Is a Real Estate Appraisal Really Just an Opinion of Value?

Should a real estate appraisal be done before listing your home?

From time to time a seller will ask me if it is a good idea to have their home appraised before we put it on the market. It is a good question and one that needs some reflection about what a real estate appraisal is.

In a sentence a real estate appraisal is an opinion value. The interesting thing about an opinion is that we all have one. A persons opinions can be influenced by many circumstances. So what influences might affect the real estate value opinion of an appraiser? A major influence is often the reason for the appraisal itself.

Story time…Earlier this year I was invited to meet with a homeowner in regards to listing their home. I was made me aware that they planned to apply for an equity loan on the home in order to use the proceeds to purchase another home. I told them they should not list the home until after they had completed the home equity loan process. Most lending institutions will not entertain refinancing or equity loans if the home is for sale with a real estate firm.

They took my advice, finished their business with the lender and called me to list the home. They wanted to tell me all about their experience and what the appraiser said their home was worth. I shouted STOP! I did not want to know the appraiser’s opinion of value. They did not understand why I declined the insight of the appraiser. I told them my value consideration for their home could be compromised if they told me what the appraiser estimated the home value to be. They agreed and were thankful that I wanted to give them my uncompromised value opinion.

I used my 5 points of valuing a home (future article) and came up with a range of between $310,000 to $325,000. They decided to list it for $340,000. Within 2 weeks we had an agreement for $325,000. The deal made it all the way past the real estate appraisal which came in at $328,000. Unfortunately the settlement did not happen and the home went back up for sale. This time we started at $325,000. Within 6 weeks we had an offer for $315,000. The real estate appraisal came in at $318,000 and the property settled.

After settlement I asked the seller what the home appraised for when they applied for the equity loan. They told me $275,000…Amazing! In just over 3 months a home was appraised by 3 different appraisers at $275,000, $328,000 and $318,000. How is this possible?

Years ago lenders would give the appraiser value estimates of what they thought the home was worth. Today that is not done and the appraiser is left virtually uninfluenced in their opinion of value. The appraiser does not know the borrower and is being paid by the lender. The influence on the appraiser in the home equity loan is very limited.

When an appraiser is working on a purchase they have many influencers such as the buyer, seller, Realtor(s), title company and mortgage originator. If the property does not appraise for the sale price the deal may not happen. No one gets paid and it is all the appraisers fault. These are people that local appraisers deal with every day. Do you think that may have an influence? Some appraisers will not even take an appraisal assignment from a lender if they do not think they can make the number. They do not even have to give the lender a reason.

My question is, why does the lender forward the agreement of sale showing the parties involved and the sale price to the appraiser prior to the appraisal in the first place?

My opinion on pre-listing appraisals is simple. If you are the seller do not ask the Realtor® you plan to hire to refer an appraiser to you. This may be a conflict of interest. Look in the yellow pages, call your local real estate association or go online and find several appraisers and interview them just like you would a real estate agent. When hiring a Realtor® to market your home do not disclose the appraiser’s opinion.

Pricing your home may be the most important thing you do during the selling process. Make sure you hire people who are honest and educated in their field. It is more important to hear what you should instead of what you want. In my humble opinion.

Knowledge is power!

Jeffrey C. Hogue

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