Appraisals in Today's Market

Appraisals – The Ins and Outs of Appraisals today.


The following blog is from information I have collected and my own thoughts on appraisals for today’s market. The need for appraisals has changed dramatically with the falling real estate markets in the last several years. Additionally the industry and the government now require tighter standards.

What is the importance of a professional real estate appraisal today?

In the lending process borrowers often think of appraisals are done for the borrower. After all - the borrower is required to pay for the appraisal. In fact the appraisal is really for the lender. The lenders need to ensure the appraisal is adequate collateral for the loan. This idea that the appraisal is for the lender surprises most. But actually usually the buyer of a home has not negotiated through a buy sell agreement that the home must appraise for the sales price. The lender must ensure the home (thus the offer) is not over valued possibly affecting the security and integrity of their loan.

With today’s regulations the lender is required to give the borrower a copy of the appraisal whether the lender approves or denies the loan. Under the Equal Credit Opportunity Act, your lender must provide you with a copy of the appraisal report upon your written request. But under today’s HVCC (Home Value Code of Conduct) regulations the lender is required to provide you a copy of the appraisal report regardless if you ask for one or not.

HVVC was implemented May 1, 2009. This new federal regulation has dramatically changed the rules in which appraisals are handled both for the lender and for the borrower.

The idea of HVCC is to protect consumers from appraisers over valuing a home. Why might an appraiser over value a home? To help the lenders lend you more money or to help cover the loan requested. There are many reasons this could happen. The big component of the code is to bar any production staff, such as loan officers and processors from ordering or selecting appraisers. The regulators want a “Bright Line” between those who are compensated on closed loans. Prior to the HVCC regulation loan officer or their staff would order an appraisal directly from an appraiser.

The appraiser is an expert in real estate valuation. They are an important impartial third party that’s serves as the lenders “check” in the lending process. The idea is that since the appraiser has extensive training, knowledge and expertise the appraiser will arrive at a professional opinion of the properties value with out any undue or overt influence.

Appraiser must adhere to state qualifications either being sate licensed or state certified. Additional there are many educational and experience requirements that must be complete. Appraisers agree to industry standards and a professional code of ethics.

Appraisers follow USPAP which is the Uniform Standards of Professional Appraisal Practice. This helps appraisers to legally complete a report with integrity and uniformity. Today most of the ‘standards’ that you see are driven by the lenders that order the reports. Most appraisals are done under the Comparable approach. This compares recent sales of similar homes in the area. Other methods of appraisals include the cost approach or the income approach. Some investors want to see all sales within 6 months and within a certain geographical radius. Different lenders have outlines that they give the appraiser to complete. These outlines are all different and vary from lender to lender. These out lines change based on the market, internal criteria and the area that is being appraised.

The appraiser looks to complete the best possible report and provide the lenders underwriter with additional criteria if they request it, which seem to be more often in today’s market.

Typically, at a minimum the appraiser will use 3 sales with in a 12 months period. In this market, if sales are available, they will utilize the most recent. Ideally, the sales will fall within 6 months and 1 of those sales should be within 3 months. If there is a lack of data, the appraiser may include active listings to further support your market findings. There may be additional requests by the lender if the property is a 2 – 4 unit, berm home, new construction or other varied scenarios.

Then the lender may run valuation models. There are several available services. These AVMs (Automated Valuation Models) provide support of value for the property. These reports can confirm the appraisers’ value or provide additional questions that will need to be answered. If they see multiple contradictory data in the market the underwriter will ask the appraiser to make clarifications to support the value conclusion.

If you have any questions in regards to appraisals please contact me.