Appraise This! Dangers of Equity Loans

Dear Pat,
We recently had a real estate agent over for a market analysis of our home and she told us our house was worth between $170-180,000. This came as a shock, since we used up a big home equity loan last year based on an appraisal of $190,000. Now it seems we have no equity left in our house to use for a down payment on a new home. This agent was highly recommended, but should we get another opinion?
---Crestfallen

Dear Crestfallen,
By all means get another opinion of the value of your home, but don’t be surprised if you’re disappointed again. It’s a small consolation, I’m sure, but you’re not alone. Recently I’ve run into several homeowners who are in the same predicament. With the banks giving out money the way they used to hand out toasters, too many people are living in zero-equity homes. You’d expect that these days of double-digit appreciation would prevent this from occurring, but the fast appreciating market is actually partially responsible: banks eagerly lend up to 100%, even 125% of value in anticipation of future appreciation.

Does this mean that we’ve reached the end of our “bull market” in rising real estate values? No—not yet, if this Spring’s prices are any indication. But every home sale is a unique case, and too many individual factors create “value” to justify an equity loan based on a blanket appreciation rate expectation. This is where the bank appraisers are utilized to determine actual present-day value to protect the lender’s interests and, indirectly, the borrower’s. If the homeowner elects to borrow beyond the home’s actual value—and the bank is willing—there should be no one to complain when there is no equity available later that year, or even the next year.

 Where does that leave you, Crestfallen? You didn’t borrow more than your appraised value last year—so what happened? Unfortunately, you borrowed more than the actual value, thanks to a poor appraisal. Let us examine, for a minute, the plight of the modern-day appraiser: overworked, crushed beneath record numbers of re-fi’s and new sales, flung hither and yon with no single neighborhood to call her own, often reliant (whether she cares to admit it or not) on a purchase agreement to guide her on her search for value. This appraiser can make a mistake, especially when the market has not “spoken” as in a sold situation. Appraisers don’t get to see as many on-market houses as Realtors do, nor do they always have a clear knowledge of extenuating circumstances which may have affected the sale price of a comparable property. That’s why the good ones often call upon us for additional information.

I don’t mean to bash appraisers here—most do their jobs with great skill and care, especially given the workload of recent years—but the wise homeowner will take advantage of the free market opinions offered by Realtors. Use all the tools available, and be realistic when you borrow.