Is The Old Lady In The Shoe Real?

April 22nd, 2011

old shoe

What Is An Appraisal?

An appraisal is thought by most consumers to be an exact valuation of the home they are purchasing or refinancing. The reality is that there is no such thing as exactly valuing a home, since a home is worth what someone is willing to pay for it. And since different people are willing to pay different prices, the real value is hard to pin down, or even impossible.

I have had many appraisers tell me there job is not to value a house for exactly what they think its worth. Their job is to justify to the bank that the contract price is valid, and that the house should suffice in serving as the bank’s collateral. So 9 times out of 10 the appraisal will come in right at the purchase price. The average mortgage borrower typically cries foul and thinks the whole appraisal process is rigged. This is incorrect. An appraisal usually comes in at the purchase price because the appraiser is working for the bank, and their job is to justify that the purchase price being paid is supportable. The appraiser’s job is not as much about trying to pin down the exact value of the property, which we know is almost impossible anyway. And think about it, why would an appraiser say a house is worth $520,000 if the contract price is $500,000? They are just sticking their neck out saying a higher value is “real”, when we all know value is subjective. Some appraisals do indeed come in higher than the contract price, but now you have more of an idea why most appraisers come in at the asking price.

Another misconception is that as long as the home appraises for enough to cover the loan, then the bank should have no problem approving the loan. This is very untrue. If there is purchase contract on a at $500,000 home, and there is a $400,000 loan and the lender is offering you an 80% loan-to-value loan, that means its terms require that you have 20% equity. If the house appraises for $400,000, then your loan-to-value is 100%, and there is no equity. Loan denied. If the home appraises at $450,000, there still is not 20% equity. Loan denied. The appraisal has to be at least $500,000 to have 20% equity.

Conversely, if the home appraises over the asking price, that does not help you in any way. The lender will only lend on the contract price or the appraised value, whichever is lower.

Another important thing to note is that an appraisal is not just the act of an appraiser physically inspecting the home (and an appraisal has nothing to do with a home inspection, there is no analysis of the structure or systems in an appraisal). An appraisal inspection is just the physical analysis of the home which includes photos and measurements. I have had hundreds of clients over the years tell me, “the appraisal was done 2 days ago, why don’t I have a copy, what was the value?!” What was done was not the appraisal itself, what was done was the appraiser’s inspection of the subject property.

All the appraiser needs is measurements, general observations and photos, and they can be gone in 10-15 minutes. Then the appraiser needs to find comparable, settled sales (listings are not considered data since the price is only an asking price), shoot photos of the comps, make adjustments for differences between the comps, and research things (condition, renovation level, was a sale a distressed sale, etc). The research and follow up calls alone can take several days. Then the appraiser has to drive around to the comps he has chosen and shoot photos of those comps. Then after making all the necessary adjustments between the subject property and the comps, the final appraisal report is delivered, which can be 20-30 pages, or more, depending on the type of property. Hence, a final appraisal report can take at least a week to deliver, or more, depending on the appraiser’s backlog.


Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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