Okay, not all about appraisals, but here are a few things you might find useful to know about appraisals:
Myth: An appraisal will tell you the true market value of your home (what a buyer would pay to purchase your home).
Truth: An appraisal will tell you what someone paid for a home somewhat similar to yours in the recent past.
While adjustments are made to try and account for differences between your home and the other recently sold homes selected by an appraiser to use in a value report, the amount of adjustments that can be made before invalidating the comparable property, and the report, is limited. And while an appraiser can adjust for value increases over time in an appreciating market, this “time adjustment” is also limited, and it is not uncommon, in a hot real estate market, for “appraised values” to trail true real-time market value.
Myth: If property in your neighborhood is selling for, say, $300 per square foot, then if your house is 200 square feet larger than a neighboring house that just sold, your value should be greater than your neighbor’s sale price by the difference in square footage multiplied by the total average per square foot value (200 square feet x $300 = $60,000).
Truth: While the value of homes within a specific neighborhood may translate to an average of $300 per square foot, this number proves to be useless in determining either total value, or the value of floor area differences, and is ignored by appraisers.
While a simple increase in floor area by itself may indeed increase the market value of a property over a smaller home, the increase will be by a factor much less than what might be the neighborhood’s total average value per square foot. Floor area adjustments can range from $50 to $150 per square foot (in neighborhoods where total value averages $250 to $500 per square foot).
HOW IS AN APPRAISER SELECTED
It all began in 2007 when the New York Attorney General’s office investigated alleged appraisal fraud at Washington Mutual. They found that a large appraisal service had “knuckled-under” to pressure from WAMU and allowed loan officers to select appraisers based on whether or not they agreed to “hit the number”. The result, according to the Attorney General, was inflated values and fraudulent loans that were then sold on the secondary market. Because WAMU was a federal-charted bank and under federal jurisdiction, the suit was filed against the appraisal company and not WAMU directly, but the related investigation was enlarged to include the due diligence of secondary market giants Fannie Mae and Freddie Mac.
In response Fannie and Freddie agreed to establish the “New Home Valuation Protection Code” which set requirements for lenders selling loans on the secondary market governing the production of appraisals used in loan origination. No longer could appraisers be selected by loan originators, nor could lenders utilize in-house appraisers. Independent appraisal service companies had to be used. And eventually any contact between originator and appraiser was prohibited, and appraisals could be disputed and/or replaced only under strict and extreme conditions.
The results have been mixed, with as many unintended, as intended, consequences. But that is for another story. The bottom line is that an appraisal for a mortgage must be ordered through an independent service, and the appraiser selected by the service “in blind fashion” from their list of approved appraisers.
The number of appraisers nationwide has declined a whopping 25% over the last 10 years. Appraisals take more time, and appraisers are paid less, than was the case a decade ago, due to an increase in report requirements and the insertion of an appraisal service between the lender and the appraiser (which takes a cut of the fee). As the profession has become more bureaucratic and less lucrative, more are leaving and fewer are entering. There is also the specter of automated appraising in the near, rather than far, future which discourages many from choosing appraising as a profession.
The result is a shortage which is being felt most acutely in rural areas where longer travel times further reduce the profitability of performing appraisals. In urban/suburban areas we are seeing appraisal fees and production times creeping up.
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