New York Times – When calculating the value of a property, an appraiser also factors in surrounding conditions. Neighborhood nuisances like an overgrown yard or a resistant odor could, in some cases, bring down the value of adjacent homes by 5 to 10 percent, according to the Appraisal Institute.

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• What a homeowner might refer to as a bad neighbor, the appraisal industry calls “external obsolescence” – depreciation caused by factors off the property and beyond the homeowner’s control.

• Some issues are not always permanent and an appraiser may overlook them. But an obvious eyesore, like a yard cluttered with old cars, for example, may be enough to prevent a neighboring property from selling.

• The perception of what’s unsightly varies by neighborhood. It’s possible that even a roof covered with large solar panels might be considered obtrusive in some areas, though the impact on nearby homes would be far less negative than if the property was run-down.

• Some neighborhood annoyances may be potentially mitigated with help from the local municipality. Unregistered vehicles in a yard, for instance, or a chicken coop and thumping late-night music, may violate local ordinances.

• Real estate professionals recommend homeowners work directly with their neighbor before making a complaint, to avoid future problems.

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New York Times – As home sales pick up in the million-dollar-plus market, deals are being complicated by unexpectedly low appraisal values.

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Wall Street Journal – The growing gap between a high-end home’s sale price and its appraised value can prompt potential buyers to walk away; those who decide to buy anyway may end up with an unwelcome mortgage surprise.

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Six federal financial regulatory agencies have issued the final rule that establishes new appraisal requirements for “higher-priced mortgage loans.” The rule implements amendments to the Truth in Lending Act made by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). Under the Dodd-Frank Act, mortgage loans are higher-priced if they are secured by a consumer’s home and have interest rates above certain thresholds.

For higher-priced mortgage loans, the rule requires creditors to use a licensed or certified appraiser who prepares a written appraisal report based on a physical visit of the interior of the property. The rule also requires creditors to disclose to applicants information about the purpose of the appraisal and provide consumers with a free copy of any appraisal report.

If the seller acquired the property for a lower price during the prior six months and the price difference exceeds certain thresholds, creditors will have to obtain a second appraisal at no cost to the consumer. This requirement for higher-priced home-purchase mortgage loans is intended to address fraudulent property flipping by seeking to ensure that the value of the property legitimately increased.

The rule exempts several types of loans, such as qualified mortgages, temporary bridge loans and construction loans, loans for new manufactured homes, and loans for mobile homes, trailers and boats that are dwellings. The rule also has exemptions from the second appraisal requirement to facilitate loans in rural areas and other transactions.

In response to public comments, the agencies intend to publish a supplemental proposal to request additional comment on possible exemptions for “streamlined” refinance programs and small dollar loans, as well as to seek clarification on whether the rule should apply to loans secured by existing manufactured homes and certain other property types.

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Washington Post As the real estate market heats up and prices continue to recover, more home buyers and sellers are likely to encounter the problem of an appraisal that is lower than the agreed-upon sale price.-

Making sense of the story

• Appraisals must be based on recently settled transactions, and in a rising market those past transactions are likely to be lower in price. Whether a buyer or seller, it’s important to understand the risks involved around low appraisals – and the options available.

• Because of new restrictions on the relationship between lenders and appraiser – aimed at curbing the appraisal abuse that contributed to the housing bubble – buyers and their mortgage representatives have less control over the process.  Lenders simply order an appraisal from a list of approved appraisal companies, and a third party directs the individual to perform the appraisal.

• Resulting from the third-party rules, the appraiser who is assigning a value to the home may not be from the immediate area. It can help to inform the appraiser of the quality of the school district or the amenities in the local neighborhood, as well as improvements to the property as compared with other recent sales in the area.

• One appraiser recommends sellers prepare a package of information on the home, including data on comparable houses and any improvements that have been made that should influence the value of the home.

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Los Angeles Times – Unexpectedly low appraisals can happen for a number of reasons, especially when foreclosures, short sales, and other distressed properties abound.

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Wall Street Journal - Rules proposed by federal regulators would ban the practice of “drive-by” appraisals and require a physical inspection of the home.  But the rules, required by the Dodd-Frank financial overhaul of 2010, would only apply to a small slice of the mortgage market – loans defined by regulators as “high risk.”

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Six federal financial regulatory agencies have issued a proposed rule to establish new appraisal requirements for “higher-risk mortgage loans.”  The proposed rule would implement amendments to the Truth in Lending Act enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  Under the Dodd-Frank Act, mortgage loans are higher-risk if they are secured by a consumer’s home and have interest rates above a certain threshold.

For higher-risk mortgage loans, the proposed rule would require creditors to use a licensed or certified appraiser who prepares a written report based on a physical inspection of the interior of the property.  The proposed rule also would require creditors to disclose to applicants information about the purpose of the appraisal and provide consumers with a free copy of any appraisal report.

Creditors would have to obtain an additional appraisal at no cost to the consumer for a home-purchase higher-risk mortgage loan if the seller acquired the property for a lower price during the past six months.  This requirement would address fraudulent property flipping by seeking to ensure that the value of the property being used as collateral for the loan legitimately increased.

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(Editor’s Note: Several members have raised questions concerning whether the county assessor can reassess properties upon sale for greater than the purchase price. The issue seems to relate principally to the reassessment of tenancies-in-common in cases where the sale of an interest in a building results in a reassessment of the entire building.

Set forth below is a question and answer from the State of California’s Board of Equalization web site that, in part, addresses the issue.)

How does a change in ownership affect property taxes?

Each county assessor’s office reviews all recorded deeds for that county to determine which properties require reappraisal under the law. The county assessor may also discover changes in ownership through other means, such as taxpayer self-reporting, field inspections, review of building permits and newspapers. Once the county assessor has determined that a change in ownership has occurred, Proposition 13 requires the county assessor to reassess the property to its current fair market value as of the date ownership changed.

Since property taxes are based on the assessed value of a property at the time of acquisition, a current market value that is higher than the previously assessed Proposition 13 adjusted base year value will increase the property taxes. Conversely, if the current market value is lower than the previously assessed Proposition 13 adjusted base year value, then the property taxes on that property will decrease.

Only that portion of the property that changes ownership, however, is subject to reappraisal. For example, if 50 percent of the property is transferred [as in a TIC sale], the county assessor will reassess only 50 percent of the property at its current fair market value as of the date of the transfer, and deduct 50 percent from any existing Proposition 13 base year value. In most cases, when a person buys a residence, the entire property undergoes a change in ownership and 100 percent of the property is reassessed to its current market value.

Wall Street Journal – Record-low interest rates are a boon for home buyers and for homeowners seeking to refinance.  But low appraisals are making it difficult or even impossible for some borrowers to take advantage.

Making sense of the story

• Lenders report that “overly pessimistic appraisals caused by appraisers using distressed sales as ‘comparables’ are a key reason why deals are falling through.

• Part of the problem is that home prices have plummeted further than many people would like to believe.

• Another key factor is the appraisal changes enacted in the wake of the financial crisis that were designed to eliminate improper pressure on appraisers that often led to inflated valuations during the housing boom.  However, critics say those changes resulted in unnecessarily conservative valuations and the greater use of appraisers with little knowledge of local market conditions.

• Additionally, accurate valuations can be difficult to come by when sales are thin and prices are just beginning to edge upward after prolonged declines.  Many borrowers are “in a holding pattern for extended periods” because it’s difficult to find comparable sales to support the appraisal value.

• Despite these issues, there are ways consumers can improve their odds of getting a deal done.  For example, borrowers can look at comparable sales from the last three to six months before seeking a mortgage to know the range of home values in the area.

• Secondly, although borrowers cannot choose their appraiser, they can accompany the appraiser during the inspection, pointing out improvements that add to the home’s value.  They also can provide the appraiser with comparable sales that can be used to support the valuation.

• Borrowers also can request that the lender review the appraiser’s findings, though the chances of success are slim.  If the borrow thinks the value is unreasonably low, they should first look for factual errors, such as an erroneous number of bedrooms or miscalculated square footage.

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