Appraisal Question

While the buyer is paying for the appraisal, they are paying for it as part of their loan costs. The appraiser is hired by the lender and works for the lender and his/her purpose is to inform the lender. I just saw an appraisal of a property I know would sell at about $950,000, come in at $750,000. The appraisal was for divorce purposes and it was a unique, difficult to value property. Appraising is an artform, not a science. There is no one absolute number pointing to what a home is “worth”.

The reason there is an appraisal is in case you do not make your payments and the bank has to foreclose. If you are buying a house for $500,000 and you are putting $200,000 down, frankly, the appraiser doesn’t have to agonize over the process. The bank is clearly going to be able to sell it for the $300,000 they lent you to buy it. Now if you are putting zero down, the appraiser is on the line in the event you foreclose and the bank can only sell it for $450,000.

You need to determine what the home is worth. It’s great when it appraises and everyone loves those few times when it appraises for more than the sale price (except the seller). But if it appraises “right on”, don’t take that as some great feat. Different appraisers will get different answers. Appraising for different purposes, like to value for an estate or divorce when the house is not being SOLD, will often produce different results than when the appraisal is for a home purchase.

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ARDELL is a Managing Broker with Better Properties METRO King County. ARDELL was named one of the Most Influential Real Estate Bloggers in the U.S. by Inman News and has 33+ years experience in Real Estate up and down both Coasts, representing both buyers and sellers of homes in Seattle and on The Eastside. email: cell: 206-910-1000

8 thoughts on “Appraisal Question

  1. Great post Ardell. Your point about how the appraisal is actually to valuate the collateral in case the load defaults is spot on. However, I disagree with your $200,000 down scenario. The lender’s underwriter assigns “layers of risk” for each individual deal. If a borrower has so-so credit, just enough income to cover the payment, and a spotty job history, then a large down payment can be vital in the lenders decision to approve a deal. In a case like this, the LTV is important enough that the appraiser’s valuation is every bit as important as a zero-down situation. Since the appraiser is never privy to these other risk layers, they must approach every deal with the same level of “agony”.

  2. So your saying if the house is being sold for different reasons it can be appraised at different values? I guess this makes sense to an extent but this almost seems unfair. Shouldn’t a $400,000 house always be appraised at $400,000 no matter why it’s being sold?

  3. Good question Eric. I said: “Appraising for different purposes, like to value for an estate or divorce, often will produce different results than when the appraisal is for a home purchase. ”

    Appraising for an estate or divorce (or home equity loan or cash out refi), as noted by me in this instance, means the house is being appraised, but not SOLD. If the property is being sold as part of an estate or a divorce, then you are correct that there is no difference as to why the property is being sold. In a sale, the appraisal is being done for the buyer’s LENDER, who doesn’t care WHY the property is being sold.

    In my statement regarding an appraisal being done solely for the purpose of a divorce proceeding, this means the property is not being sold. The appraisal is being done so that one party can buy out the other party, without the benefit of the open market assisting in the valuation process. Same for an appraisal being done by the estate when the surviving spouse or only child is going to stay in the house, and the property is being valued by the appraiser for tax and stepped up basis purposes. If there is a sale, the appraisal is done for the lender, not the owner. When the house is not being sold, the appraisal is done for the executor or the owner(s).

    People often think that when a property is appraised at $400,000 it means the house is “obviously” worth that. There is always a “range of value”. A house is never worth a specific amount, with “to the dime” accuracy. I think the variance is always at least 5% either way, and can be much greater at times.

  4. Ardell, If a home is being appraised for “market value” it should not make any difference if the purpose of the appraisal is for a sale, refinance, or a pre-listing assignment.

    Often what people forget is that there ARE different purposes for appraisals and they can dictate different values.

    For example, a relocation appraisal will be for the “anticipated” sales price within a specified marketing time (120 days)

    An estate appraisal may be a “retroactive” value as of the date of death. The same may be true with a divorce or any assignment where statutes dictate the effective date of the appraisa.

    An appraisal assignment for a tax appeal my combine both a retroactive date (1/1/2005) and statue regulations (3 year average of prior sales).

    We can certainly agree that appraised values will always result in a “range of value” and an acceptable variance in opinions can be +/-5%.

    However, IMHO, it is an unacceptable appraisal practice for an appraiser to be coming up with different “market values” just because of the circumstances (refinance, sale, pre-listing, etc.)

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