TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/57493
FEATURE SERVICING The New Math, Appraisal Style Lenders and servicers face special challenges when it comes to handling appraisal data; find out what industry pros can do to ensure a seamless mortgage process. By Brian Coester, CEO of Coester Appraisal Group E very lender has experienced it. You get a borrower who wants to refinance. He or she has done a lot of work on the house. Everything looks great until the appraisal comes in. You check the numbers and the value is significantly lower than the borrower expected. What follows isn't typically pretty. Sometimes the borrower will respond indignantly, reasoning that the value is too low, that the house is improved and upgraded, surely the best in the neighborhood. You may hear something like, "I know Tom sold his house down the street for $500,000 last month, but I've spent $50,000 more on renovations—mine should be worth at least $50,000 more than his. If you aren't going to do something, I'm filing a complaint and calling that new appraiser hotline." All of a sudden, the confusion over value has turned into what sounds like an accusation, as though you had anything to do with the value. Needless to say, it's particularly frustrating for loan officers, who have no control over the value of a property. These types of conversations happen every day and are indicative of the mass confusion among homeowners about what renovations or upgrades mean to their homes. While we certainly hope there won't be a next time, if you come across these difficulties with a borrower, here are some tips for shedding light on the issue. Location, Location, Location A s the old adage goes, the three most important factors to consider when purchasing a property are location, location, location—the notion being that your value will be protected more by location than by any other factor, which is probably true. That said, the same goes for the reverse. Values are also limited by location. Renovations and upgrades can get you to the top of your neighborhood's range but they can't get you out of your neighborhood. If you live in a market area of homes that sell for $400,000 to $500,000, the less renovated, less up-to-date homes will probably sell for somewhere between $380,000 to $420,000, the average ones will likely go for $420,000 to $460,000, and the renovated ones will probably fetch somewhere between $460,000 and $500,000. There may be one freak comparable, possibly a crazily renovated home that sold at $510,000, which the homeowner probably purchased with cash. One Plus One Does Not Equal Two A homeowner who just spent $70,000 on kitchen and bathroom renovations for a house that was purchased for $500,000 will likely assume the home to be worth $570,000. And why not? It's simple math: Great house for $500,000 + $70,000 in renovations = $570,000. Right? Not necessarily. The equation could very likely look more like this: Average neighborhood house valued at $430,000 + upgrades that are valued at $50,000 = $480,000. When the appraiser hands over the final report and the homeowner sees the $480,000 value, it's not unheard of for the homeowner to not only feel that the appraiser is wrong, but also to suspect that he or she has been THE M REPORT | 53 ORIGINATION SERVICING ANALYTICS SECONDARY MARKET