Many people don’t realize that if you borrow $1,500,000 ($1.5M) or more on a mortgage, some lenders require two appraisals. They deem a larger loan such as this a riskier loan, and they want to take extra precaution in confirming the value of the asset. The problem is that two appraisals means two appraisers. I respect appraisers, they certainly know more about how to value residential real estate than I do. But you have to find a process suspect when you send out 5 different appraisers and get 5 vastly different values. And I would argue this happens enough to make you wonder about the whole appraisal process. In other words, valuing real estate can be a grey area. So getting people to agree on the value can be difficult.
I am currently doing a refinance where a client is borrowing $1.8MM on a new loan. Hence, two appraisals are required. One appraiser said the place was worth $2.8MM, and the second appraiser said the place was only worth $2.45MM! Who is right? I guess the underwriter will tell me (actually they’ll automatically use the lower appraisal of the two). But how did we get a $350,000 variance on the same house? That is a 12.5% to 14.5% variance, depending on which value you think is correct. Those are pretty big margins of error.
I had a Realtor tell me once that most good Realtors and buyers know values better than appraisers because they have more street-level knowledge. They know more about the schools, the lots, the views, the neighbors, the streets, the shopping, interior finish level, and all the amenities of a neighborhood that an appraiser will have a hard time knowing in as much detail as a buyer or Realtor.
Appraisers come in the home for 10-15 minutes, shoot their photos, take some square footage measurements, and leave. Realtors, buyers, and sellers live, work and play in these homes and neighborhoods. They spend hours, days, weeks, months and lifetimes in a marketplace, learning street-level data.
I am starting to see more and more how I saw a $350,000 variance between two appraisals! But appraisals are notoriously hard to challenge.
So when you borrow more than $1.5M, be aware you may be required to get two appraisals and you should hope you get two really experienced appraisers!
Mortgage guidelines can change at any time, so always talk to an experienced mortgage loan officer who will help you understand the current guidelines and how they might apply to you.