Is The Old Lady In The Shoe Real? How would you appraise her shoe home? 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. 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.
What do appraisers say?
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.
What is the appraiser’s job?
The appraiser’s job is not as much about trying to pin down the exact value of the property. This 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 appraisals 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 untrue. Assume there is purchase contract on a $500,000 home, and there is a $400,000 loan. This means the lender is offering you an 80% loan-to-value loan. That means it’s terms require that you have 20% equity. If the house appraises for $400,000 then your loan-to-value is 100%. There would be 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.
An appraisal is more than just the appraiser’s physical inspection of a home
Another important thing to note is that an appraisal is not just the act of an appraiser physically inspecting the home. As an aside, 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 yet? What was the value?!” What was done was not the appraisal itself. What was done was the appraiser’s physical inspection of the subject property.
What exactly does an appraiser do?
All the appraiser needs is measurements, general observations and photos. They can be gone in 10-15 minutes. Then the appraiser needs to find comparable sales. Comparables are settled sales. You cannot use listings. Listings are not considered data since the price is only an asking price. Then an appraiser has to shoot photos of the comps, make adjustments for differences between the comps. Then they’ll research things like 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. An appraisal report can be 20-30 pages. It can even be more depending on the type of property. Hence, a final appraisal report can take at least a week to deliver after the physical inspection of the property, or longer. It depends on the appraiser’s backlog.