The Science of Appraisals

By Beacon Staff

It’s not uncommon for homeowners, prone to overestimating their home’s worth, to be unhappy with appraisal numbers. But when Cal Scott, a local real estate professional, started getting five or six calls a week from consumers enrolled in his homebuyer education classes he was concerned.

“It was more than the casual thing where it didn’t work out the way they wanted them to,” he said.

Scott, who worked as an appraiser and lending underwriter in the Seattle area for some 15 years before moving here, started calling area lenders and asking them about the trend. “The conclusion from calls to four or five lenders was that they were losing about 40 percent of their refinance applications to low appraisals,” he said.

In many cases, Scott said, those low numbers made sense. The homes were in a declining market and located in an area that had been hit hard. But other appraisals, especially for homes in the lower-price range of $100,000 to $250,000 where values have remained steadier, seemed drastic.

“A property that is somewhere in the range of $250,000 and $400,000 has decreased dramatically over the past year – that’s understood,” Scott said. “But it’s not the same in other areas of the market.”

In Kalispell, for example, statistics show that home prices within city limits dropped about 1 percent, while they actually climbed 3.6 percent in Columbia Falls. In comparison, median sales prices in high-end areas like Bigfork and Lakeside were down about 18 and 27 percent, respectively.

“Many appraisers seem to be overcorrecting or inflicting their opinions by lowering values without consideration as to the price range or geographic area,” Scott said.

For students in Scott’s homebuyer classes, that often means that they don’t qualify for refinancing and are stuck with high loan rates. “Some of these people were the ones caught up in predatory lending; this keeps them in a bad situation,” he said.

Other area lenders and appraisers, however, say low appraisals are more likely the result of a plunge in the number of home sales and an uncertain market than appraiser biases.

Appraisals are an inexact science. At its most basic, the process requires appraisers to compare the property in question with other like properties that have recently sold. Adjustments are then made for differences between the homes; for example, an additional bathroom or new roof.

“With the number of sales three or four years ago, there might be 10 houses on one block that they could use to compare,” Steve Paulson, a mortgage banker with Mann Mortgage, said.

Now, appraisers are faced with a drastically different market: The number of home sales in Flathead County dropped by about 28 percent in 2008, according to statistics from appraiser Jim Kelley.

Appraisers, Kelley said, approach home values in the same way that consumers shop around at different stores, looking for the best price. “It’s one thing if you have 10 stores with the same product, but if no other stores are selling that thing it’s harder to tell if it’s a reasonable price,” he said.

At Mann Mortgage, the “phones have been ringing off the hook” since interest rates plummeted last year, Paulson said. But he noted that appraisals are only one part of the lender’s overall decision, and other requirements have changed as well.

“Credit guidelines are very tight right now and homeowners are limited in amount of equity they can tap into,” he said.

When the market balances out and sales pick up, appraisals will likely become more consistent.

“At this point everybody is just trying to figure out what’s happening in market, and with the number of sales as they are, there’s just not many to choose from,” Kelley said.

Stay Connected with the Daily Roundup.

Sign up for our newsletter and get the best of the Beacon delivered every day to your inbox.