Many home buyers think the appraiser is working for them. After all, they paid the appraisal fee - so the appraiser has to be looking after their best interests, right?
The appraiser does not work for the buyer, the seller, or the real estate agents. The appraiser's loyalty is to the lender. Why? Because the lender wants to make sure the they have enough collateral to cover their loan and in order to do that, they have to make sure the home is worth what the buyer has agreed to pay.
To develop a better understanding of appraisal accuracy, you have to look at the beginning.
So, let's start off:
What is an appraisal?
An appraisal is nothing more than one person's OPINION of value.
Despite what many buyers, sellers, loan officers, real estate agents - and even appraisers themselves may believe - it is an OPINION. Nothing more.
There are many methods appraisers can use to calculate those values - and while I don't want to go down the rabbit hole for this post and get mired in the details of all the methods an appraiser uses to determine values - quite often, appraisers look to recent closed sales to determine the value of a home if they can find suitable comparable properties.
So, since appraisers often look to closed sales for values - what does that mean? A home sale often takes 30 to 45 days to close once it goes under contract. Effectively, the appraiser is looking at the PAST of what the market demand at that time determined the price the home was worth - to determine the present value of the home today.
In a slow or normal market, that is typically fine. Home values and market demand aren't changing fast enough month to month to make much of a difference. In those stable markets, a good appraisal can be spot on.
But in a fast moving market where property values going up very quickly or losing value and going down very quickly, 30 to 45 days can make a big difference on values.
Just because a home seller "got an appraisal" does NOT mean that should be the list price on the home. Often, sellers will think the appraiser is some sort of clairvoyant and the appraisal is 100% right (that is why they paid to have one done in the first place). But the reality is, get 5 appraisals and a lot of times you'll end up with 5 different values.
Now, here comes the controversial part where I become unpopular with what I say... by looking primarily at closed sales to determine value in a fast moving market - this is fundamentally like driving a car while only looking in the rear view mirror (i.e. the past) - to try to see where you are (i.e. the present) or where you are going (i.e. the future).
I would argue that in a fast moving market up or down, many real agents are actually going to have a better handle on home values than most appraisers. Why? In competitive markets where values are going up rapidly, real estate agents are going to see the 200+ people at the open house and the 50+ offers that come in. Appraisers often just see the final contract that was accepted. And conversely, in markets where property values are in free fall going down - appraisers aren't likely to be aware of the zero activity on a home and how fortunate that the home seller was to actually get an accepted contract.
Quality appraisals in stable markets can be accurate. But they are merely an opinion of value to protect the lender.
Comments(4)