So you’re buying or selling a home and it’s time to get it appraised. This is a crucial part of the process that can really make or break a deal. So let’s talk about what you need to know about home appraisals. This is an industry that desperately, in my opinion, needs a disruption. Arguably the real estate industry as a whole is undergoing one as we speak, but that’s a topic for another day. The industry I’m talking about here has somehow managed to get away with practices that are just archaic. And I mean that from my standpoint, a real estate salesman standpoint, and just a market analysis standpoint.
So what do you need to know about home appraisals? Let’s pull back the curtain and look at what the appraisal process looks like from behind the scenes.
1. When a buyer who is financing a purchase through a bank or lending institution makes a formal application for that loan for a house they are under contract to buy, one of the first steps that lender does is order an appraisal.
2. Once the appraisal is ordered, it is managed by what’s called an appraisal management company, or AMC for short. The AMC may have a pool of appraisers that are under them.
3. The AMC will throw the job out to their pool of appraisers for one of theem to pick it up. They may pick it up for a variety of reasons. They may think “hey, I know this area well so this will be a slam dunk” or “hey, this is an easy one” or “hey, this one pays well” or maybe just “hey I can make this deadline.” Whatever the reason, they pick it up. They get paid for the job just about the same from what I see at the closing table across the board.
So what’s the problem with this system? I have a few thoughts.
1. They have no incentive to work extra hard to get to a value. They get paid the same no matter what so they are no incentivized to do do any extra work to arrive at the most accurate value.
2. Nowhere in the appraisal report is supply and demand addressed. Economics 101, the very first thing I learned in my first economics class at Auburn University, was the rule of supply and demand and how it affects market value or a good or service. Nowhere in the appraisal report is supply and demand really given any value or weight. It may be mentioned occasionally, but the fact that there were five or six offers on a property that they’re holding a contract on, or the overall climate of the market is not given any value.
3. They have no skin in the game. Appraisers, whether they get to that contract value or not, they have (as far as I can tell) no one to answer to. They may have a boss somewhere, but they are not working for the buyer or the seller. And in a way that’s good, that would be a conflict. There is a real estate appraisers board in the state of Alabama that you can file complaint with if you feel there has been some negligence or they didn’t take into account some obvious comps that were found. I have reported appraisers before, but it doesn’t seem to do anything.
So what does this mean for sellers?
If you’re a seller and you’re entertaining offers, look for buyers that offer cash instead of financing. How they are paying for the house makes no difference to you at the closing table, but with a cash offer you most likely won’t have to deal with an appraisal (unless they request it specifically in their offer).
As a buyer, you are at a disadvantage if there are any offers submitted that are for cash because your offer is automatically contingent on the appraised value being at or above the contract price. It’s important for you to know this because, in the current market, I am experiencing far more appraisal issues (appraised values that are lower than the contract price).
Unfortunately, it doesn’t matter that the contract price is what the buyer has said they are willing to pay for the property. A saying we have in real estate is that a property is only worth what a buyer is willing to pay!
Have questions or opinions about appraisers? Call or text 256.361.5593