The Purpose of an Appraisal in the Home Buying Process
The lender's appraisal and why you should secure your own appraisal
The Home Buying Process
Everyone in real estate is familiar with the same process when buying a home. When simplified, the process goes something like this: A price is agreed upon, and the contract is made between the buyer and seller. The buyer’s lender then orders a home appraisal. Say the appraisal value comes back at or above the contract price. Then, the purchase goes through and everyone is happy. As an appraiser of 12 years, this seemingly simple process raises a few questions for myself, as well as a few concerns I would like to express to potential buyers and sellers.
The Purpose of the Lender’s Appraisal
While the buyer may pay for the appraisal, the appraisal is made for the lender with the intended user being the lender. An intended user is named by the appraiser as an authorized user who has the right to rely on and employ the information contained in the appraiser’s report. The appraiser is not permitted to discuss information, analysis, or conclusions (the appraised value) with anyone but the intended user, who is the lender in the case of a purchase appraisal. The purpose of this appraisal is simply to help the lender make the financial decision on whether or not it is in their best interest to loan out hundreds of thousands of dollars on this property. The point that I am trying to make is that this appraisal has one purpose: to protect the lender, and only the lender, from financial loss. Unfortunately for many appraisers, if they do not hit the number the lender wants, the appraiser runs the risk of ending up on the lender’s exclusionary list or Do Not Use list. There is an immense pressure for appraisers to lean more favorably toward a number that is beneficial to the lender. Which leads into the next section describing why you want to order your own appraisal.
Consumer Protection and Ordering your own Appraisal
Here we will detail why both the buyer and the seller may want to purchase their own appraisal to protect themselves from financial loss. As I mentioned in the above section, the appraisal in the home buying process is ordered by the lender to protect themselves even though the buyer pays for it. An appraisal is supposed to be an opinion of value of a property from an unbiased third party. Due to the nature of how the appraisal system is set up, it is difficult for an appraiser to remain unbiased if the lender will never use them again in the case that they do not hit a certain value. Purchasing your own appraisal before the process begins has the potential to save you time, money, and your own sanity.
Why a Home Seller Needs Their Own Appraisal
When listing their homes, most sellers trust real estate agents to set the list price of their properties. This is could be a mistake. A real estate agent is first and foremost a salesperson. They are important to the process especially when it comes to negotiating and writing a contract. They unfortunately have no formal training when it comes to valuing homes. A real estate agent is not allowed to legally call their value an appraisal value. You may notice, real estate agents offer “home evaluations”. As a homeowner, it is important to hire a professional real estate appraiser to value your home. In fact, many smart real estate agents do hire appraisers to value their client’s homes in what is known as a pre-listing appraisal. In my home state of Virginia, a real estate agent only needs a 60 hour class to become an agent. A certified residential appraiser needs over 200 hours of classes, a four-year degree, and a two-year long apprenticeship before becoming licensed. It is clear that you need to trust a professional certified residential appraiser with appraising your home to find its true value. A properly priced home sells much faster. If your home is underpriced or overpriced, you run the risk of your home sitting on the market for too long or selling at a price under market value. A good real estate agent is important and can guide you through the process of selling your home; however, a good real estate agent with a good pre-listing appraisal will make the process go much more smoothly and you will know exactly how much your home is worth.
Why a Home Buyer Needs Their Own Appraisal
We outline above that when a home buyer signs a contract to buy a house, the lender will order an appraisal that is designed to protect them. As a buyer, you should also order your own home appraisal to protect you as well. An appraisal from an unbiased and professionally certified residential appraiser will ensure that you are not making a bad financial decision. A home is the largest purchase many people will make in their lifetime. It is wise to spend a couple hundred dollars up front for an appraisal that could potentially save you hundreds of thousands of dollars. This is why all lenders across the United States do this everyday. In many states, there is a three to five day cooling off period after signing a contract when you may have an appraisal done. If you have an appraisal contingency worded correctly in your contract, you may also back out if your appraisal comes in low.
A Third Party Neutral Opinion
Here is what Appraiser Phil Crawford the Voice of Appraisal Podcast and www.findmyappraisal.com has to say about the topic:
“Buying a home or investment property is an exciting and emotional experience. Everyone involved in the transaction has a vested interest in the deal closing.
The real estate agents want a commission,
The loan officers want a commission,
The title company wants their fees,
and the property sellers want their money!
With all of these parties dependent on the selling of real estate, who is there to protect the buyers of real estate?
There needs to be a third party unbiased point of view to bring balance to the transaction.
Real estate appraisers can help you understand the transaction you are about to enter and the decision you are about to make.
They are highly trained, unemotional, disinterested, third parties that can provide homeowners honest and credible opinions of real estate values.
Let a real estate appraiser help you with the largest investment of your life…
Buying a Home.”
Make the smart financial decision and only pay a couple of hundred dollars up front for an appraisal that could potentially save you hundred of thousands of dollars. The only regret you will have is that you did not find your homes true value sooner.
Visit www.sparkvaluations.com to learn more about our appraisal programs and services.
Jacob Millson
Owner/Lead Appraiser Spark Valuations
www.sparkvaluations.com
