Thinking of buying or selling a home?

Even when both sides agree on a price, the deal could fall apart thanks to an under-appraisal.

Here's the increasingly common scenario: The seller lists the house for $325,000, the buyer offers $275,000 and they settle on a $300,000 sales price. A week before closing, the appraisal comes in at $265,000, the maximum upon which the bank or mortgage company is willing to lend.

Who's going to make up the $35,000 shortfall?

"This has proven to be a fairly significant problem," says Walter Molony, senior public affairs specialist with the National Association of Realtors, in Washington, D.C.

In the aforementioned scenario, the seller -- having already come down -- typically doesn't want to drop the price further. The buyer may not have the available cash, or may not be willing to pay more than the appraised value.

Consequently, the wheels often fall off the deal.

Short appraisals typically arise in a declining housing market because the lack of recent comparable area homes sales, or "comps," making it difficult for appraisers to determine the current market value of a property.

When home sales slow, good comps "age" fast. Add foreclosures and short sales to the mix and appraisals can run all over the map.

The Home Valuation Code of Conduct, or HVCC, that went into effect last May has compounded the problem. The HVCC prohibits Fannie Mae and Freddie Mac lenders from having direct contact with appraisers.

As a result, most lenders have opted to work through appraisal management companies, or AMCs, whose pool of residential appraisers includes those with limited training and/or little familiarity with the geographic area being appraised.

A rash of recent questionable appraisals has prompted the National Association of Realtors and others to call for a moratorium on the new code, Molony says.

"We were deluged by complaints from our members," he says.

"Our findings show that among successful home buyers in the last year, 12 to 13 percent experienced a contract cancellation and this is the cause. Prior to this year, that figure would have been a low single-digit number."

Dean Moss, broker associate with Keller Williams Realty -- Lincoln Square in Chicago, has seen six instances of "severe" under-appraisals this year. While the buyer may lose the dream house and inspection and appraisal fees, the seller is often left with a much larger problem.

That's especially true with Federal Housing Administration or Veterans Affairs deals; in such instances, a file number is assigned to the appraisal, Moss says.

"So, the next buyer has to look up that file number," he says. "They can't just put that appraisal in a drawer. It puts a permanent mark on the property that impairs its ability to sell."

That's a bitter pill to swallow, especially if your under-appraisal is unsupported by valid comps.

Leslie Sellers, president of the Appraisal Institute in Chicago, says the root problem lies with the way AMCs are compensated.

"They are paid a fee and they make their money on the spread between what they can get paid from the bank and what they can hire an appraiser for," Sellers says. "Over a period of time, the lesser and lesser quality appraisers are the ones that end up getting all the work.

"As a result, we have appraisers who do not have competency in how to properly verify sales in declining markets and are using improper sales, known as comps. Many times they aren't doing fraudulent things; they just don't know what they don't know."

How can you protect yourself from short appraisals? Here are some suggestions for buyers and sellers.

If you're a buyer

-- Tell your lender to find an appraiser who comes from your county, or perhaps a neighboring county.

-- Request that the appraiser have a residential appraiser certification and a professional designation. Examples include the Appraisal Institute's senior residential appraiser, or SRA, or member of the Appraisal Institute, or MAI, designations.

-- Meet the appraiser when he or she inspects the home and share your knowledge of recent short sales and foreclosures that might skew the comps.

"Many appraisers are just pulling up data out of MLS (Multiple Listing Service) or off the deed at the courthouse and not checking it out," Sellers says. "Most good appraisers will appreciate the information."

And yes, you can speak with your appraiser; the prohibition only applies to your lender.

If you're a seller

-- Get an appraisal before you list a home. Search for a qualified appraiser in your area on the Appraisal Institute website.

-- Use the appraisal to set a realistic listing price for your home.

-- Give a copy of your prelisting appraisal to the buyer's appraiser. "They won't be offended," Sellers says. "The more professional appraisers will understand that you're just trying to add more data and another perspective."

-- Question a low appraisal. There's always a chance the appraiser or a supervisor will take into account new or overlooked information.

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