Appraisers Home In on Value

Each party in a home sale transaction has an agenda. The seller, naturally, wants to sell the house for as much as possible. But the buyer hopes to negotiate a lower price. Individual needs skew each person's perception of what a property is worth.

Enter the real estate appraiser�a professional who can determine the value of the property, but who has no vested interest in the sale transaction.

"The hallmark of a good appraisal is that it's independent, objective, and impartial," says Sara Schwarzentraub, SRA (residential appraisal specialist), an appraiser in La Mesa, Calif.

And, beginning in February 2010, a new rule regarding who can hire appraisers will aim to ensure their objectivity.

No longer working for the lender

In the past, lenders hired appraisers directly. But starting Feb. 15, lenders no longer will be able to order appraisals on loans insured by the Federal Housing Administration (FHA). As of April 2009, 70% of housing loans were FHA insured.

Instead, lenders will turn to third-party appraisal management companies that hire appraisers on contract to do the job. The rule is supposed to ensure that lenders don't pressure appraisers to inflate home values.

In a real estate transaction, a third-party management company hires the appraiser on contract. The appraiser's task is to determine whether the property has sufficient value to secure a loan. In other words, if the borrower fails to pay back what's owed, is the property worth enough to cover that amount so the lender won't suffer a loss?

"The appraisal tells the lender that, yes, it's OK to give a loan on the property," Schwarzentraub explains, "or, no, there's not enough value and you need to reconsider" making the loan.

Sometimes borrowers don't understand that the appraiser is not working for them, points out John Bredemeyer, SRA, an appraiser in Omaha, Neb. On the mortgage closing statement, "they see they're paying $350 or $400 for an appraisal," he notes, "and they'll think, 'aren't I the client?' But it's a pass-through, just like title insurance and other costs you pay to the lender when closing a home buying or refinancing transaction."

Confusion also surrounds the roles of appraisers and home inspectors. "These are totally different functions," Bredemeyer emphasizes. An inspector, hired by the prospective home buyer, scrutinizes a house inside and out, from the roof to the basement floor, to search for any structural or mechanical problems. An appraiser, hired by a third-party company, aims to develop an overall impression of a property and its value.

Detective work

The appraisal process begins, Bredemeyer explains, with sizing up the property's location. How close are schools? Is there a park nearby? Is street traffic heavy? "The appraiser looks at positives and negatives," he says. "Think of the process as moving down in circles, starting with the community, then the neighborhood, and then the house."

The appraiser notices, for instance, the convenience of the house's floor plan and the quality of materials and workmanship that went into construction and finishing. The appraiser also takes note of updates and extra features, such as a remodeled kitchen or a bigger garage. "We walk through with the mindset of how a prospective buyer would react to what we're seeing," Bredemeyer says.

The next step is to compare the property with similar ones in the neighborhood that sold recently. What did these get in the marketplace? Two properties are, of course, unlikely to be identical. So the appraiser makes a judgment about the differences and adjusts the property value accordingly. From there, the appraiser submits an appraisal report to the appraisal management company, which then passes it to the lender.

"We're like real estate detectives," Schwarzentraub explains. "We try to figure out what the value of the property would be in the eyes of the typical buyer. What features do buyers want? What are they willing to pay for? We use market data to figure out the answers to those questions."

When opinions differ

Sometimes the appraiser's evaluation may not suit the seller or buyer. The seller may think the home is worth more. And if the lender trims the size of the loan because of a lower appraisal value, the buyer may have to come up with a bigger down payment to be able to purchase a property.

What do you do if you think the appraiser missed the mark? First, check the appraisal report. "Make sure the information is right," Bredemeyer advises. Look for correct square footage, number of fireplaces, and other details. In the property comparisons, be sure the appraiser didn't miss a new sale that appeared in the sales database only recently.

You could try to get the appraiser to reconsider. If you're a seller, go through your real estate agent. If you're a borrower, talk to your lender. Ask the professionals there to request that the appraiser take another look. The lender will then contact the appraisal management company to do another appraisal if necessary.

"Sometimes we miss something," Schwarzentraub acknowledges. "Tell us what else you want us to consider. Sometimes we will change our opinion because new information is brought to us."

But be sure you have facts to back up your argument. And remember, the appraiser is the one who is likely to be the most objective about a property's value.

In the go-go home sales environment of up until about three to four years ago, some forgot what the appraiser's role is supposed to be. In some cases, mortgage brokers pressured appraisers to inflate property values so the brokers could make larger loans and thus earn bigger commissions.

Some appraisers caved to this kind of pressure to garner more business or to avoid losing lenders as clients. The resulting overpriced property values helped fuel the recent mortgage disaster. Some homeowners have even sued appraisers. Consumers also can file complaints about appraiser misconduct with their state licensing agencies. (All states license appraisers, although not all require licensing.)

The current housing situation is a painful reminder of why appraisers must perform the job they're supposed to do, without interference. "The appraiser's impartiality is vital," Schwarzentraub says, "for all parties concerned�including the appraiser."

Published January 20, 2010