I touched on this ever so briefly on my Memorial Day/VA loan post yesterday (and thank you to all who shared that one across the interwebs.)
Some 17 months after the real estate market well and truly turned here in the Phoenix area, appraisers are catching up.
I’ve had recent listings where we had no trouble getting a contract but the sellers and I were crossing any appendage we could think of in anticipation of the appraisal. On at least two of these occasions, I didn’t there there was a snowball’s chance in hell of getting the appraisal.
And yet we did.
Conventional loan. FHA. Hasn’t mattered. Appraisers seem to be going back to the geometry theorem version of appraisal – look at the contract to see what the answer might be, then look to see whether there are comps and/or upgrades to justify the price.
But wait, you say … aren’t appraisals supposed to be opinions of value? Well, yes. They are exactly that – opinions. And they are ordered by the lender for the sole purpose of determining whether to take the risk on a loan on a given property. The bank doesn’t care what the house’s real value is; the lender only wants to know that it’s worth at the inherent risk.
That is why appraisals vary depending on purpose. Appraisals for refinancing, for instance, almost always come out higher than appraisals for purchase because the bank knows there is underlying equity in the house, lowering the overall risk of the loan.
Truth be told, the geometry theorem method of appraisal is far better than the “I know more than you do and I’ll keep the market down myself” version.
What really is the value of a property? Whatever price that a seller agrees to sell and a buyer agrees to buy. If not for financing – third parties, if you will – it would be that simple. It’s that simple on cash deals.
On finance deals, the value is whatever price where a seller will sell, a buyer will buy and an underwriter will release the finding.
Intrinsic value of a home? Doesn’t really exist. And even if it did, does it matter? Paper gains and losses are just that – paper gains and losses.
For the vast majority of people, the value of their home shouldn’t matter much until the time comes to move. Unless they like just staring at equity (or the lack thereof) on their list of Quicken accounts.