How To Maximize Your Appraisal During A Mortgage Refinance

During the housing boom, nobody worried about appraisals. If you put in a bid to purchase a house for $300,000, the appraisal was basically guaranteed to come out at $300,000 or above. Appraisers are hired by lenders, and back then lenders wanted to make the loan happened no matter what. Therefore, if you were an appraiser and you didn’t reliably provide the number that the lender wanted, then your phone might stop ringing. I was told directly that the intended purchase price itself was a “strong indicator of value”. Rather self-fulfilling, no?

Nowadays, banks are much more cautious, and thus so are appraisers. In addition, recent legislation created new Appraiser Independence Requirements for Fannie Mae and Freddie Mac loans. At the same time, mortgage rates are at lows and refinance requests are at highs. Your ability to refinance is often dependent on what the appraiser says your house is worth, as you will need to satisfy a certain loan-to-value ratio. So what can you do to maximize your appraisal?

Feel out the lender first. Appraisers still work for lenders, and a good mortgage broker should be able to give you an idea of your chances for an adequate appraisal given the current environment and your basic home details. Check recent sale prices in your neighborhood on sites such as Zillow.com and Trulia.com to get a realistic sense of what to expect.

Collect supporting documents. If you’ve made any improvements to the house, gather up any blueprints or housing permits to provide to the appraisal. You could also make a list of the best “comps”, or recent sales of comparable homes in the area. If you’ve gotten one recently, dig up your last appraisal, and see if there were any omissions or changes. A busy appraiser might simply copy stuff from the previous appraisal. You may even find that they just bring a copy of the old appraisal and mark off things as they go.

Prepare your house. The appraiser will call you to schedule a time to see the interior of your house. Some people have suggested that you should hire a landscaper and basically stage your house as if you were selling it. I don’t know about spending that much energy on things, but I would definitely keep things neat and tidy. Have the kids and pets playing elsewhere. You want the house to come off as well-maintained and cared for.

Meet the appraiser. You’re dealing with a human, so be nice. Walk the appraiser around your house, answer any questions he or she may have, and point out any changes that you have made to the house. When I met my appraiser he was happy to see our official building permits that showed our legal additions. We also pointed out any remodeled areas and newly-installed hardwood flooring.

I don’t know if all appraisers would be open to debating about exactly what houses make good comps to yours or not, it might rub them the wrong way. But you could probably point out ways that your house is different than other potential comps (bigger yard, pool, view, etc.).

Read the appraisal report and follow-up if needed. Request a copy of the report and review it for any inaccuracies. The workload is high right now, and it could be that they mixed up details with another house or just copied stuff over from other sources. Point out any errors along with supporting evidence and you may be able to get the appraisal re-evaluated. On the extreme end, you might ask for another new appraisal at your cost.

Don’t worry about property taxes. While the local government might consider your house’s sales price history when figuring out your home’s tax assessment, they will not be notified of the value from an independent appraisal. In fact, they probably have a rather rigid formula to figure out your home’s assessed value (they do have to do this on a lot of houses) based on things like number of bedrooms, number of bathrooms, square footage, lot size, etc. If anything, you might volunteer data from the new appraisal to appeal your assessed value – assuming it’s lower of course!

In the end, by taking these steps we felt that we had done our best… and our refinance was a success, so good luck!

Comments

  1. This is all useful advice, but it goes out the window if the appraiser cannot find any comps that are “normal” sales. We just refinanced our home in January to take advantage of the HARP program, and the appraisal was sobering, to say the least.

    We cleaned up the house, walked the appraiser through the house, chatted up the improvements and premium features. At the end of the walkthrough, he turns to me and says, “This is all wonderful, but it will have no affect on your appraisal because I cannot find a single ‘regular’ home sale in a 5 mile radius within the last year.”

    And he was right. Every single home sale in not only our subdivision, but every neighborin subdivision, was either a short sale or a foreclosure. In that scenario, it doesn’t matter how much you’ve upgraded the house, because the appraisal value…per the fed regulations…defaults down to the short/foreclosure going value.

    End result…our house was appraised for 12% lower than what is should have been if we had normal sales to compare it to.

  2. There’s something called a “streamline” refinance that can be done on FHA mortgages while having no equity at all or being upside-down. Obviously, in this case, the value of your home means nothing in the process as they simply give you your current loan back at todays low interest rates.

    However, in all other cases (non-FHA loans, investment properties, trying to pull out extra money with equity, etc) your article makes good sense.

  3. We just had an appraisal for refinance and the appraiser just picked the number we chose, though honestly I didn’t see a lot in his report to support the price. I was sure it would come in $10k-$20k under. Anyway, I kind of got the feeling nothing has changed. You pick a number out of the air, the appraiser agrees, the mortgage company is HAPPY to give you the loan, and life moves on. That’s how it was in the boom. To be fair, our house was very close in value to what we needed. Obviously if the difference is six figures, you are screwed. But being so close, I just kind of rolled my eyes and thought “business as usual.”

    {What happened is I just picked a number out of the air to get us to 80% equity, but I honestly felt home prices were at that point, or even higher. I later saw prices had declined, and I worried the refi would not go through. We will squeak by the skin of our nose on this one! I would have paid cash down to keep 20% equity though – I guess the bank didn’t know that. I really want the refi. ;) }.

  4. Insurance almost always goes up with a higher appraisal just like taxes

  5. LargeTalons says:

    I had a similar experience as Rik, comps are the number one thing they use. If you have a unique property, or sales volume in your area is low, chances are your appraisal will come out much lower than your house might actually sell for. Its a vicious cycle now, in the opposite direction of before the crash. Appraisers are much tougher on values now, thus more people cannot qualify for refi, thus more foreclosures, thus lower home values, ect. In my personal opinion, appraisals are almost completely useless. While going for my refi recently, I had two appraisals done which differed from each other by 20%. That experience demonstrated to me how subjective the process is. Banks need to find a better way of doing this, and if the government is interested in kick starting the housing recovery, they need to open up no-appraisal, existing balance refinances to everyone, not just a strict subset of loans.

  6. I have had 7 appraisals done on my home and rentals in the last 4 years and my experience is this: unless you have added square footage to the home, the appraisal will come in at (what the house last sold for) – (the amount the average home has decreased by in your zip code over that time frame). We gutted one house top to bottom, replaced absolutely everything, and the appraisal came back at what we bought the place for minus the general market decrease, improvements didn’t matter.

    We bought our current residence a year ago and it appraised at $150k, we paid $125k since it was a short sale. When we refinanced a year later, the appraiser said home values had been stable so our value hadn’t changed – yet the appraisal come back at $125k. The appraiser only knows what the house sold for, not what it appraised at. Sounds like hogwash to me. If it appraised at $150k and the values haven’t changed, then it should be worth $150k, right? Basically, you’re paying these people several hundred dollars to snap a few pics of the house, and compare the last sales price to the market deflation/inflation.

  7. I agree with most of what has been said. The appraisal process isn’t particularly interested in the condition of your home. And I totally agree about the vicious cycle. Lower appraisals are pushing down home prices which are pushing down appraisals.

  8. Due to the steep drop in rates, I refinanced my house twice last year several months apart. The second appraisal came in $15K lower than the first. Nothing has changed including the market which was fairly stable during this time. Good thing that it was so I don’t mind putting in the extra money to get the deal through, but this shows you how arbitrary the process can be.

  9. Yeah I don’t think that cosmetic appearance or minor elements of the home will really matter much.
    One time I talked to an appraiser who was evaluating my home. I asked him about landscape and interior condition and he told me none of that really mattered for the appraisal.
    For one appraisal I had they did not enter the interior of the home. They just drove by and took some photos.

  10. I vote with Thuy and LargeTalons — if you really need a particular value for your refinance, and it doesn’t come in on your first try, try again with a different appraiser.

  11. I researched this issue myself a while back and the best tips I came up with are these: (1) put your best foot forward by making sure the house is immaculately clean; (2) make arrangements for your dogs to be elsewhere at the time of appraisal; (3) provide a written list of improvements to the appraiser, which will be used when looking at comps; and (4) just sit quietly on the sofa when the appraiser is doing their work (no one likes to be followed while doing their work, and something might be overlooked because you’re busy talking.

  12. Jonathan, I agree with you most part but not all including checking the zillow for comps. I am also a partime realtor and real estate investor and deal with clients and appraisers a lot. Here is my 2 cents.

    1. There is a report which came out in Wallstreet journal clearly saying that Zillow and Trulia estimates are off almost10-20% and also their comps are not really accurate. There is also a recent survey done by one houston company and I wrote about it my realtor website at smarthoustonrealtor.com

    2. Appraisers get paid by clients not by lenders even though they get their job from lenders. They are like realtors who needs to be middle when analyzing and apprasing the house. They cannot go with the figure from lender.

    3. Appraiser is done for any structural improvements and any cosmetic changes doesn’t really matter. Whether you have your house dirty due to small kids, it doesn’t matter. It’s the strutural maintenance and improvements on the house which counts. If you have wood floor compared to carpet, that matters.

    4. If you need comps, talk to local realtor and they might be happy to get it for you even though you are not in the market.

    5. You can ask for changes in the appraiser but they most likely will have supporting document for their appraised value which they will have in the report. It’s very rarely modified after you input.

    Hope this helps.

  13. I’m not saying you should use the Zestimate or whatever, but you can use Zillow or other websites to find actual homes that sold in your area along with sold prices. The Zestimate is just some computer-generated number that can fail to incorporate certain factors.

    @Scott – That is one area that I forgot to mention – our insurance did go up a tiny bit because our value went up and the lender wanted to adjust the homeowner’s insurance accordingly. The physical house value vs. land value didn’t change that much though.

  14. Jonathan, the minute i finished reading your piece i thought you left out probably the MOST crucial advice – do what Alexandria did and TELL THE APPRAISER THE NUMBER YOU’RE LOOKING FOR.
    Your appraiser does not know what value you need to get approval for the loan, but if you let them know they will probably appraise that number IF THE COMPS CAN SUPPORT THE APPRAISAL. After all they are human and will likely feel more inclined to give an appraisal value that makes all 3 or 4 parties happy (the buyer/seller/2 banks) if they know what that value is, as long as they can support the value with the information available to them.

  15. It probably is a very good idea to tell the appraiser the number you need. It will color the appraiser’s analysis and they will anchor to that level and increase the likelihood that if it is reasonable they will appraise for the targeted value.

  16. Based on my conversations with them, I was always under the impression that the appraiser knew exactly what number was needed, it was just a matter of if they could justify it. But I agree, you probably can’t go wrong by telling them just in case.

  17. Generally I think an appraisal is supposed to present an independent and objective opinion of the property’s value. So they should not really be working towards your target amount. The appraisers are often working for the lender rather than the homeowner so the lender would not want them inflating the values of homes. Telling the appraiser how much you want the home to be worth really shouldn’t influence their result. It is likely unethical for them to aim for a goal and depending on the situation and local laws it could be illegal as well.
    You usually can’t make the payment based on them hitting the goal or not. Having said all that I imagine that there are many appraisers that will try to hit the dollar value people want, even though thats not how its *supposed* to work.

  18. Zillow values are generally within +/- 20% of the market value most of the time. They are more accurate in some places and less accurate other places. A lot of people put too much value in Zillow numbers. They should be viewed as a ballpark estimate starting spot.

    But Zillow is still useful to give you that ballpark starting place. You have to look past the single “Zestimate” number and find the range of values. For exmaple if they say the house has a Zestimate of $220,000 then you can’t expect that to be very accurate. But if you pay attention to Zillow site and scroll down you can find the range of prices. If the range says the house is worth $189,000 to $255,000 then that range is likely to be more accurate.

  19. Zillow always seems to be off in ever area I own homes. Shrug. We’re planning a refi but we’re resigned to the fact we’ve put 30k into upgrades for our main house in 2 years and we will still probably see a 20-30k drop in value since the purchase in late 2009.

    Don’t trust appraisers at all. They seem to give the numbers the bank wants. Sometime the number is silly high.

  20. @vijaianand is correct. You pay for the Appraisal (unless you negotiated for someone else to pay it). Therefore you have more leverage to get that person to be more thorough if you so require.

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