There’s a new plan in works that may eliminate the need for in-person home appraisals for real estate transactions priced below a certain figure. The proposal could save home buyers and those who are refinancing hundreds of dollars, not to mention speed up the sale process; however, some say the change could cause significant problems.
According to a recent report from Clare Trapasso of realtor.com, the new plan would require human appraisals only for home purchases that cost $400,000 or more. Currently, the threshold is set at $250,000. Why is this significant? According to Trapasso, this would be the first time since 1994 that the limit was increased. Back then, the median home price was $130,000, according to the Federal Reserve Bank of St. Louis. The median has now more than doubled to $295,000, according to the most recent Realtor.com data.
If the plan is approved, it could save home buyers and refinance borrowers around $500 — the average cost of an in-person appraisal. It would also save time by streamlining the appraisal process and allowing the buyers and sellers to move forward with the transaction more quickly.
A press release from Federal Deposit Insurance Corp. (FDIC) stated that the proposal “could meaningful burden relief from the appraisal requirements, without posing a threat to the safety and soundness of financial institutions.”
The FDIC, along with the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency, developed the plan. Trapasso states it could take months or even years before the plan is approved.
The proposal would not apply to government loans such as FHA, USDA and VA mortgages, as well as those guaranteed by Freddie Mac and Fannie Mae. Additionally, mortgage lenders that do not use government-backed loan products could still request in-person appraisals.
Some industry experts say that while the new plan could save time and money, it could set people up for problems down the road, as automated appraisals may not be as reliable as those completed by an actual person.
“Automated valuation models are when you throw a lot of data in the hopper and flip the switch; it churns and it spits out a value” said New York City-based real estate appraiser, Jonathan Miller in a statement to realtor.com. “[But] the problem with that is AVMs are wildly inaccurate.”
The inaccuracy lies in the fact that AVMs have no way of knowing more intimate details of a property. For instance, Trapasso cites the fact that AVMs won’t know if there’s a meth lab in the basement or if the current property owners are hoarders. These sort of issues would naturally drag the property value down; however, an automated appraisal system wouldn’t catch these problems. Unfortunately, they would likely arise later on in the process, causing headaches and added stress for everyone involved in the sale.
Likewise, AVMs may be at fault for overestimating a home’s value, even if the property is well-kept. This could set unrealistic expectations for sellers.
“They get anchored by the wrong number, and they live and die by it,” said Miller. “If the number is wrong, then there’s a winner and a loser.”