A short sale of a home, as a last-ditch effort to avoid foreclosure, is challenging enough, without the FHA torpedoing it in mid-voyage because of a faulty appraisal. Unfortunately, this is happening now in a disturbing number of cases.
Here is what is happening: As short-sale specialists, we get the short sale process started, set a reasonable price on the house, and start selling. We get an offer, and forward that on to the lender. Because so many houses are FHA insured, the agency also has to sign off on the deal.
So the FHA calls on one of its contract appraisers, who checks out the property and comes back with his or her own valuation of the property. Nine out of 10 times, this works just fine, but for the other 10 percent, the appraisers appear to be coming up with values that are way off the mark. They might have been decent values in 2007, but not in the current environment.
The problem is, once that appraisal is done, FHA won’t budge from that amount. There’s no appeals process, and the only recourse for the seller, the agent, and the lender is to wait out the 120-day shelf life of that appraisal. Despite our protests, FHA just tells us to wait the four months and then they’ll be willing to re-appraise the property.
But in four months, most lenders have worn out their patience, and just go ahead with the foreclosure. In the end, everyone loses. The seller, who tried to do the right thing by putting the house on the market, has to leave and gets a long-term stain on his credit history. The lender ends up with a house that will sit empty for weeks or months, has to pay all the taxes, HOA fees, and maintenance costs on it, and in the end it probably won’t sell for as much as it would have in the short sale anyway.
The potential buyer goes away empty-handed, frustrated at all the behind-the-scenes intrigue. And of course, the agent gets nothing, despite the effort he or she put into getting the house on the market and showing it any number of times.
Some of the appraisals are so far off as to be laughable, if the situation wasn’t so serious. We have seen FHA appraisals that are 50 percent higher than our original suggested price, and we do our homework carefully before setting a price. We are baffled at how unrealistic some appraisals are and wonder if the appraiser got within a mile of the property before coming up with his or her number.
In one recent case in Arlington, Texas, the FHA appraiser completely overlooked the repair values for a house, missing several major shortcomings, and of course came up with a totally invalid value. Our contact at the bank told us, “Sure I know this guy is wrong, but the FHA stands by this appraisal and we have to use it.”
There are solutions to this problem, if FHA would only be open to them. The first and most obvious solution is some form of appeal. Once the FHA appraiser’s valuation comes in, the agent and seller should have some avenue to challenge that and compel the FHA to take a second, expedited look. Closing the door for four months is not an approach that helps anyone involved.
Second, the FHA needs to keep track of the performance of its appraisers. If challenges are coming in repeatedly to the work of certain appraisers, the agency needs to reconsider using them. It’s like having bad refs in NBA games; if all the coaches are complaining and if the bad refs aren’t subsequently weeded out, the league and the game itself suffer.
It’s in everyone’s interest to get accurate appraisals from the start. An appeal process should be allowed for questionable appraisals. Without accurate appraisals, the FHA may continue to force people into foreclosure unnecessarily in at least 10 percent of short sales. They shouldn’t let a red-tape mindset get in the way of a short sale which is the most workable solution to the foreclosure epidemic.