Very good break down.

I've found most appraisers and home inspectors really don't want to "kill" a deal no matter who they're working for..

Man, Brian... this one just kills me.  Every now and again a borrower will pay me for the appraisal and then decide to back out of the loan.  Since the loan is not funded, the Loan Officer may choose not to release the appraisal to the borrower.  I'm not sure if this is legal or not, but it does happen and I get pretty perturbed about it especially since I am 'the face behind that lending institution' to the borrower.

Perhaps a Loan Officer can set the record straight.  Are you also obligated to provide a copy of the appraisal even if the loan does not fund?

Well written, Brian. Thank you for the clarification - and the excellent solution of the buyer ordering their own appraisal. 

Brian,

Absolutely excellent.

May I add a couple of points? When an appraisal comes in low the appraiser takes a lot of flack. The appraiser's job is to protect the lender, but they are the only party to the transaction who's motives and advice is with out regard to their getting paid! They are also the lowest paid ($250 to $500) person in the deal.

Everyone else advising the buyer gets paid only if the deal closes! The REALTORS® make 6% or so only if the deal closes. The Loan Originator makes 1.5% or so only if the loan closes! The Escrow Officer makes $500 or so only if the loan closes. The Title company makes a thousand dollars or so only if the loan closes. The sellers only get your money if the sale closes. (Home inspectors are another safety net, but are not universally employed.)

There are a lot of good people in real estate and lending, but as long as we're paid on commission our advice will always be in question. The appraiser doesn't face this question and since he's paid regardless of his findings, he is free to give his frank opinion. Paying for a low appraisal is probably the best money a would be home buyer ever spends!

As to "hitting the mark". The appraiser has all the information, on a purchase, on a refi tell them what you're looking for. What I tell my appraisers is "give me something you're proud to sign" but I often add "don't low-ball me for a few dollars, unless there is an absolute comp" Come in 5% low and I'll never complain, the value just isn't there. Come in 3 to 5% low and we'll talk! Come in less that 3% low and I'll never use you again, no one is that good! No one! Again always tempered by absolute comps.

A good appraiser can neither create or limit value, it has to be there. Appraisal is both statistics and art, art as always is in the eye of the beholder. People have to understand that with cookie-cutter houses, situs is the only variable the appraiser can debate.

God bless the appraisers, every one should. It's a tough job, and it's not your job to please everyone!

Nothing I've said should be assumed to apply to FHA or VA appraisers, regarding those I have no polite opinion.

Regarding the question about copies of the appraisal, the law is simple: if you paid for the a appraisal you're entitled to a copy.

Bill

William J Archambault Jr

The Real Estate Investment Institute

First National Mortgage Sources

http://www.reii.org http://www.williamjarchambaultjr.com

Great write up.  I too was curious as to the use of an appraisal when most are right at the sales price.  Thanks for shedding some light on the subject.

Great write up.  I too was curious as to the use of an appraisal when most are right at the sales price.  Thanks for shedding some light on the subject.

Interesting   -- thanks for the information.  It can get a bit confusing.  I wonder about your suggestion of having an appraisal done before the offer.  I have a feeling it would not be well received here in New Hampshire.

I must say that I've run into Lenders that will not accept an Appraisal that was performed at the request of a Borrower/home owner.

I love a good appraiser!  It was a good write up and appreciate your post.  Value is value.

Brian, congrats on the star. your post is the feeling of how it is. people complain that the lenders don't give them the reports and they aren't even typed yet. the only FSBO's i get are prior to selling, never buying.. or renters considering buying where they live. do you get those assignments? Sara, you?

-nick

Brian,

I truly do enjoy reading your blog and have subscribed to it. Thank you for the post and for pointing out the items to the tee.

If I remember right in regards to Sara's comments lenders are not allowed per the secondary market big boys to accept appraisals from the loan applicant and that if an appraisal is ordered on an application then the applicant is entitled to a copy regardless if the loan closes. Of course as quickly as things are changing these days these points may be outdated already.

The hard part is explaining to the applicant that the appraisal has to come from the party that ordered it and not the appraiser.

I don't know if anyone answered Sara's question.  The appraiser usually provides a copy of the appraisal when the appraisal is paid for regardless of whether the loan funded or not.  I know when I was in MD working as a loan office, so many of the appraisers were no longer waiting to be paid at closing.  There were a lot of refinances being done and there was such a backlog that the locked rates had expired before people could close, deals fell through and the appraiser had to fight to get paid.  Most started requiring the money at the time of appraisal.  The borrower paid for it, the borrower should receive the report.

Interesting post. Thanks for pointing some things out.

WOW!  I woke up this morning to 13 comments to this post!  THANKS for the interest!

I think there may have been some confusion over the LAST sentence or two of my post: Protection for the Buyer? Simple . . .They should order their OWN appraisal (making them the client and intended user) prior to making an offer on a home. The appraiser then works for THEM. There is no "deal" to be broken . . .the appraisal is for their information only. They can decide if they want to pay more or negotiate the price down.

Sara & Joan:That comment related to the bolded statement "Protection for the buyer".  If the BUYER is wanting someone to look out after THEIR interests, then they need to become the Intended User and the Intended Use will then become what THEY specify. 

For example, earlier this Summer I had a first-time home-buyer hire me to do two pre-purchase appraisals on homes she was considering.  She passed on the first home and ultimately purchased the second.  My appraisals were to assist HER in making an offer on the properties.  They included current listings and market trends.

This is important!  I did NOT get the appraisal assignment for her financing. In the case that I'm describing, the User (buyer) and Use (Pre-purchase) were not going to be acceptable for lending purposes.  The lender MUST always engage the appraiser DIRECTLY (or through their broker/appraisal management company). 

There's a GREAT 4-page document, issued by the Federal Reserve, FDIC, NCUA, and the Office of Thrift Supervision that explaines their position on "Appraiser Independence".  It's titled: Independent Appraisal and Evaluation Functions.  On the bottom of page 1 it says:
 

"The agencies' appraisal regulations address appraiser independence and require that an institution, or its agent, directly engage the appraiser. The only exception to this requirement is that an institution may use an appraisal prepared for another financial services institution, provided that the institution determines that the appraisal conforms to the agencies' appraisal regulations and is otherwise acceptable. Independence is compromised when an institution uses an appraiser who is recommended by the borrower or allows the borrower to select the appraiser from the institution's list of approved appraisers."

SIDE COMMENT: As an appraiser, I have an "small" issue with the Fed's position about selecting an appraiser from an institutuion's list of approved appraisers. (wink)   ALL the appraisers are pre-APPROVED by the lender.  As noted in the example above . . . I did NOT get the lending assignment when my client purchased her home.  If I was on her lender's approved list, what would it have HURT to have allowed me to complete the lending assignment?   

Author: Brian J. Davis, RAA - Brian Davis & Associates - Brian has over 23 years of appraisal experience in Central, IL and hosts the Appraisal Scoopblog and the WinTOTAL Users Group an email forum for appraisers.

Good Post and the comments are intense. I love it.

Excellent post--Too many times we as agents, do not understand the complex role of an appraiser.

Just random thoughts:

As I understand it, the appraiser is looking at the past to justify the present. The buyer is in the present, has seen multiple properties in this price range currently on the market, and this is the value he or she places on the property in question. If a property is truly worth what a buyer is willing to pay (we hear that statement all the time) then isn't the appraisal unnecessary-at least as far as the buyer is concerned?

This is a wonderful post. 

I agree with every word written in response to Kelly's post.  Appraising is a tough job and takes not only a LOT of training, which appraisers get; a lot of hours of practice, which appraisers get; a lot of continuing ed, which appraisers get.

They perform a vital function that takes an understanding gained only through much experience and it takes a lot of guts to put their work product on the line daily.

For what, about $350??? 

Kelly -

I frequently hear similar comments with regards to the "myth" that appraisers are somehow not functioning in the here-and-now! (wink).

It's been a while back, but the BlueRoof.com'sblog and I had an exchange on similar topics.  It was titled: The Battle Between Appraisers and Everyone Else!  In that exchange, the blogger alleged:

• Appraisers see the value through a narrow field of view,
• only taking into account specific criteria.
• In general, they [appraisers] are ridiculously intolerant of appreciation rates.

TWO THINGS to keep in mind:

1. Who's the intended user?
2. What's the intended use?

Why are those questions important?  Because they determine the "rules" by which the appraisal must be completed.  Is this a market value appraisal, an anticipated sales price (ERC - relocation) appraisal, a retrospective valuation (estate, divorce) or is it based on some other set of "assumptions" (as complete, as repaired)?   For lending work, appraisers have very clear guidelines from our clients and the secondary market.

Do appraisers look at recent closed sales?  Of course. Is that ALL they look at?  NO! 

For example, recently Fannie Mae announced that it will be alerting lenders if the collateral property for a mortgage is located in an area where house prices are declining.  Fannie's Desktop Underwriter will send a message to the lenders notifying them that they need to carefully review the appraisal to ensure its accuracy and require additional information from the appraiser, if necessary.

They expect the appraiser to describe market trends and the effects it will have on the value of the property. Fannie Mae states "It is unacceptable for the appraiser to ignore these issues and not report the factual property value trends and market conditions.

This is nothing NEW . . .only a restatement of a long standing Fannie Mae policy

What does this mean?  It means that appraisers should be looking at current listings, pendings, supply and demand, and market trends.

ALL residential form reports INCLUDE a line for "Time" adjustments.  THIS is where appraisers can adjust for appreciating or depreciating values.   That is where the appraiser can adjust "historical" sales prices to "current" values.  Of course this must be supported by market analysis!

ARE appraisers SO RESTRICTED by rules and regulations that we can't possibly arrive at a CURRENT market value?  NO! 

To the CONTRARY, lets refer to USPAP.  The USPAP 2006 Scope of Work Rule clearly states that:

An appraiser must not* allow assignment conditions to limit the scope of work to such a degree that the assignment results are not credible in the context of the intended use.  [* emphasis added]

Author: Brian J. Davis, RAA - Brian Davis & Associates - Brian has over 23 years of appraisal experience in Central, IL and hosts the Appraisal Scoopblog and the WinTOTAL Users Group an email forum for appraisers.

Hi Kelly -

90%-95% of the time we Appraiser's are hired by the Lending institutions rather than the borrower.  They are simply protecting their investment by insuring it is worth the amount of money they are lending.  Most of those requests are for refinancing.  In these cases an appraisal is very valid, otherwise it would be left to the borrower as to the value of his or her own house.

We are also under the presumption that buyers are educated in the market place, but that is not always the case. 

We purchased our first house over a decade ago in a part of the city that we were completely unfamiliar with and it was the second house we that we had ever looked at in consideration to purchase.  I never regretted that decision, but if the price was too high or low I would have had no idea without Real Estate professionals including (especially) the Appraiser (our Realtor was unfamiliar with the area as well). 

This happens all of the time.  I will see out of area Realtors under or over pricing houses around here quite a bit, sometimes they would sell for the list price, but more often than not, their pricing would be proven by a bidding war (low) or excessive days on the market and eventually a price drop or two (high).

Hi, Brian!  This is an excellent explanation of who truly owns the appraisal when a lender is involved. Thanks for pointing out the 'intended user' terminology which can be misunderstood as the buyer.

Kind of reminds me of health care a bit, your doctor orders an MRI, you pay for it but they get the results and you have to fight or pay to get copies.

Great post by the way

There is absolutely no connection between who pays for something and who benefits from that purchased product or service. The appraiser works for no one in the sense that his opinion should be independent of who pays her or even how much. Now the general purpose of the appraisal is to ensure appropriate collateral to the lending party, so in that sense the appraiser "works" for the lender. So much so that if lenders stopped requiring appraisals, appraisers would find themselves out of work very  soon. 

I think you all might have misunderstood me a little. I personally think that appraisers perform a very valuable function. I am well aware of how educated and qualified appraisers are. Interestingly, in my market, most cash buyers do not get an appraisal, which leads me to believe that appraisals are mostly for the lender. All of my buyers get a full market evaluation of any property they are considering buying, so in that regard, they are very educated. I realize, however, that not all agents provide this service to their buyers and not all buyers are familiar with current market conditions. I would never suggest foregoing an appraisal to any buyer, cash or not.

The question of market value, however, is rather subjective, wouldn't you agree? I've had appraisers tell me that they look at the contract price and will make sure that their number does not go higher than contract price, even if the home is, in fact, of higher value. They tell me that lenders do not want to see a higher value. I don't understand this concept. I've also been told that they do "shoot for" the contract number because they want the deal to go through (i.e. the lender wants to make the loan). Is that commonplace?

BTW, I do think that appraisers look at past and present values and attempt to predict the future. My comments were simply meant to further the discussion. :)

I appreciate the candor of this article and agree that in a lender / contract to purchase situation that the appaiser is working for the lender. The appaiser does have a hard job. After all it is his opinion about the value of the property and there is always going to be someone that thinks they are being taken advantage of.

well written post.

The buyer is entitled to a copy of the appraisal, afterall they paid for it. I laways give them a copy at or just after closing.

Brian, Thanks for a well written post.  We appreciate our appraisors and are truly grateful for the service they provide.  And they do it at an affordable rate.  One of our favorites is Nick the Appraisor.  Bless Him!!

Kelly -

I was trying to address the comment " . . . the appraiser is looking at the past to justify the present.  The buyer is in the present, . . ."    Sorry if I misunderstood.    I took that to mean appraisers are out-of-step with what's happing NOW!  (wink) 

Are appraised values "subjective"?  I guess I'd have to give that a qualified yes?  Appraised values are OPINIONS and not FACT.  So to that extent they are subjective.  They are also subject to the education, still, and experience of the appraiser.   What sets appraisers apart from non-appraisers is that their opinions must be SUPPORTED!

That said, personally, I'd steer clear of appraisers that operate under the premise that their value cannot be higher than the contract price or that they have to "shoot for" the contract price (response to your comment above).   Those are clearly unethical practices.

You ask is that commonplace (to target the sales price)? SADLY . . .Yes!  Mortgage fraud almost always requires that an unethical appraiser be part of the fraudulent transaction.   Often it's unwittingly . . .but far to often it's NOT!

In many parts of the country we're seeing values decline and foreclosures on the rise.  Rising speculative values are no longer covering up for inflated appraisals.   Also, as properties are foreclosed and loans go into default, reviewers and REO appraisers will be taking a strong look those values.

Author: Brian J. Davis, RAA - Brian Davis & Associates - Brian has over 23 years of appraisal experience in Central, IL and hosts the Appraisal Scoopblog and the WinTOTAL Users Group an email forum for appraisers.

Brian,

Excellent post! In my 35+ years in Title Insurance I have never seen a better explanation of appraising as you have written here. My compliments. Thanks,   Fran

Brian, what a great post and through explanation!  I do appreciate what you do and an honest appraisal!

Very interesting comment! But what about the seller, can he get a copy of the buyer's appraisal?

Sorry!  The seller is not entitled to an appraisal that was paid for by the buyer . . ordered by the lender . . .for the buyer's financing. 

Author: Brian J. Davis, RAA - Brian Davis & Associates - Brian has over 23 years of appraisal experience in Central, IL and hosts the Appraisal Scoopblog and the WinTOTAL Users Group an email forum for appraisers.

Brian -

I agree... but what about when the appraisal was paid for by the borrower even though the client/intended user is the lender... and let's say the loan does not close?  I presume that is simply an agreement between the borrower and lender, but it seems rather dirty to hold the report if the borrower paid for it in the first place.

I read over this post again and kept seeing ... 'appraiser will get paid at closing' but that insinuates a predetermined value (ie: the appraiser will have to 'hit value' to get paid 'at closing' because if they don't the loan will not close).  It is important for the entire industry to understand that we are allowed to invoice, but not 'get paid at closing' ...

I'm glad this post came back up on the radar.

Fabulous post and incredible comments.

Sarah -

The borrower is always entitled to a copy of their appraisal regardless of who pays for it.  The Fair Credit Act ensures that right . . .if they ask for it in writing.

Since my original blog post here, we've had much discussion of the Home Valuation Code of Conduct and lots of proposals under the 90-day comment period.

One that I particularly like is by a software company . . . a la mode, inc. and their founder David Biggers.

From their proposal: http://www.appraisalpress.com/news/articles/proposed_changes_to_the_hvcc/

II. The lender shall ensure that the borrower is provided, free of charge, a copy of any and all collateral valuations concerning the borrower's subject property immediately upon completion, and in any event no less than three days prior to the closing of the loan. The borrower may waive this three-day requirement. The lender may require the borrower to reimburse the lender for the cost of the collateral valuations.

What's great about that provision?  That means that if the lender orders 5 AVMs and 2 Appraisals . . .seeking the highest value . . .the borrower would get them ALL!  They would get to SEE what was done behind the scenes.   Notice that it provides them PRIOR to the closing! 

Think about it . . .What good is an appraisal (to the borrower) AFTER they've closed the loan??!!

The fact remains that (in a lending situation) the lender is our client (intended user) and the appraiser will (should) be paid regardless whether the deals closes or not.   You are absolutely correct that an appraiser should NEVER put themselves in the position of expecting to be paid only on loan deals that close!

Author: Brian J. Davis, RAA - Brian Davis & Associates - Brian has over 23 years of appraisal experience in Central, IL and hosts the Appraisal Scoopblog and the WinTOTAL Users Group an email forum for appraisers.

Very informative post.  We often see buyers agents write into their offer "subject property to appraise at or above contract price".  I am not aware of a single time when the buyer hired their own appraiser.  They all just used the one ordered through the lender.  I like your advise for them to hire their own appraiser.  Thanks!

If the buyer orders the appraisal, there is room for percieved bias, which could kill the deal.  Buyers are entitled to a copy of their report ALWAYS.