Appraisals: What Is an Appraisal?

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Happy April everyone! We have just returned from a great Spring Break.  Hope you had a wonderful March as well.  The market continues its brisk pace and keeping us busy!  Let us know if you have any real estate questions.  Many of you have asked me about real estate appraisals.  I will use the next few months to discuss this broad topic.

PART I.

Most people encounter an appraisal in 3 situations:  (1) buying or selling a home when a mortgage loan is involved.  (2) refinancing a mortgage.  (3) some order an appraisal to help determine asking price of their homes.

First, what is an appraisal?  Most people believe an appraisal to be an objective determination of value, but I think it is more accurate to consider it a subjective opinion of value.  A licensed appraiser’s opinion of value is called an appraisal.  The opinion of a real estate agent is called a CMA (Comparative Market Analysis) or a BPO (Broker’s Pricing Opinion).

A licensed appraiser is a trained professional in rendering that opinion of value.  The purpose of this opinion is to help banks make risk assessment in mortgage loan decisions.  It is important to understand this: an appraiser’s true customer is the lender financing the purchase, not the buyer or seller.  The bank wants to know, if a property is worth at least the sale price.  Yes, the appraiser does get a copy of the contract and knows the sale price ahead of time.  He is not being asked to make a blind appraisal.  If the appraiser agrees with the sale price, the bank will accept the property as the collateral for the loan.  The bank does not care if the home is worth more, but it must not be worth less.  Many people ask us if the appraisal only has to match the loan amount.  But actually, if a bank is lending 80% of value and requiring the buyer to put down 20%, the collateral must meet the 100%, not just the 80%, hence the appraisal value must be at least the full sale price.

As mentioned above, an appraisal is a “subjective opinion of value”.  I see the reality of that all the time.  I’ve seen different appraisals on the same house come back at significantly different values.  I’ve reviewed many appraisals over the hundreds of transactions I’ve been a part of.  Most of them are good appraisals, but many can be not-so-good ones.  I have good relationship with many appraisers.  They contact me routinely to seek additional information on my sales to be used as comps in their reports.  I respect the work of professional appraisers but I also distinctively see the difference in what they do vs. what I do as a real estate agent.   Our opinions of value can converge or diverge.

Next month, I will discuss this convergence and divergence.

Until then, take care!  See you next month!