Interacting With Appraisers

Real estate appraisals are critical components in real estate financing and risk management.

Lenders order appraisals to get a stronger understanding of risk relating to the underlying collateral offered in a mortgage. They want to know how much that property would bring in an open market so they can determine if the loan is supported well enough by the collateral.

Mortgage appraisals are not provided to confirm a sales price, though they can help both lenders and consumers make sound financial decisions. It serves neither the lender nor the consumer to enter into a mortgage loan that is more than the value of the property.

In some cases, the appraisal may not match the sales price. But just because an appraisal comes in below – or above – the contract price, doesn’t mean it’s flawed. The agreed-upon contract price may be above market value, for example. In those situations, the buyer and seller often renegotiate the contract at more favorable or balanced terms.

The best way to combat potential problems with appraisals is to ensure the appraiser hired by your lender is highly qualified and competent.

The homebuyer can ask if the appraiser is directly engaged by the bank, or if the bank uses an appraisal management company. The homebuyer can also ask what their procedures are for engaging qualified appraisers.

As a homebuyer, you have every right to demand the use of a highly qualified appraiser who knows how to conduct a thorough market analysis and make appropriate adjustments. Ask the lender for the qualifications of the appraiser, including if they are professionally designated by a professional appraisal organization such as AI.

Your home purchase is one of your most important lifetime investments. The money spent or invested in a quality appraisal is well spent.

Appraisers welcome information that would help develop a more accurate or well-informed appraisal.

Ask your lender for permission to accompany the appraiser when they conduct the property inspection and provide any information they may consider important.

Most importantly, decide if an adequate inspection is performed. Did the appraiser spend enough time at the property to observe important features or improvements, or potential problems?

In some cases, an appraiser may not visit your home and will perform what’s typically called a desktop appraisal. In these cases, the lender does not feel that a site visit by the appraiser is necessary. You can still provide valuable details about your home to the lender, who can pass these items on to the appraiser for their consideration.

Even though the appraisal report is ordered to help assess lender collateral risk, as the buyer, you are entitled to a copy of the report. Federal regulations require lenders to provide buyers with free copies of appraisal reports no later than three days before the loan closes.

Buyers and sellers should first understand what an appraisal is and how it’s used. Real estate appraisals for mortgage finance applications are prepared for the bank or financial institution so they can better understand the collateral risk in making the loan. This can be confusing because buyers typically pay for the appraisal.

Although appraisal review is best performed by qualified appraisers, you can examine the appraisal for potential deficiencies. According to “Appraising the Appraisal: The Art of Appraisal Review,” 2nd edition, common errors in appraisals include:

Ask yourself the following questions:

Lenders are required under federal law to report legitimate complaints with appropriate regulatory authorities. State appraiser regulatory authorities also accept complaints from consumers and some states accept them anonymously.

Contact the appropriate state appraisal board.

An additional benefit of using a professional designated appraiser is that a referral can also be made to the professional appraisal organization for appropriate ethics and counseling of the appraiser.

Visit the Appraisal Institute Professional Practice Center to make a referral about an Appraisal Institute Professional.

Ask your lender to review the appraisal report. Most lenders have appraisal appeal procedures, known as reconsiderations of value.

If you are aware of recent, comparable sales information or items that may not have been available or considered by the appraiser, provide those to your lender.

If you feel the appraisal was incomplete or unsatisfactory, you can appeal it.

If problems were found with the first appraisal, you can and should request a second appraisal.

Depending upon their qualifications and designations, appraisers provide a variety of services, including advice for estate planning, dispute resolution, zoning and tax assessment review, and cost/benefit analysis.

You need to read a copy of the appraisal to double-check its accuracy. It also makes a valuable record for future reference, containing useful and often revealing information, including the legal and physical description of the property, square footage measurements, list of comparable properties, and description of the general market area and current market trends in the vicinity.

The appraisal is, in fact, legally owned by the lender — unless the lender “releases its interest” in the document. However, lenders must provide buyers with free copies of appraisals no later than three days before the loan closes.

Market value is based on what a willing buyer likely would pay a willing seller for a particular property, with neither being under pressure to buy or sell. Replacement cost is the dollar amount required to reconstruct a property in-kind.

The appraiser has no vested interest in the outcome of the appraisal and renders services with independence, objectivity and impartiality regardless of who hired them.

While most states support the concept that assessed value approximates estimated market value, this often is not the case. Examples include when interior remodeling has occurred and the assessor is unaware of the improvements, or when properties in the vicinity have not been reassessed for an extended period.

Value appreciation of a specific property must be determined on an individual basis, factoring in data on comparable properties and other relevant considerations. This is true in good times as well as bad.

These types of websites often estimate a value for the property based on unreliable information and could grossly miss the mark in terms of the property’s real value. While they are a starting point, reliable appraisals performed by professional appraisers are what lenders rely on to make a lending decision.

Property value is determined by several factors, including location, condition, improvements, amenities and market trends. Outside condition is important, but not the only factor in estimating market value.