Article reposted from the Appraisal Institute:
“If you’re buying or selling a home, first you should understand what an appraisal is and how it’s used,” said Appraisal Institute President Stephen S. Wagner, MAI, SRA, AI-GRS.
“Real estate appraisals for mortgage finance applications are prepared for the bank or financial institution so lenders can better understand the collateral risk in making the loan. This can be confusing, because as the homebuyer you typically pay for the appraisal and receive a copy of it.”
He noted that in some cases the appraisal may not match the contract price. But just because an appraisal comes in below – or above – the contract price doesn’t mean it’s flawed, Wagner said. The agreed-upon contract price may be above market value, for example. In those situations, the buyer and seller often renegotiate the contract at more favorable or balanced terms, he explained.
Wagner said that contrary to incorrect interpretations of appraiser independence requirements, appraisers welcome information that would assist the development of a reliable, credible opinion of value. If lender policies permit, sellers (and potentially buyers) can accompany appraisers during the property inspection and may provide the appraiser with information they consider important, he noted.
Wagner recommended that buyers and sellers ask their lender for permission to do so, and confirm the appointment. Most importantly, he said, sellers and buyers should take note of whether an adequate inspection is performed. Did the appraiser spend enough time at the property to observe important features, significant improvements or potential problems?
Wagner encouraged homebuyers to take advantage of their right to obtain a copy of the appraisal report. Even though the appraisal is ordered to help assess lender collateral risk, buyers are entitled to a copy of the appraisal report, he said. Federal regulations require lenders to provide property buyers with free copies of appraisal reports no later than three days before the loan closes.
Wagner also said that homebuyers and sellers should ask their lender for the qualifications of the appraiser, including whether they are designated by a professional association such as the Appraisal Institute. A qualified and competent appraiser knows, for example, how to conduct a thorough market analysis and how to make appropriate adjustments.
He said the homebuyer, or seller, also can ask whether the appraiser is directly engaged by the bank or whether the bank utilizes an appraisal management company, and what their procedures are for engaging qualified appraisers.
“The best way to combat potential problems with appraisals is to ensure the appraiser hired by a lender is highly qualified and competent,” Wagner said. “You have every right to request the use of a highly qualified appraiser, someone with experience in the local market and knowledge to handle the assignment properly.”
Although appraisal review is best performed by qualified appraisers, Wagner said, homebuyers and sellers should examine the appraisal for potential deficiencies. According to “Appraising the Appraisal: The Art of Appraisal Review,” 2nd edition, common errors in appraisals include misuse of adjustments to comparables, disregarding special financing and concessions, or miscalculation of gross living area.
He said buyers and sellers should ask themselves:
Did the appraiser perform an adequate inspection?
“Most lenders have appraisal appeal procedures, known as ‘Reconsiderations of Value,’” Wagner said. “If you’re aware of recent, comparable sales information or items that may not have been available or considered by the appraiser, provide those to the lender. If problems were found with the first appraisal, you can and should request that the lender obtain a second appraisal.”
He also noted that, if they have sufficient evidence, homebuyers and sellers can file legitimate complaintswith the appropriate state appraisal board or professional appraisal organizations. To contact the appropriate state appraisal board, visit https://www.asc.gov/State-Appraiser-Regulatory-Programs/StateContactInformation.aspx. Legitimate referrals about Appraisal Institute professionals can be made via the organization’s Professional Practice Center at http://www.appraisalinstitute.org/ppc/ethics.aspx.
Read the full article on the Appraisal Institute.