Appraisers - Why You Need to Be Concerned

Time was when appraisers magically appeared at a home that was under contract to sell, wrote up a report that usually had the appraised value match the contract amount, and the deal closed. Everybody went home happy.

But not so much any more. And with good reason.

With the mortgage melt-down last year, scrutiny was focused on every step of the selling process. The appraisal system was deemed inaccurate at best, and perhaps knowingly inept or frequently "fudged" at worst. So how does this appraisal thing happen anyway, and what does it mean to the seller and the buyer?

To keep it brief, when a buyer applies for a mortgage, the lender orders an appraisal to be done. The lender needs to know the true market value of the property, so that the lender is comfortable giving the buyer a loan on that property. It used to be that the lender could call on any appraisal company he chose to do the appraisal, giving the lender a healthy amount of control over the appraisal process. At least the lender had knowledge of the appraiser's work, work ethic, areas of real estate market experience, etc. But with the mortgage industry debacle came new rulings on how appraisers were to be selected for a property under contract. Suddenly the lenders had no ability to select the appraiser. Appraisers were being doled out to do jobs from a central control processor. And the lender was strictly forbidden in having any conversation with the appraiser assigned to a file, and forbidden in doing anything that looked like an attempt to influence the appraiser's report. The results were immediately disastrous. Legitimately disastrous. Appraisers who had no familiarity with a community or neighborhood or condo building were writing reports that mocked the meaning of the word "accurate." Transactions were falling apart because of it.

The real estate and mortgage community put up the cry - Fix This! And the pendulum has swung back the other direction somewhat. But we still hold our breath when an appraiser's report is delivered, hoping that the results look accurate, given the community, neighborhood and specific condo buildings.

When the appraisal report supports the purchase contract price, the transaction can do forward. If the appraisal states that the purchase price is more than the market value, the lender cannot issue the loan as requested. Depending on the property, the lender might demand more cash from the buyer, or suggest a renegotiated purchase price, lower than the first agreed upon price, to meet the appraisal report. Or the lender might deny the loan altogether.

This is why the buyer and seller must be making their best effort to agree to a selling price that is not over the market price. It will only mean a brick wall to overcome if a mortgage is part of the deal.

Up Close and Personal with an Appraisor (and why do we want to do THAT?)

I had the pleasure of chatting with an appraiser at my office a few days ago, at the invitation of a Realtor colleague. "Ok, so a lender gives you an assignment to appraise a property for a mortgage loan. What do you do?" was the question we posed to him.

His answer was animated fascinating. One of the many twists and turns the real estate and mortgage industries have experienced most recently is a very tight control on how appraisals are ordered and performed. And the result has been been 100% effective in meeting the goals of said controls. I will certainly concede that in years past, appraisals were submitted to a lender with a wink and a nod to get a mortgage underwritten.

No more. Indeed, the pendulum had swung too far in the opposite direction. Only a couple weeks ago a bit of reason was injected back into the process of appraisals for home purchases. The details of this topic will be left for another day. What is important to know now is that as a buyer, you will be asking a mortgage lender for a lot of money to buy a property. The lender wants to know that you are not over-paying for that property; the appraisal is the measure of the property's current market value.

Until the rules were recently modified, appraisers were being sent to a property without any regard to the appraiser's familiarity with the surrounding community. In an attempt to keep the appraiser "pure" and without influence, the listing real estate agent was not permitted to provide opinion or comparable properties to the appraiser. In the worst case scenario, an appraiser from 60-100 miles distance from the subject property would be sent to appraise a property, having to research and understand the neighborhood and community to do a correct appraisal, even though the appraiser might never have set foot in the community prior to the appraisal order.

The end result of that situation was that appraisals were becoming grossly incorrect and derailing property transaction closings. Now the appraiser assigned to an order is to be familiar with the area; in addition, the listing agent is permitted to offer multiple comparable sales to the appraisor to provide solid background information. This can be invaluable assistance to the appraser. And ultimately, a fair and correct appraisal will go far in putting a buyer into the house of his dreams.

These days, anything that can be done to stimulate more activity in the real estate industry is a good thing, don't you agree?