Buying overview -> Appraisal for buyers

Appraisal for buyers

An appraisal is not always an accurate guide to
the market value of a home.

The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 has over 300 pages of new appraisal regulation. All appraisals for residential mortgages must now be ordered through a third-party appraisal management company, or AMC, which is completely independent of the lender. The lender can have no direct contact with the actual appraiser, only with the AMC. The only parties to a transaction who may now speak to an appraiser are the real estate agent, if the transaction is a purchase, or the homeowner, if the transaction is a refinance.

The purpose of a purchase appraisal is to affirm that the price being paid for the house is reasonable based on recent comparable sales (comparables) of similar properties in the same area. It is unusual for a purchase appraisal to come in below or above the purchase price because there is an assumption that the purchase price reflects the market value of the home.

If the appraised value does come in below the purchase price, the lender will use the appraised value, not the sales price, as the guide in determining the loan amount for which you can be approved.

Two important factors to know about appraisals:
  1. In an affluent market like northern California with many unique homes, the comparables that the appraiser chooses, and how the appraiser adjusts their value to bring them into line with the property being appraised, can have a big impact on the end result, especially with a refinance.
  2. In choosing comparables, the appraiser is required to use homes that are close geographically, and have similar square footage and room counts. This tends to minimize certain important features that determine property value. Amenities such as a spectacular view, great floor plan, or first-class home theater may not be given the value that a buyer would see. Conversely, negatives such as a bad floor plan, or a hillside home that gets little light, are also hard to quantify, and a ‘problem’ house may appraise for more in a refinance than it would bring if sold.

If you feel that your property has been appraised for less than it is worth, and it is affecting your ability to get a loan, your lender may be able to work with the appraisal management company on getting the appraisal corrected. However, this is much more difficult than it was in the past. Sometimes the only way to get an increase in appraised value is to get a new appraisal. However, with the new regulations this can only be done by switching lenders—and, this doesn’t always work.

In a situation where you need an appraisal that is not for a refinance or purchase—a divorce, probate, or some other financial settlement—you may not want to rely on an appraisal obtained by another party. Appraisals always have a degree of subjectivity, and if you want to be sure you are being treated fairly, order the appraisal yourself.

Although a licensed appraiser can be found online, it is better to get a referral from a real estate agent or lender. If you contact me, I will refer you to an appraiser I have experience with who works in your area. To check the qualifications of an appraiser you are working with, you can visit the website of the California Office of Real Estate Appraisers.