Perhaps no step in the process of a real estate transaction is more misunderstood – and more feared – than the appraisal. Simply put, the appraisal exists to assign a value to a property that is derived from a standard methodology, providing parameters for mortgage lending, and negotiation between buyer and seller. Appraising is also an art, as it relies on the judgement and observation of the appraiser to assess condition, quality, similar properties to compare against (Comparables) and other subjective criteria. Appraisals also differ from Broker Price Opinions (opinion of listing price provided by a real estate agent) or a sales price on a website such as Zillow or Realtor.com. Appraisals follow the substantial and detailed framework put forth in the Uniform Standards of Professional Appraisal Practice (USPAP), which was initiated by Congress in 1989, and is now overseen by the Appraisal Standards Board of the Appraisal Foundation. It is updated every two years, and a licensed appraiser is required to reacquaint and update themselves with the 600 page volume every two years through mandatory classwork. Following the mortgage crisis of 2008, further legislation was enacted to create “appraiser independence”, to further protect the integrity of the appraisal from undue influence.
With these stringent standards in place, why is the appraised value so often hotly contested? One must understand the difference between “market value” and “appraised value”. The appraised value is derived from the process as outlined above, whereas the market value is simply the price someone is willing to pay. In our current market, many properties are being sold for considerably more than appraised value. In other times, the market could be flooded with properties and market values can be less than appraised value. Or maybe a buyer just wants a certain property and is willing to pay market value or more, despite cited defects or other issues that may lower appraised value.
Is there overlap and gray area in the market vs. appraisal value scenarios? Yes, and that leads us to the expectation that the value derived from a formal appraisal can happily coexist with market value. How? Many agents and appraisers differ over what comparables to use, property and neighborhood characteristics or other factors, yet are under the impression that USPAP and appraisal independence prohibits working and communicating together. This is not the case, and a savvy agent will learn to work with the appraiser by recommending comparables, attending the appraisal and providing other helpful information that will facilitate the most accurate appraisal and help expedite the lending and closing process.
Appraisers often get blamed for “killing the deal”, when more typically the additional factors of inadequate communication from the agent and unrealistic expectations of the seller contribute to disagreement of value. With today’s sky-high market, low inventory, virtual inspections and a host of other factors, it makes sense for agents, appraisers and informed buyers and sellers to communicate and work together to facilitate a transaction based on the most appropriate property value.
For more information from our partners at Landy Insurance, click here.