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Appraisal Rules Tangle With Home Values

How much your home is worth depends on who’s looking at it. Your home insurer will value your home in terms of the cost to rebuild it. A mortgage lender’s appraiser will value your property in terms of the sale prices of similar homes in your neighborhood that sold recently. The property tax assessor may have a different set of criteria.

Due to recent changes in the economy, the market value of your home could be considerably less than it was a few years ago. However, don’t be too quick to ask your insurance carrier to drop the valuation on your homeowner’s insurance. This would save you money but could leave you underinsured.

Replacement cost and market value aren’t necessarily the same. When home prices peaked in 2006, the market value of your home might have been much higher than the replacement cost value. Today, the sale price of your home could be a lot less than the cost to rebuild.

Talk to your insurance agent about how much coverage you need. This will depend on the square footage of your home, upgrades and amenities, and the price per square foot to rebuild in your area.

HOUSE HUNTING TIP: Most states levy property taxes, and the property tax structure and rate varies from state to state. In California, your initial property tax assessment is based on the purchase price. If you purchased your home in 2006, your property tax base could be higher than your home’s current market value. In this case, you can appeal to the assessor’s office for a reduction in your property taxes.

The current appraised value of your home, or one you want to buy, may be lower than you expected due to changes brought about by the Fannie Mae Home Valuation Code of Conduct that took effect May 1, 2009. One of the major changes is that loan originators — mortgage brokers and loan agents — can no longer talk directly to the appraiser.

This new restriction, while intended to be in the consumer’s best interest by keeping loan originators from pressuring appraisers, is resulting in misleading valuations — not in every case, but in enough cases to raise concern.

Many loan originators now order arm’s-length appraisals from third-party appraisal services. Some of the appraisers who work for these companies are hired to appraise properties outside their area of expertise. In one case, an out-of-area appraiser used a property in East Oakland, Calif., as a comparable for a home in Albany, Calif., a much pricier community located 15 miles away.

Appraisers used to appraising homes in planned-unit developments where there is uniformity in the housing stock often have a hard time making sense of market value in areas with a lot of diversity.

For example, some older neighborhoods were developed over several decades. Some homes have been remodeled and some not. House size can differ significantly. A 1,500-square-foot home could be next door to one with 2,400 or 3,000 square feet.

Another negative repercussion of the new code of conduct is that there are more inexperienced appraisers doing appraisals. Many of the experienced appraisers, who have plenty of work, won’t work for fees offered by the third-party appraisal companies, which may take a big chunk of the fee to run their companies.

Homebuyers or homeowners trying to refinance who receive a low appraisal should ask to see the comparable sales used by the appraiser. Even though your mortgage originator can’t talk to the appraiser, a homeowner or real estate agent can.

THE CLOSING: Ask your real estate agent to provide you with recent comparable sales that closed within the last three months. Then, ask the appraiser to consider these.