Appraisals, What Are They Good For?

Appraisals seem to be the issue of the day in the mortgage and real estate world. Everybody seems to value property differently even in the best of real estate markets. In a more difficult real estate environment, appraising becomes even more contentious.

FHA loans

For example, banks have really tightened their underwriting policy on appraisals. On an FHA loan they may require two appraisals if if the loan is an FHA jumbo loan (which is one that is over $417,000), if the property is in a declining market, and if the buyer is borrowing the maximum loan to value (which is 96.5%, i.e. a 3.5% down payment).

Also on an FHA loan, even if it is a loan that is a conforming FHA loan (which is one that is below $417,000) the bank may require a desk review if the property is in a “declining market”. A desk review simply takes the original appraisal and has a second appraiser review it, no re-inspection of the property is required. However, if the second appraiser finds a problem with the first appraiser’s work, they may lower the value of the appraisal.

Conventional loans

Also, on Conventional loans, there are usually two appraisals required on loan amount of $1 million or more.

And beyond the strict requirements by the banks and underwriters, there simply seems to be more disagreement than ever as to how to value property. There was a property that was being bought by some client of mine recently, where the agreed upon purchase price was $858,000. There was a Realtor involved, buyers who had looked at many properties in the marketplace, and a seller who lived in the neighborhood and you would think would know the values of the properties there. However, an appraiser told us that he believed the property was only worth $810,000.

I spoke to another appraiser to get their opinion, and while he thought that the $810,000 valuation was too low, he also thought $858,000 was too high. He cited the fact that the two highest sales in the neighborhood recently were at $839,000 and $850,000. In this market, to be the highest sale in the marketplace at $858,000 the second appraiser said that the property better be special, and either be larger, or more nicely renovated, or have features that the other properties at the top of the market did not. However, the property was not larger, nor better renovated, nor did it have any extra special features. The second appraiser ended up saying that he thought the property was worth around $825,000. So now we have to get all parties to agree and meet in the middle somehow.

Summary

But it is always interesting to me how you can send 10 different people out to a property, whether they be Realtors, appraisers, buyers, or sellers; and you can get 10 different ideas of what a property is worth. It just goes to show you that valuing property is very subjective, and there is no science to it. A property is worth what someone is willing to pay for it, until you get the banks involved!