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The Appraisal: A True Evaluation of a Home’s Worth?

Every house for sale in today’s real estate market must be sold twice. First, you must find a buyer ready, willing and able to purchase the home. Second, you must sell the value of that house to a bank so they will agree to lend money based on the negotiated price. The second sale may be more difficult than the first in the current lending environment.

A mortgage is necessary in the vast majority of real estate transactions in this country.  The buyer puts a certain amount of money ‘down’ and then borrows the remaining balance from a lending institution. The lending institution then issues a mortgage to the buyer using the house as collateral. In order to establish the value of the house (collateral), the bank will send out an appraiser. The appraiser will inspect the home; do research on the homes like it that have recently sold in the area and report back to the bank whatever it deems to be the value of the house. The bank must feel comfortable that the value is strong enough to justify using the home as collateral for the loan.

The appraisal process can be much more difficult in the current environment than it has been in the past for two reasons:

1.) More mortgages are becoming delinquent.

The value of the collateral has always been important. The other major consideration of the bank when making a loan was the borrowers’ previous credit history. If the borrower could show a history of always paying their bills on time, the bank would have less concern about having to take the home back in a potential foreclosure action for non-payment. The collateral would then be less of an issue in the bank’s mind.

The number of people defaulting on their mortgage payments is currently ten times greater than historical levels. Some borrowers are even ‘walking away’ from their mortgage obligation even if they have the financial resources to pay. There is currently a greater chance that the bank will have to foreclose on a loan. That makes the appraised value of the home (the collateral behind the loan) more important. We have seen banks become more conservative with appraisals because of this.

2.) The ‘mix’ of homes used to establish value has changed.

There were very few distressed property sales (foreclosure or short sales) five years ago. Distressed properties make up over twenty five percent of all homes sold today. The homes used as comparables by appraisers to establish value today reflect this change. More and more distressed properties are entering the ‘mix’ of properties being used as comparables. The distressed properties sell for less. The result is lowered appraisal values when they are used as comparables.  (In tomorrow’s blog, we will discuss this issue in greater detail.)

Should an appraiser even consider distressed properties when establishing the value of a non-distressed property? There is much debate on this issue. We must realize that the reason the bank is doing an appraisal in the first place is to protect the loan they are making to the borrower. The house is the collateral to that loan. If the borrower fails to make payments, what will the bank be left with – A FORECLOSURE! With that in mind, the bank can make a reasonable argument that distressed properties should be considered.

What does this mean to you?

If you are a buyer…

Realize that only you know what the true value of the home is to you and your family. You have probably shopped online and seen 100’s of homes. You then picked out the ones you thought were best and visited them. You went into every room and saw every amenity. After scrutinizing all these homes, you picked out the one that best fit the needs and goals of your family. You agreed on what you believed to be a fair price. Don’t allow the appraisal to convince you that you were wrong. The report was done in just a few days (or even hours) and was completed to satisfy the banks current need to be conservative.

Be willing to revisit the price of the home and see whether the difference can somehow be negotiated.

If you are the seller…

Realize you are selling your house at a time when banks are being conservative on values. If your appraisal does not come in, do not be quick to ‘kill the deal’. There is no guarantee that you will  find another purchaser. There is no guarantee that a new buyer will match the offer the previous buyers made and, even if they do, there is no guarantee that you won’t have the same challenge with a new appraisal.

Think hard and long and see if perhaps you can re-negotiate a deal that both you and the buyer can live with.

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8 replies
  1. Rich Bonn
    Rich Bonn says:

    Home Sellers, remember this too… FHA Appraisals travel with the home, not the buyer. If you kill the deal, and a new buyer comes in wanting FHA financing, you will still have to use the same appraisal (for up to 120 days.)

  2. Chip Wagner, SRA
    Chip Wagner, SRA says:


    There are many challenges facing the real estate industry today, and one of the biggest is the abundance of foreclosures and short sales proliferating the marketplace in many areas of our country.

    I am a third-generation, professional residential real estate appraiser with over 20 years of experience in the Chicago area, and I have never seen a marketplace like I have over the past 2-3 years.

    The first issue is the HVCC, and the second issue is the marketplace itself. The HVCC has given the appraisal profession a major blow, and the most experienced of residential appraisers are leaving the industry. The intent and desire was to insulate appraisers from lender-pressure to direct values (push the numbers higher). The unintended result has allowed the additional layer of insulation (appraisal management companies) to seek appraisal services from appraisers willing to do the work for appraisal fees of 25% to 75% less than our fees before the HVCC was enacted in May 2009. In many cases, the quality appraisers have diversified away from the business, and this in turn is leading to less-experienced appraisers trying to survive in the most complex real estate market anyone has seen since our Great Depression. Geographic competency has become a major issue as out-of-area appraisers are going into areas they have never been to for the work.

    The HVCC has caused me to completely diversify my appraisal business away from doing lending appraisals into better appraisal work where my clients truly do want to know the value of the property. (Relocation, attorneys, and other private parties for litigation, divorce, estates, trust, tax appeal, etc.)

    The appraiser analyzes and interprets the market, and is an unbiased disinterested third party giving an opinion of “Market Value.” What the lender decides after receiving the appraisal report is one of the issues out there as well.

    What the bank elects to do as far as making a loan is a completely different scenario. I have a relative who attempted to purchase a condominium in Florida this Spring with over 35% down, FICO scores in the high 700’s, an appraisal over $40,000 higher than the negotiated purchase price, yet two lenders (not one, but two) who approved the pre-qualification of the borrower would not make a loan on the property.

    I know of another scenario where a close family friend attempted to refinance, the appraisal came back $25,000 higher than he needed to qualify, but the lender and their underwriter decided to do a desk-top review and lowered the value $50,000 below the appraised value.

    My daily challenge is finding “good comparables” and in many cases, they don’t exist. The marketplace is proliferated with data of distressed sales. The definition of value in a foreclosure or short sale is going to be “Liquidation Value” – not “Market Value.” So it is indeed unfair to use comparables that sold at liquidation value in a property where market value is supposed to be estimated by the appraiser.

    Another concern is that as our real estate market bottoms out, and prices begin to appreciate or increase again which they are in some areas of the country, we are going to have a data pool of comparable properties supporting lower values. Really a catch-22 situation.

    But what has happened, in some markets, the only homes selling are the distressed sales. This creates the new “norm.” The real estate principal of “Substitution” states that when several similar or commensurate commodities, goods, or services are available, the one with the lowest price will attract the greatest demand and widest distribution. This is the primary principle upon which the sales comparison approach is based. If competing properties are priced at $179,900, why would you pay $200,000? Food for thought.

  3. Steve Harney
    Steve Harney says:

    @ Rich – Great point! Thanks for the information.

    @ Chip – Thank you for taking the time to shed further light on the entire appraisal situation. Very well articulated. Would you mind if I used the comment as an actual post next week? I will obviously give you proper credit.

  4. Donna Roberson
    Donna Roberson says:

    It’s apparent the banks are only looking out for their own interested. Why can’t the foreclosed properties be sold at market value? Isn’t there some kind of law about trying to monopolized on an industry?


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  1. […] Wagner is an appraiser with over 20 years experience. Below is a comment he made to Monday’s post. We thought so highly of his response that we received his permission to post it directly on the […]

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