How to ensure a fair home appraisal
Joe Magdziarz, president of the Appraisal Institute.
Tess Vigeland: So as Nancy mentioned, it's a great time to get a mortgage -- assuming you can find a bank that's actually lending money. But before they do, they'll require and appraisal of the property. Same if you're doing a re-fi. They'll visit the house, and they'll look at what are called "comps" -- comparable homes that have sold in your area. But the high number of foreclosures is complicating the math, because foreclosures can also be used as comps.
Joe Magdziarz is president of The Appraisal Institute.
Joe Magdziarz: Foreclosure sales should only be used as a last resort by appraisers.
Vigeland: But from what we're hearing, foreclosures are factoring in. Is there a certain point at which they should be calculated?
Magdziarz: For example, in the Las Vegas market, where there are so many foreclosures, they might be the only sales occurring.
Vigeland: Hm. So you don't really have any other so-called "comps."
Magdziarz: That may be the case, but hopefully that's in rare circumstances.
Vigeland: Are there other markets where you're seeing that is necessary?
Magdziarz: Well, there have been some in Florida, where they have a huge oversupply of condominiums and a lot of foreclosures. But then in some markets, there's usually a number of market transactions that should be utilized.
Vigeland: Does that mean that as a general rule, unless you're in a place like Las Vegas or Florida, that foreclosures should not be calculated when appraisers are out looking at your home's value?
Magdziarz: An appraiser must consider all the sales in the marketplace and look for the ratio of conventional sales versus foreclosure sales.
Vigeland: Then explain to us why a property owner, perhaps in a nice neighborhood, thinking that their home has a certain value would then have to be subjected to the fact that maybe a bank as been holding onto a foreclosure for a long time, really due... It's not the home owner's fault at all that that foreclosure is sitting in their neighborhood.
Magdziarz: You're correct. It's not their fault. And in some markets, the marketing time to solve these foreclosures is greatly extended. And that's very unfortunate. When we had that situation before in the savings and loan days back in the late 80s and 90s, that oversupply was sold off rather quickly. So we're not experiencing the terrible decline in values that you see today.
Vigeland: Hm. How much of an effect would a foreclosure have on a home value, perhaps within a block or two or within a neighborhood?
Magdziarz: You have to look at the ratio of homes that are selling normally in that market. And then you should concentrate on those sales as being reflective of market value. If one had to use a foreclosure sale, it would require probably a significant upward adjustment to bring it to a value conclusion similar to that that would happen under a normal market sale.
Vigeland: How does a home owner make sure they're getting a fair appraisal?
Magdziarz: Well, unfortunately, the regulations for federally related transactions -- this would be a loan through a bank -- the lender must select the appraiser or they use a management company or another fiduciary to select that appraiser. So the home owner really doesn't get to choose the appraiser.
One of the things they could do is request someone from that immediate area. And if they have a chance to talk to that appraiser, they should ask him how active they are in that area, when they're making an appointment. If they find out that they're 50 miles away, I would probably tell that person not to come and call that lender and tell them to get somebody local. Because right now, it's really important that you understand that market, and that market could be a very small area. You wouldn't send someone from Chicago out here to DeKalb to appraise a home.
Vigeland: All right, Joe Magdziarz is the president of The Appraisal Institute. Thank you so much.
Magdziarz: You're welcome.