A real estate appraisal helps to establish a property's market value or the likely sales price it would bring if offered in an open and competitive real estate market. A lender will require an appraisal when you ask to use a home as security for a loan. They will make sure that the property will sell for at least the amount of money it is lending, if not more in most cases. The appraisal should be a fair and impartial evaluation of a property's true value. It is a risk-management tool that is designed to assure the owner gets a fair price, the buyer pays the right price and the lender's risk in making the loan is commensurate with the property's true value.
Given the turmoil in the housing market, perhaps more than ever an appraisal can make or break a sale or stall the refinancing process. It can also attract or deter buyers who rely heavily on the outcome of the appraisal. During the downturn, an appraiser can be pressured to lower values, or may have a difficult time finding true market value. In some markets, where foreclosures and short sales are prevalent, appraisers are sometimes unable to find a balance between distressed sales and how they affect market value. In addition since appraisers are hired by the lender to protect its stake in the transaction, the appraiser is beholden to his or her employee -- the lender -- not necessarily the buyer nor the seller. This can lead to the buyer and seller feeling left out of the process. There is so much riding on the valuation, but you have limited control of the outcome or its consequences.
Recognizing how the property valuation process contributed to the housing boom and how it now may be prolonging the bust, the federal government recently put in place the Home Valuation Code of Conduct (HVCC). The HVCC is designed to enhance the independence and accuracy of the appraisal process, and provide added protections for homebuyers, mortgage investors and the housing market. The hope is that by relieving appraiser pressure, appraisals will become more reliable across the board. However, there are fears that the HVCC will drive up costs, while the appraisal quality may not necessarily improve. Appraisers are taking a wait and see approach on how the HVCC will affect the market place.
Either way, it is important as a seller or buyer, that you play a role in the appraisal process by keeping an eye on what is transpiring.
Here are a couple of ways to stay involved:
Request that a lender use only local, licensed and certified appraiser with trade group designations. Ask the lender, or get your real estate agent to ask the lender for the appraiser's credentials. A local appraiser is much more familiar with local market and property conditions than an outsider. Affiliation with the Appraisal Institute or other trade group is also important. Institute members typically work beyond state licensing and certification requirements to earn a Senior Residential Appraiser (SAR) designation.
Local work, an unblemished license, certification and designations are good indications of an experienced and ethical appraiser, but not a blanket guarantee. If the appraisal was a drive-buy or automatic valuation model-generated (AVM) some assumptions could have been made about the property and its description. If you know from your own ownership or inspection of the property that the information is inaccurate, tell the lender.
Also, remember that every borrower is entitled to a copy of the appraisal. You should ask for and carefully review the appraisal. In addition, do not be afraid to ask your real estate agent to review the appraisal for errors or omissions that affect value. If there's anything in the appraisal that you or your agent takes exception to, bring it to the attention of the lender.
Finally, as a buyer you may want to leave the financing contingency in place until the lender has signed off on the appraisal. This will make the financing contingent good until your approval of the appraisal, thereby providing greater protection.
For more information about this article or if you have general questions, contact the author Mathew Roth at mroth@p-properties.com