Tiffany Chapman, Realtor, SRS

The Appraisal Process: Decoded

What Exactly is an Appraisal? An appraisal is a supportable and defensible opinion of value. It is a professional opinion of a home’s market value.

Why is an Appraisal Important? When a home is under contract and the buyer requires a loan for the purchase, the lender will require an appraisal to ensure they are loaning a fair amount of money for that property. If there’s anything the housing market crash taught the banks in 2008, it’s they shouldn’t just loan out however much is needed for the buyer to get the home. They want to make sure they’re not giving the buyer too much money. In the event they should suddenly need to sell, the bank wants to know they’ll be able to get their money back. This is where the appraiser is brought in. Why can’t the REALTOR® just come up with the value of the home? After all, they did a comparative market analysis (CMA) to arrive at the list price. Realtors are trained to find the market value of a home. However, sellers can have their own idea of what they want for their property, regardless of the REALTOR’s® opinion of value.  Additionally, appraisers go through years of training, in addition to an extended internship before they can perform appraisals on their own. Their reports are incredibly detailed and take into account not only factors that fall under an umbrella of what a REALTOR® uses to arrive at the market value,  but more specific cost analysis to convey the accurate value to the lender.


Who Hires the Appraiser?

Nowadays, the appraiser is randomly selected from a pool of approved appraisers hired by an AMC (appraisal management company).  The AMC works with the lenders to facilitate the ordering, tracking and delivery of appraisal reports.  This keeps everyone at arms length and helps avoid people who are buying or selling from hiring their own appraisers, which could lead to a biased outcome. Some time ago, sellers could hire their appraiser friend down the street to conduct the appraisal on their home. No doubt this resulted in some skewed and inflated values. If the buyer hired the appraiser, he could try to sway the appraiser to report an inaccurate or biased value. It’s safe to say that taking it out of the hands of the buyer and seller is for everyone’s benefit. Once the appraiser completes his/her report, it is turned in to the appraisal management company for review. Once it has been reviewed and cleared, it is sent to the lender for underwriter review. If the underwriter finds errors or omission, he/she can then send it back to the appraisal management company to question the appraiser. If it appears justifiable, the loan officer is then notified the home appraised at or above the contracted amount. Since there are several steps in the process, it’s not unusual for a buyer to wait 10 days to receive the appraisal…while everyone bites their nails, of course.  But the process, as tedious as it may be, does provide a form of quality control, something that was lacking pre-recession.

What Happens if the Appraisal Comes in Under Contract Price?

In the event the appraised value comes in below the contract price, the lender will not loan above appraised value minus the buyer’s down payment. Therefore, there are 3 options. Most likely, the buyers are going to request the seller lower the contracted purchase to the appraised amount. A seller should not take the other party’s word that it came in low, but should request the opportunity to review the report. The buyer is not mandated to release the appraisal, but should be willing if they want the seller to adjust the purchase price. The reason a seller’s agent should request to see a copy of the appraisal to review is to check for any skewed home facts, and also to see if the best comparable properties were used.   Remember, appraisers are not always hyper-local, and the seller’s agent may have a better grasp on the area and comparable properties that should be used. If the seller’s agent, along with the seller believe there is an error in the appraisal report, they can contest it to the lender. This could cause a delay in the closing date, since the report now has to go back through various levels of review; but sometimes it is worth it if there is a blatant misjudgment or error. Most of the time, the appraiser’s decision is final and you’re not going to convince them to change the reported value; however, with enough supporting evidence, they will make adjustments. If there is nothing to contest, the seller may agree to the purchase price adjustment, and everyone can move on with the sale. If the seller doesn’t agree, the buyer then has the option to pay the difference between the contracted purchase price and the appraised value in cash, or walk away and have their escrow deposit returned to them. They will however, have lost the money they spent on inspections, as well as the appraisal fee. Sometimes buyers and sellers will agree to meet in the middle and split the difference. It’s important that buyers, sellers, and their agents remain calm during this process and they choose to work together to create the best outcome for all parties. It’s especially important the agents practice good communication, and attempt to work together for everyone’s sake. Many agents let their own emotions get involved and develop a “push me, pull you” attitude and approach, which causes nothing but strife, and makes the whole process more stressful on the buyers and the sellers.

True of False? All the Upgrades and Extras in a Home Add to the Appraised Value.

In short, the answer is false. Many homeowners get hung up on all the updates and upgrades they put into their home, thinking the money spent will be automatically reflected in the appraisal. That’s not necessarily the case. Just because Home A has six inch base boards and Home B next door has three and a half inch does not mean there will be an itemized adjustment to Home A for the extra expense. This is why it can sometimes work against a seller to put in a ton of extras and upgrades that may not be market supported. Additionally, a seller may put in a $50,000 pool, and could be very disappointed to learn that market preference for this improvement may result in a much lower value adjustment.  It all has to do with the local market and what is expected in that area. If most comparable properties have a pool, then a pool will most likely be expected from a potential buyer. However, if few pool homes exist in the area, a pool may command a higher value.  It comes down to what a buyer expects and would ordinarily be willing to pay. Having an updated and clean home is important, but sellers shouldn’t go overboard on renovations with the idea of getting their money back and then some. Rather, they should look at it from a buyer’s stand point. Having an updated kitchen will make the home more marketable and will appeal to a larger pool of buyers. Having a newly renovated $50,000 kitchen may price many buyers out, limiting the buyer pool, and may also create issues with the appraisal.

In Conclusion:

Appraisers are a valuable asset to a real estate transaction. They help determine the true, unbiased market value of a home. It is important to note however, that no two appraisers will arrive at the same value conclusion.  An appraisal is a professional opinion.  I believe it is important (in many cases) for the listing agent to disclose all details of the home to the appraiser.  The listing agent may have valuable information on the home next door as to why it sold at a low price due to extenuating circumstances. It’s important to share this with the appraiser, who otherwise wouldn’t know that and may use that property to compare to his or her listing. Additionally, the listing agent can provide a list of updates that may not be noticed by the appraiser. If nothing else, the listing agent should be there just to answer any questions the appraiser may have to ensure they have all the pieces to the puzzle before putting it together. Additionally, mortgage lenders choose what AMC they use, which can affect whether or not a local appraiser is hired to conduct the appraisal. An appraiser from 150 miles away will most likely not have a good grasp on the area, and can cause major problems in the appraisal. This is why I’m a firm believer in using a local lender, but that’s a whole different article for another day.

Disclaimer: I am a licensed real estate professional in Florida. Different states and lenders handle these processes differently. I am speaking from my professional experience and have also consulted a local, licensed appraiser in writing this blog article. There is even more concerning appraisals that would make this article very lengthy so I just covered some general basics. I am always open to deeper questions and discussion, so feel free to comment or reach out!
Tiffany Chapman, REALTOR®, SRS®, PSA®
Member: Institute for Luxury Home Marketing®

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