Here are a few important appraisal reminders and issues.
I. Appraisals Are Coming In Low More Often Now.
We’re seeing more low appraisals than in the past – primarily because markets are softer and appraisers are reluctant to push values to the top of the comp range. Agents should prepare their clients – unless the comparable sales are particularly strong.
II. Artificially Inflated Purchase Prices To Cover Large Credits Will Likely Result In A Low Appraisal.
We recently received an appraisal that came in $75,000 low. Not coincidentally, the sellers had also agreed to pay for $80,000 of repairs through escrow – and the contract price exceeded the list price.
Exceptionally large credits often result in low appraisals – especially in soft markets and when the contract price exceeds the list price.
III. Don’t Celebrate Too Soon If An Appraisal Comes In “At Contract Price.”
This is because every appraisal is subject to an underwriter’s review, after it comes in. And – if a CU score is above 2.5 or higher (depending on the lender/investor), a desk review may be ordered.
IV. What Is A CU Score? (Low Scores Are Better)
CU stands for Collateral Underwriter; they surfaced about a decade ago; and I blogged about them way back in 2016: Fannie Mae’s Collateral Underwriter; The Dreaded CU Score.
Fannie Mae uses CU software to analyze every appraisal for “risk,” giving them a CU score of 1 to 5 (1 is the lowest risk; 5 is the highest). If an appraiser ignores “inconvenient comps” in close proximity to the subject, for example, the CU score will likely be too high.
V. Freddie Mac Has Its Own Version Of CU – Called Loan Collateral Advisor or LCA. Lenders Compare CU/LCA Scores To See Which Is Lowest.
If Fannie’s CU score is too high, lenders will often see if Freddie’s score is lower – and, if so, get the loan approved under Freddie Mac guidelines. The reverse happens too.
VI. CU Scores Prevent “Friendly” Appraisers From Pushing Values Above The Comparable Sales Value Range.
Appraisers are well aware of CU scores, and they know if they push a value too high, the CU score will be too high. This will subject the appraisal to a review by another appraiser, and often result in conditions that appraisers must address – creating a lot more work for the appraiser. Smart appraisers understand the CU algorithm and try to ensure CU scores will not be too high.
VII. Underwriters May Order A Collateral Desktop Analysis (CDA) When They See A High CU Score (2.5 or higher, depending on the lender).
A CDA is a desktop (as opposed to a field) review by another appraiser – who closely scrutinizes the appraisal for accuracy and ensures the best comps were employed. Underwriters sometimes order field reviews, too, where review appraisers actually drive by the subject and the comparable sales. CDAs usually take two business days, and we have been having great luck with them coming in at value, as of late.
VIII. Lenders Need Appraisals At Least Five Business Days Before Close.
This gives lenders enough time to review the appraisal (required every time) and order a CDA if necessary. If a CDA is ordered, an additional day or two may be necessary.
IX. We’re Seeing Refi Appraisals Come In Under Purchase Price.
We recently had a Plano, TX appraisal come in under a purchase price from two years ago. This is something we used to rarely see, but it is more common now – especially in many Sunbelt markets.
X. Appraisers Correlate To Purchase Price. (Homeowners Should Keep Their Receipts For Improvements)
Even in appreciating markets, appraisers are often reluctant to appraise a home for more than its purchase price for 12 to 24 months after close. If homeowners do improvements after they buy, they should carefully document them and keep their receipts to show the appraiser. A verbal discussion about all the work that was done will rarely suffice.
