When purchasing a home you certainly want to be sure you're getting the most for your money. Quite often, having a professional appraisal of the property done will give you a good idea of how much the home you are considering purchasing is worth: lending institutions typically insist that an appraisal be done before a mortgage loan is considered.
While an appraisal is only an opinion, it is supposed to be a truthful representation of the value of a property. Of course, appraisers can disagree on what a property is worth; an inflated appraisal is something else—a misrepresentation. However, an inflated appraisal can be very tempting. For example, valuing the property higher may result in a significant increase in the amount of your loan—enough to cover the closing costs on a home. Or, it may result in your lender eliminating the requirement that you pay money down on the purchase. This can be very attractive to buyers without a great deal of liquid assets or with poor credit histories. Keep in mind, however, that most lenders will use the lower of the appraised value or purchase price, so an inflated appraisal will typically be of little value to you.
On the surface, it may appear as though a high appraisal would be good news to a prospective purchaser. However, when you understand the potential consequences of an inflated appraisal, you might just change your mind.
Who Hires An Appraiser
Loan officers, mortgage brokers, and real estate agents are paid based on the number of loans or sales they secure. Unfortunately, these individuals often hire or refer real estate appraisers to potential purchasers. As you might imagine, this vested interest in the sale of a property and grant of a mortgage application can result in appraisers being pressured to value properties in a way that makes purchase or refinance applications acceptable—ensuring agreements of sale go through to closing. If the sale is not made, appraisers may risk losing future referrals and fees from the mortgage company.
Inflated appraisals can come back to haunt homeowners, especially when housing prices begin to cool - homeowners frequently realize that their homes are worth less than they thought and this can have serious consequences. For example, when selling a property, homeowners who bought property based on an inflated appraisal may find that they have to lower the asking price below the amount they actually paid. Homeowners who purchased property with little or no money down, and who try to refinance, may be shocked to discover that more is owed than the true value of the home.
Similarly, homeowners who have used the majority of the equity in a property to finance improvements, consolidate credit card bills, or pay other expenses, might not be able to refinance with a fixed-rate mortgage because the property is worth less than the amount actually owed. If interest rates rise, these homeowners may struggle to pay higher monthly obligations on original adjustable-rate loans—with no way out. The possible result of a situation like this can be devastating—foreclosure and ruined credit may follow.
Who Regulates Appraisers
Federal law provides that individual states have the responsibility to license and regulate appraisers. Unfortunately, many state agencies that provide this regulation are not adequately staffed or funded—this frequently results in complaints against appraisers being uninvestigated for years while the individuals at issue continue to appraise property. So, there may be little recourse for you if you think an appraiser has valued your property improperly.
What Can You Do?
Many lending institutions require buyers to use their approved appraiser—the buyer is not permitted to hire his or her own. This requirement helps ensure consistent appraisal practices across the industry, which is actually to the benefit of buyers and sellers alike. However, occasionally, your lender may allow you to choose your own appraiser. Additionally, you may be in a situation where you do not have to use the services of a lending company—in this case, you are able to hire your own appraiser. If choosing your appraiser is an option for you, ask someone not involved with the real estate transaction, such as your estate attorney, accountant, or financial advisor, for recommendations. Once you have a list of names, make sure you hire someone from the area where the home you are considering buying is located, and who is familiar with the local property market. When making your decision, request proof that the appraiser is properly licensed by your state's licensing board or department of professional regulation.
Once you have secured the services of an appraiser, request that he or she physically look at the property. It is not sufficient for an appraiser to simply check comparable sales on his or her computer - those sales might not give a true picture of the value of your home. Comparables do not ensure that you are comparing similar properties. For example, homes that were recently sold in the area might have extensive landscaping which increased their values and sale prices, but the home you are considering does not. So, you can see how comparing the properties may not give you an accurate gauge of the value of your property.
Updated: January 1, 2013
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
© 2013 Wilmington Trust Corporation.