When it comes to real estate, the appraisal is the linchpin around which all else revolves. Both buyers and sellers are in a holding pattern until the appraiser arrives at the property, looks it over and comes back with a figure on what he thinks the place is worth.
Such is the case whether the property in question is a single-family house in the suburbs or a $200 million office tower in the city.
"Nothing happens in real estate until the appraisal report is signed and an opinion of the property's value is provided," says Brian Coester, an appraiser who presides over his own appraisal management company.
With that in mind, here are some things you should know:
-- There is a major disconnect within the lending business. Some lenders -- and real estate agents -- think the appraiser's job is to get the deal done, whereas appraisers generally think of lenders as money-hungry outfits who don't understand their profession.
According to Coester, CEO of Coester VMS in Rockville, Maryland, the appraiser's job is to be unbiased and completely independent of the transaction, while at the same time being realistic and practical.
-- The appraiser's valuation is her opinion -- repeat, opinion -- of what the property is worth. It doesn't matter what the buyer is willing to pay or what the seller is willing to accept.
"Two appraisers could do an appraisal on the same day, on the same house, come up with two different values and have them both be right," says Coester. "The reality is that value is really the appraiser's opinion, not an average, not a range, but a number the appraiser picks by looking at the data, understanding the market and all factors considered."
If the appraisal comes in too low for the lender to accept the buyer's application for a mortgage, the seller will either have to lower his price or the buyer will have to come up with more cash to make the deal work.
Yet the appraiser's valuation does not have to be the final word. Most appraisal companies offer a step-by-step procedure to follow if anyone involved in the deal thinks the valuation is off-base.
-- The information available determines much of the results. Appraisers are only as good as the data available to them.
Most, but not all, markets have a multiple listing service from which the appraiser gleans much of her information. But issues tend to arise when the appraisal is on new construction or houses in rural areas. Then, the appraiser must often deal with incomplete, inaccurate and outdated data.
Sellers should write up an inventory of all the improvements made to the house within the previous five years, complete with receipts if possible, to present to the appraiser as he enters the house. That way, the appraiser can spend his time verifying the information, which is more likely to reflect favorably upon the overall appraisal.
Remember, though, routine maintenance does not count.
-- You are only as good as your neighborhood. Like it or not, for better or worse, your neighbors and your neighborhood have an overall effect on your home's value. In a $200,000 neighborhood, spending $100,000 on improvements is not likely to add $100,000 in value.
-- At the end of the day, all adjustments to the valuation must be backed by real data that support the appraiser's opinion and would stand up in court.
For example, a $5,000 adjustment for garage space isn't just pulled out of thin air. It is backed by market research and data indicating that garages are worth $5,000 per space. It might be that homes with two-car garages sold for $5,000 more than those with one-car garages, or a variety of other market data.
-- Lenders' guidelines are unclear at best. While all lenders try to adhere to the rules set down by Fannie Mae and Freddie Mac -- the two secondary market companies that purchase loans from primary lenders -- or those from the Veterans Administration and Federal Housing Administration, the variety of requirements and requests lenders ask for can be amazing, according to Coester.
Moreover, most underwriters haven't been properly trained on appraisals, and as result, appraisers are sometimes stuck with requests and requirements that contextually don't make sense in the realities of the market or the appraiser's scope of work.
The Uniform Standards of Professional Appraisal Practice (USPAP) is the one true requirement. USPAP discusses how appraisers go about their business, and is the only thing appraisers are bound to. "Everything else is considered guidelines or suggestions, and varies from client to client," Coester says.
-- Appraising is a full-time profession. The typical appraiser does one or two appraisals a day.
"They are trained to be very careful when it comes to what they will and won't do when it comes to value, property condition and selecting comparables," according to Coester.
-- Appraisers are supposed to be licensed and be familiar with the area in which the subject property is located.
Licenses are hard to come by. According to Coester, "it takes two years, 300-plus tested education hours and 3,000 field hours to obtain an appraiser certification."
You have the right to ask to see the appraiser's credentials and make sure she hasn't traveled from outside the subject market. And if you aren't satisfied, you can ask the lender to send another appraiser.
-- An appraisal is not a home inspection. The two are totally different. The inspector's job is to make sure all the mechanical and subsystems are working and that there are no structural issues. The appraiser's is to observe the house in its current state, compare that with similar homes in the area and come up with a valuation.
Put another way, appraisers typically work on the assumption that everything is in good working order, whereas inspectors verify functionality.