The fate of your next home purchase or mortgage refinancing may be determined in an unpretentious, computer-lined office suite like the one real estate appraiser Donald Zimmerman runs in Northfield.
There, on the third floor of the Willow Hill Executive Center, in offices overlooking the Edens Expressway, Zimmerman and his staff calculate the square footage of thousands of bedrooms and basements, pore over stacks of real estate sales reports and zap digital pictures into computerized reports.
When completed, these reports can make or break a real estate deal. If the valuation in a professionally prepared residential real estate appraisal falls short of a home’s selling price, it can kill the sale.
Zimmerman, who in 1978 started his company, Donald Zimmerman & Associates, and the other 4,000 real estate appraisers operating in Illinois play an invisible, but crucial, role in almost every residential real estate transaction.
“Before a lending institution approves a mortgage on a single-family residence or condo, they want an objective, independent opinion of its value. The home seller can’t provide that value; he’s too emotionally involved. Nor can the real estate broker, whose commission is on the line.”
Instead, the mortgage lender turns to a real estate appraiser, a professional who performs a physical inspection of the home in question, checks out its neighborhood and compares its selling price or mortgage refinance amount against the selling prices of comparable homes in the area. An appraiser also plays a key role when homeowners try to demonstrate they have enough equity to drop costly mortgage insurance.
In Illinois, the fee for an appraisal averages $250, and is paid by the home buyer or homeowner seeking a refinancing as part of the new mortgage’s closing costs. The lending institution will either assign an appraiser to the task, or allow the home buyer to choose one from a selected list.
The appraiser will spend about an hour at your home, measuring rooms, checking your most recent real estate tax bill and checking your plat of survey against his measurements.
In addition to using a tape measure and clipboard, many appraisers are investing in digital cameras and computers equipped with special software because lenders want information and images sent electronically.
“The appraisal is a safety check for the lender,” says Russel Haraus, an appraiser and the manager of the single-family division of Appraisal Research Counselors Ltd. in Chicago. “If a homeowner gets into trouble and can’t make his mortgage payments, the bank will have to take the property back. And if the appraisal on that property was too high, the bank will lose money.”
That’s exactly what happened in the 1980s, when the nation’s savings and loan institutions were left with hundreds of overvalued commercial properties.
The resulting failure of these institutions prompted Congress to pass the savings and loan bailout bill, the Financial Institutions Reform, Recovery and Enforcement Act of 1989. Part of that act required all 50 states to begin licensing and certifying their real estate appraisers, who, until then, had operated relatively unchecked.
Now, anyone who appraises residential and/or commercial real estate “in federally related transactions” in Illinois must be licensed or certified by the Real Estate Appraisal Administration Division of the state Office of Banks and Real Estate in Springfield.
Because all banks operate under federal charters, this means that since 1993, almost anyone performing real estate appraisals in Illinois has had to meet basic license requirements, which include at least 75 hours of approved courses in real estate appraisal, and pass an examination.
To be certified, an appraiser must take more courses, have 2,000 hours of appraisal experience, and pass another exam. The requirements for membership in the industry’s half-dozen professional associations, including the Appraisal Institute, with national headquarters in Chicago, are even more stringent.
The existence and enforcement of appraisal standards doesn’t guarantee that all residential real estate appraisals are uniform themselves, however.
“Theoretically, two experienced appraisers looking at the same house should come within 3 percent of each other,” Zimmerman says. “But it’s hard to remove subjectivity from the process. You’re always making a decision about things like whether the decorating is right for the market and if the home’s exterior building materials and landscaping fit in with the neighborhood. Two appraisers might also select different comps ? comparable home sales to compare the house against.”
If your appraisal matches or exceeds the price you’ve agreed to pay for that new home, or covers the amount you want to refinance, the process remains invisible. Disputes occur, Zimmerman says, in about one appraisal out of 25, when the appraised value comes in below the selling price. Such discrepancies can happen when the appraiser values a renovation or room addition project at less than the seller thinks it’s worth, or when the house has a hidden defect, such as a location within a flood plain.
In a slow real estate market, comparable sales figures may be too old to make good comparisons; in a hot market, like Lincoln Park, they are too new.
If you had agreed to pay $250,000 for a house the appraiser says is worth only $200,000, for example, you can, of course, walk away from the deal. But more often, Zimmerman says, the buyer and seller will negotiate a new price or the buyer will increase his or her down payment, so that the mortgage and the appraisal numbers are in line.
Other discrepancies, however, may arise within the appraisal process itself.
State appraisal director Larry Bullock says his office has fielded hundreds of complaints against appraisers since 1993 and has leveled sanctions against 190 of them.
“The biggest complaint we get,” Bullock says, “is about appraisers acting as advocates for their clients.”
A mortgage loan officer working on commission, for example, may want to push up home values and will shop around for an appraiser who will oblige. Bullock’s office is routinely informed about such offenses by other appraisers.
Home sellers and homeowners looking for large refinancing loans may try to pressure appraisers into writing high appraisals ? an appraiser on Zimmerman’s staff recently turned down a $100 bribe ? or spouses in a contested divorce may file dueling appraisals with the court, artificially inflated and deflated valuations for the same piece of property.
Most often, however, problems in the appraisal process arise from inexperience. The appraiser disciplinary actions listed on the state Web site (www.state.il.us/obr) involve mostly “careless and negligent” documents filled out by assistants and passed off as the work of licensed or certified professionals.
How can you be sure the appraisal process works properly in your next real estate transaction? Appraisers, state enforcement officials and real estate brokers offer the following tips:
- For a home owner or seller:
- Don’t wait to be surprised by an appraisal. If you’re thinking about expanding or renovating your home, pay a real estate appraiser to go over the plans with your contractor and architect before you start the work.
“If you’re spending $45,000 to over $100,000 to improve your home, why not spend $300 to find out if your house will be worth that much more when the job is finished?” says Haraus.
- Physical condition and neatness count. Before the appraisal date, be sure your yard and house are in top shape. In a refinancing, for example, the mortgage lender wants to be sure you can take care of the house for the life of the loan.
- Have copies of your plat of survey, blueprints from any additional construction, and your latest real estate tax bill ready to give the appraiser as soon as he or she arrives.
- Don’t offer information to the appraiser, but be available to answer questions. In a sales situation, you can ask your real estate broker to take over this task.
To select an appraiser:
- Home buyers and those seeking a mortgage refinancing can request a list of approved appraisers from their mortgage lenders; home sellers can ask for recommendations from local real estate brokers or bankers or can request a membership directory from the Appraisal Institute (312-335-4472) or from one of the other professional associations listed on the state Web site.
- Call the state appraisal division (217-524-8200) to check on whether the targeted appraisers are currently licensed and/or certified. In Illinois, licenses are good for two years and must be renewed in a timely fashion or the appraiser must begin the course work and exam process all over again. Ask if complaints have been filed against those appraisers.
- Don’t select an appraiser by price. In Illinois, a real estate appraisal should cost from $150 for a condo to $300 or more for a large house. Anyone offering to do an appraisal for a lower fee is probably less experienced and could make mistakes.
- When the appraisal is completed, ask your lending institution for a copy. Check it for errors and to make sure that the appraiser signing the report is the same one who inspected your home.
For more information on real estate appraisals, call the Appraisal Institute and ask for its brochure, “Understanding the Appraisal.”
