We are often asked by clients who buying or refinancing a home why their appraisal seems to always come in at contract price, or, in the case of refinancing an existing mortgage, why does the appraisal come in at exactly the amount of the loan.
We hope the following article will give you a better understanding of the process. Feel free to contact us with further questions!
Ernest Ovitz is a graduate of The Georgia Institute of Technology, School of Architecture. He entered the real estate field in 1992. Since that time, he has been a Mortgage Banker and Certified Real Estate Appraiser in Colorado and Florida.
Why does my appraisal match or nearly match my purchase price?
By: Ernest G. Ovitz
It is a common question among home buyers, and one that expresses the unspoken concern that the appraisal may have been an expensive formality. While skepticism is a normal human reaction, fortunately the reality is more reassuring. In most cases the market actually works! Home sellers are eager to realize the best price possible for their home. Listing agents are motivated to make attractive and realistic listing proposals to obtain a seller's listing. Conversely, home buyers are eager to find the best deal in a home that meets their needs. Buyer's agents are motivated to find attractive and realistic listings for their buyer/clients to view. The key word in buyer and seller chemistry is realistic, and the key agent to good buyer and seller chemistry is the professional Realtor. When seller and buyer are brought together by knowledgeable real estate professionals, the natural tension that lies between them may be tempered by realistic information that helps both parties arrive at a fair price, a price that is supported and validated by an appraisal.
What then is the appraisal, is it a mere formality? First, let it be said that when the market works well, as described above, to the home buyer the appraisal may appear to be just that, a formality. However, experience tells us that while the market may work well in most cases, as it is with all things involving human nature; that which works most of the time, does not work all the time. For most people their home represents their largest single financial investment, and for most of us, a mortgage loan makes that investment possible. As home owners, we do not think of our homes as "collateral" but mortgage lenders certainly do. Appraisals are required by mortgage lenders to validate and support the quality of the collateral they are lending against. For a lender this is no formality, and a satisfactory appraisal is required before any underwriter is going to sign off on a mortgage loan. In the final analysis, this too is in the best interest of the home buyer as well.
An appraisal is more than a number. The first and most natural thing a person wants to know from an appraisal is what is the value number? The information provided in the appraisal report does not end there. To the intended user of the appraisal (normally the lender/client), the documentary support by which the appraiser arrived at the value opinion is equally important. As licensed and regulated professionals, Appraisers are duty bound to follow standards of professional practice to arrive at their value conclusion, and are required to document and support their work. Appraisers research and evaluate sales of similar and competitive properties in the market area, inspect the subject property, and when appropriate, prepare a cost analysis of the same and/or evaluate the subject property's rental income potential. As a part of any cost analysis, the Appraiser will research and support an opinion of the subject property's land value. Lenders ask their Appraisers to report on market conditions, neighborhood conditions and amenities, and other details. Some lenders may impose additional reporting requirements, or more stringent standards that the appraisal may have to satisfy. To satisfy these reporting requirements the Appraiser provides the report on a multi-page standard form specified by the lender. Home buyers often receive a copy of the appraisal report, and can gain a better understanding of the support for their home's value including: the home's physical assets and the supporting market conditions behind the value conclusion, by reviewing the entire report.
