If you're about to close on a home, whether you are buying or selling, you may want to pay special attention to how much you are paying for the appraisal – and exactly where that money is going.
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According to Ken Chitester, director of Communications at the Appraisal Institute, new Federal Reserve regulations that went into effect earlier this month have created a loophole for appraisal management companies (AMCs), allowing them to pocket more on appraisals—ultimately hurting the consumer. Appraisals typically average around $500, but appraisers themselves are being paid about half that cost, with the other half going into the AMC's pocket, according to the Appraisal Institute.
Chitester said the loophole when it comes to the Federal Reserve's new regulations -- which mandate that "customary and reasonable" fees be paid to appraisers – is that the AMCs determine what these customary and reasonable fees are, including in the portion they intend to take. The fees look higher and are not broken down to explain who is getting what portion of the money. This was never a part of Dodd-Frank, he said, which was signed into law in July 2010 with the goal of improving the financial regulatory system after the recession, and intended to bring back the most qualified appraisers into the field.
"This would seem to gut the spirit and intent of Dodd-Frank," Chitester said. "The best appraiser would produce the best work, whether you are buying or selling—you want a credible opinion of value. You want someone to defend it six ways to Sunday and back, and the best and brightest doing that work are (paid) much more."
So why are consumers paying more than double the real cost for appraisals? Jeff Kaufman, partner at KEL Attorneys, said the answer is simple—they don't realize it. Kaufman said all consumers need to ask for a breakdown of the fees and where each dollar they are spending is going, before they get to the table at a closing.
"If you ask for the appraisal costs upfront and you get to the closing and it’s more, you can walk away," he said. "If you have it in writing, then that is wrong. I wouldn't pay it. Do not trust the financial counselor or whoever is handling this for you because if you do not pay attention, they will figure out a way to take advantage of you."
Also, be involved from the start, so you know what the appraiser, AMC and lender are doing every step of the way.
"It's not like you’re holding a crappy Gucci bag and thinking, 'Oh, this isn't Gucci,'” Kaufman said. "You won't know if you aren't there."
AMCs are trying to make more on the back end, according to Chitester, and are paying appraisers less and less. The most qualified appraisers are not willing to do their job for $200, he said.
"It’s a basic dumbing down of the profession," Chitester said. "The most competent appraisers have refused to accept those fees and have found other ways to make a living."
Kaufman said having lender-appointed appraisers appraise your home will lead to cutting corners and ultimately damage the deal, regardless of if you are buying or selling your home.
"It's kind of like getting your medical treatment done in Mexico," Kaufman said. "You are getting the worst possible person to appraise your house. Some of these guys won't even inspect it; they may just drive by the house. And it can cost you a deal if they low-ball."
All is not lost for consumers, Kaufman said. There are several ways you can be more involved, and make sure your home is getting the appraisal it deserves. The most important thing is to get involved in the appraisal and closing process. Look at your closing statement before the deal is done, and see where your money is actually going. Chitester also said consumers need to be present at the inspection, and point out all the features of the home.
"You can hold the closing off," Kaufman said. "You can have a say on who is actually appraising the property. Talk to the title company and ask who they use for appraisals. In certain states you can still pick you appraisers."
Chitester said consumers should request a designated appraiser, who has achieved standards above the other licensed and certified appraisers.
"You can't request an individual appraiser, but you can say you want a designated appraiser," he said. "Even though you are paying the bill, it's ultimately how much you scream and make your voice heard."
Also, ask around before picking your title company, Kaufman said. See who friends and family are using. The more reliable and respected a title company is, the more likely it is they will pick the right appraiser.
"The larger and more responsible the company is, the less problems you will have," he said.
Also, if you feel the appraisal isn't right, ask for a second job. You may have to pay out of pocket for it, but Chitester said it's worth the extra money.
"You can appeal the appraisal," he said. "For a few hundred bucks extra, compared to the biggest investment of your life, it's not a big deal."
If all else fails, refuse to close. It is your right to have a fair closing, and if you think the house has been low-balled, speak up, Kaufman said.
Although many people are likely being low-balled on their loans, Kaufman said it is unlikely the legislation loophole will be closed. AMCs could get in trouble for pocketing the fees, but that would happen only if a lender was taken on in a class action lawsuit by consumers, he said.
"If they nitpick every single issue of this bill, nothing will get done," he said. "It’s a $250 issue on a loan."