Mary Kay Scully From Enact: Adding Value–Becoming an Appraisal Expert

Mary Kay Scully is the Director of Customer Education at Enact, leading the development of the company’s customer education curriculum. In this role, she trains over 35,000 professionals per year on a wide range of topics, including tax return review, fraud, updates to process improvements, and how to navigate and adhere to evolving compliance requirements. The statements in this article are solely the opinions of Mary Kay Scully and do not necessarily reflect the views of Enact or its management.

People are becoming increasingly interested in how much their house is worth, which has put appraisal accuracy under the microscope.

According to NAR, in 2023, 42% of lenders had a transaction fall through because of an appraisal. This begs the question: How much are you thinking about appraisals? How much do your customers understand about them? Do you know what to do when the appraisal needs a second look? Are you familiar with the new guidelines on Reconsideration of Value (ROV)?

If you are not thinking about these things now, you will be when an ROV request comes through. Brushing up on appraisals and how you can help ensure accuracy is the best way to help your borrowers and keep your business moving smoothly.

What is a residential appraisal?

While it may seem self-evident to you, it is important to be able to explain what an appraisal is to your borrowers. Remember, most homebuyers do this only a few times in their life and have no idea what goes into an appraisal. As always, it is your responsibility as an LO to teach them.

The appraisal is a report with an independent opinion of how much a property is worth. It includes an on-site visual inspection of the property and suggestions for improvements, followed by the research, analysis, and development that produces the appraisal report. In addition to a value opinion, it also provides details pertaining to local market trends, provides the reader an understanding of conformity to the area, and addresses any concerns with location influence or physical conditions.

Beyond simply explaining what an appraisal is, you also need to explain how it fits into the home buying and selling process. It’s important to let your customers know when the appraisal takes place and what is included in an appraisal report. What makes a house valuable – or not valuable – in their eyes may not match up with what actually influences the valuation.

Appraisals consider:

• Sales trends and price ranges for comparable homes in the neighborhood

• Location of the home

• Neighborhood (Is it urban, suburban, or rural? Is it old or newer and growing?)

• Square footage of the house and the lot

• Layout of the house

• Hazards such as flood hazards or other adverse conditions

• Age and condition of the foundation, roof, walls and overall structure

• Amenities, such as a fireplace, deck or swimming pool

• Condition of appliances

• Fees associated with the property (such as HOA or cost to build a similar home from the ground up)

What impacts an appraisal?

While there are a ton of factors that impact a home’s value, there are also plenty of factors that do not. The most common myth about home value is that every improvement pays for itself. It’s easy to think that if you put $50,000 into a home improvement project, you will see $50,000 added to your home’s value, but this is false. It completely depends on what that money is being invested in. For example, while making a bathroom addition can add value, it often costs much more than sellers see in added home value, according to a 2021 Cost vs Value Report. Pools are usually the same: they come with a hefty price tag to install but rarely add that much in home value when it’s time to sell.

More is not always more. Homeowners need to think about the location of the property when making improvements. Money.com says upscale appliances or fixtures may add value in an upscale neighborhood but may not make sense to those looking in a more affordable neighborhood. Similarly, a pool can be a great feature for homes in warmer climates but may not be a selling point in areas where it’s only usable for a couple of months out of the year. The bottom line is that just because something is nicer or more expensive does not mean it will always translate to a higher home value.

According to Bankrate, the projects that add the most value are kitchen renovations, bathroom renovations, energy efficient improvements, basement conversions and exterior enhancements.

There is also something completely separate from the home itself that can influence its value: bias. Appraisal bias exists when demographic elements like race, ethnicity, or national origin impact the opinion of value rendered by a professional appraiser.

As an LO, be able to spot the signs of bias to help protect borrowers and sellers. There are certain terms that are red flags for appraisal bias. For example, terms like “pride of ownership,” “crime-ridden area,” “desirable neighborhood or location” or “up and coming,” may indicate underlying bias or cause a biased reaction by the reader. The GSEs each have resources on unacceptable terms and practices that everyone should familiarize themselves with:

• Fannie Mae’s Unacceptable Appraisal Practices
• Freddie Mac’s Unacceptable Appraisal Practices

What happens if there are issues or questions on the appraisal?

The operations staff can request clarification from the appraiser if there are areas that feel inaccurate in the appraisal report. People make mistakes. Whether made intentionally or unintentionally, it’s part of your job to spot red flags or inconsistencies to ensure everyone gets a fair deal. Remember, appraiser independence requirements (AIR) ensure that appraisers can use their professional judgment without pressure from those with interests in the transaction so be sure to adhere to the requirements that restrict sales personnel from communicating directly with the appraiser.

If your customer disagrees with the value, they can request a reconsideration of value (ROV). But make sure that if this request comes through, you know your process for accepting and ordering one. Do not wait until you have an issue to deal with. It’s important to be familiar with this process now to act quickly when problems arise.

Appraisals can be a sensitive but important area for your customers. Sellers want to be compensated for the full value of their home, and buyers don’t want to overpay. Being able to educate customers on appraisals, what impacts them, and how they can ensure accuracy is becoming increasingly important, so take the time to familiarize yourself with them now so you can be prepared when the need arises.

(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes submissions from member firms. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)