The first I had heard of Appraisal Management Companies (AMCs) was after reading an article in the July 5, 2009 Sunday San Francisco Chronicle, written by Kenneth Harney. As outlined in the article, AMCs are a by-product of the Home Valuation Code of Conduct and a New York lawsuit. Now appraisers are selected by AMCs rather than in the past being selected by mortgage companies, or loan officers. On the surface it seems that this might be a needed solution to preventing appraisals being unduly influenced by the loan industry in order to just get a deal done. However, it’s application in real life is more dramatic and personal and shows a need for Congress to make some additional changes.

When I read the article, I was representing a first-time home buyer in a purchase with a partner of a duplex in San Francisco. The lender was requiring an additional appriasal and we were sent an appraiser from Concord California, a city located approximately 25 miles to the north. The property was a remodeled duplex, or 2-unit building. The upper unit had a partial view of Stow Lake, one of the few on the block that had this amenity, it had 3 parking spaces. In San Francisco a parking space alone is worth $20,000 to $40,000. The appraiser used recent comparable sales that included a short sale that was unremodeled and in need of repair, a sale in which the selling agent had not taken a commission, and then added a further decrease in value for California being in a declining market. Not all areas of San Francisco reflect this decline. In San Francisco, duplexes can be entered into the fast-track condo lottery, which if successful can result in immediate equity increases if a condo permit is obtained. For this reason duplexes should sell at a premium related to other multi-unit sales.

The result of this appraisal is that it came in $50,000 lower than expected and was the one the lender used to determine funding for the loan. Since the appraiser had included the remark that California was in a declining market it resulted in a further decrement to the loan amount available to my client. Okay, so what’s the problem? Well both parties had to find other funds to complete the sale that they should not have had to do, since in all parties’ opinion the value was artificially low and the appraisal flawed. The buyers had to come up with additional money on short notice, since they were not able to borrow the amount the lender had initially promised. The seller had to lower their price, which affected how much a newly married couple were planning on spending on a new home purchase to start a life together in another city. Believe me, the effect is a lot more dramatic than this description when you see it up close with real people filling in the blank spaces. It also required that both agents communicate clearly to all parties what was happening to keep lines of communication open and the relationships strong.

During his visit to the property I asked the appraiser about the article I had read in the Chronicle. He said the AMCs had affected his business dramatically, in part because they took almost 1/2 his fee, so he was working harder to make the same money. He also said that no appraiser, if they wanted to continue working, wanted to be seen as providing over-valuations and were now more likely to provide an artificially low-ball value, which of course has some predictable results on the transaction.

The Chronicle’s summation was perhaps best: “Be aware of this issue because it affects your equity whether your buying, or selling. And watch to see if Congress fixes the problem.”

Posted By: Bill Wygant