of conduct, are designed to prevent mortgage fraud by eliminating direct contact between appraisers and lenders. Appraisals are now ordered through a third party, called an appraisal management company, which takes a cut of the money that used to be paid to the appraiser. "I think you're getting lower quality results," Barbour said. "It's a longer process, and the appraiser is paid less to do it." Most of the recent changes to the appraisal process are designed to prevent the kind of behavior that helped create the housing bubble in the first place. The housing market crashed, in part, because banks made too many loans to unqualified buyers on property that turned out to be vastly overvalued. For homeowners who once viewed their homes as an endless source of wealth, a post-crash appraisal can come as a shock. "We all think our home is worth more than what it is," said Bryan Parker, a mortgage banker for Wells Fargo. The Solloways estimated their 2,200-square-foot house would appraise at about $265,000 after looking at the most recent sales in their neighborhood. They also knew a family in their neighborhood with a similar floor plan who had refinanced earlier this year and received a similar appraised value. "It's hard to argue, because you don't have a basis for anything," Steve Solloway said. "There's a lot of opinion involved, and that's where it gets murky." http://www.newsobserver.com/business/story/193028.html |
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