That seems to be a very important question at the moment. I used to think that an appraiser could give me the answer but it appears it is not quite that simple any more. In New York, you may want to get Attorney General Cuomo to initial next to the price on the offer just to be sure.
The value of a house should be, in its simplest form, the agreed upon price by the seller and the buyer. Prices of other investments like the price of one share of stock, a car or a dinette set on Craig's List are determined when two people come to an agreement on its worth. If nobody is willing to buy what you are selling, you don't have a perspective on what it is worth. The thing gets complicated when you ask someone to loan you money to buy the item. Now the person loaning the money has an interest in whether or not it is worth the agreed upon price. The item becomes collateral for the loan in case you fail to pay the money back. Since there are few people who can afford to pay cash for their house, an independent look at the value is an important part of the deal.
That independent look is done by an appraiser.
There is no Kelly Blue Book for real estate (although Zillo might argue that point). The value is subjective; just like the value of Bear Stearns stock over the last few months. It was clearly worth $140 a share in January of last year and it was clearly worth $2 a share last week when J P Morgan tendered their purchase offer. Why? Because thousands of shares were traded at both values. Which is the true value? The answer is both.
An appraiser determines value in his report based on what properties, similar to the subject and in close proximity, sold for within the last few months. No two properties are exactly the same so the appraiser takes the most similar ones and adds or subtracts value based on the uniqueness of the property (acreage, pools, outbuildings, marble, etc.). The appraiser, to go one step further, can't ignore better comparables that may have sold for less than the desired value. If you bought your house for $300k last year but the last three sales in your subdivision were at $275k, what do you think your house is worth? I can't imagine any body who has owned Google stock for the last couple of years arguing that the value has been inflated. Even after it dropped $75 a share last week when quarterly earnings were less that projected.
The traditional avenue for an appraisal has been that the mortgage broker or loan officer at a bank arranges to have the appraisal done. I use two or three different appraisal companies depending on where the property is, who can complete one the fastest and frankly, which appraiser works the hardest to get my business. The only appraiser I don't get to choose currently is on a VA loan. The VA has a central pool of appraisers that are selected randomly after I send in the request.
When we submit an appraisal request we include all the important information including what the contract price of the pending sale will be. This price is the starting point for the appraiser. His job is to prove that the price agreed upon by seller and buyer can be substantiated by recorded sales of like houses in the neighborhood. The only appraisers I have run across whose mission is to prove the house is NOT worth what everyone thinks are VA appraisers. And, it usually takes them a month or more to come to that conclusion. VA appraisers have no incentive to return my calls, work quickly or be courteous to the buyers. They are chosen randomly from the VA list and they know that no matter what kind of job they do, there will always be another appraisal. Why is the differentiation between VA and all the other appraisers important? Because if the settlement made in New York recently between Atty Gen Cuomo, Fannie Mae and Freddie Mac is applied nation wide, appraisals will be handled just like VA appraisals for all mortgages. I won't get to select my appraiser anymore.
It's kind of like the government deciding that accountants, who help you prepare your tax returns, can no longer be selected by you based on a free market. You must apply for an accountant with a government agency and they randomly select someone from their list that you must use. The logic (although flawed) is that since a few accountants applied deductions too liberally, none of the accountants can be trusted. An appraiser's job isn't to predict that the housing market will crash and that the value they appraised your property may decline in the next year. They take a "snap shot" of the market in a two or three day period (the time it takes to complete a thorough appraisal) and report their findings. With values now in decline, the appraisers are doing their job by frequently coming in below what the clients think the property is worth. The reason is primarily because comps are hard to find (not many sales to compare from). Also, in a buyers market, you just get lower priced houses.
Two Appraisals for every transaction.
Most people aren't aware of this but in almost every case now, there are TWO appraisals done on every mortgage. I submit our appraisal with the file but the underwriter orders another, called an "Appraisal Review". That's where a second appraiser of the bank's choosing does another complete appraisal to verify my findings are accurate.
The agreement in NY also allows for a consumer protection hot line to handle any appraisal related complaints. Now, I've been doing this for almost ten years and in all that time I have never had a complaint against an appraiser for appraising a property too high. The only time a consumer complained was when the value wasn't as much as they wanted. Who on earth would ever use such a hotline? I have an idea. It's for the millions of disgruntled property owners who will be forced to use an appraiser they didn't choose and are extremely dissatisfied with the results. They're just getting ready for all the calls...
The housing market is limping along as it is; why not kill it all together by eliminating an entire market sector, independent appraisers. Let the market work itself. It can, and does, react much faster than any government legislation could.
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