Buyers usually view the appraisal as a declaration of a property’s value. Lenders view an appraisal as a benchmark for risk assessment. Real estate agents view appraisals and, more to the point, appraisers, as the bane of our existence.
Cached amidst the flowery legalistic language, disclaimers and overly long and complicated appraisal forms, the agents see what few others realize – the appraisal only is one person’s opinion of value. Nothing more. Nothing less.
It’s not even a pure opinion. Appraisers start the process with the purchase contract in hand. Since market value by definition is where buyer and seller meet on price, appraisers already know the home’s market value when they start. All that’s left to do is price out the quality of the home and find the comparable sales needed to either declare that the home “appraises” or “doesn’t appraise” at market value.
In that respect, appraisals are like the
geography geometry proofs we all were tortured with back in high school. Pythagorus already gave us the answer. We only need to “prove” that the answer is correct.
How does this play out in real life?
Let’s take a house under contract for $496,000. And let’s say the appraiser, in filling out the paperwork, enters the contract sales price at $465,000 by mistake.
Amazingly enough (note sarcasm), when the home was “listed” as $465,000 by the appraiser, the appraised value was given at $470,000.
Notified of the error, the appraiser changed the list price to the correct value – $496,000 – changed one comp and provided a new appraised value of $497,000.
The reality of this situation? In the appraiser’s unofficial opinion, the home likely was worth more than even the $497,000 but no appraiser is going to provide an appraised value well above the agreed upon purchase price. Underwriters would scoff, sellers would feel they were taken advantage of, buyers would be bragging at every cocktail party they attended for the next five years.
So the appraiser artificially limited the appraised value to a more acceptable, politically correct if you will, value only slightly above the sales price.
In so doing, the appraiser also caused a two-plus week delay on the closing of the sale, but that’s another story for another day.
Appraisals are yet another of the many examples where real estate transactions are made far more complicated and seemingly more complex than they really ought to be. One person’s opinion of value isn’t even their true opinion of value; it’s the value they’re able to assign without catching hell from everyone else involved in the transaction.
I’m sure the state appraisal board will disagree with me but hey, what’s a little bit of transparency between friends, right?