Our loan officer is requiring an appraisal on the house we’re buying. What does an appraiser do and why do we need to have one?

-- Dana and Tom E.

Such a good question! An appraiser’s job is to ensure you aren’t over paying for your home, so their basic role is to protect your investment. They are a vital component to the entire process.

Here is how it works

When a loan company commits to a mortgage, the amount they are willing to lend is based on the Sales Price, or the Appraised Value -- whichever is LOWER. If the appraised value is LESS than what you and the Seller have agreed upon, someone will have to make up the difference.

For example, you’ve agreed to pay $300,000 but the property appraises for $295,000. This means the Appraiser is saying you have over paid by $5000, so the bank will only give you a mortgage based on the $295,000, not the $300,000.

An extra $5000 must be found to make up the difference between the mortgage and the agreed upon sales price.

If the Seller won’t reduce the price to $295,000, and you don’t want to increase your down payment by $5000 (or you both agree to share in making up the difference), most contracts allow you to get out of the deal.

Finding the value 

Basically, an Appraiser is going to compare the house you want to buy to other properties that are as similar to it as possible. They look at three houses currently for sale and three that have closed, although recently, many are being required to find six closed properties. In our fluid times, banks want to be very sure the agreed upon price can be supported by houses that have closed. The Appraiser will do extensive research to find the comparables (called comps), go to the subject property (the house you are buying) to measure it and make notes on it’s condition, and then take photos of your property as well as the comps that are being used.

Appraisers try to compare apples to apples, not apples to roast beef -- so to speak -- so there are specific guidelines they are charged to follow. These include: 

• Similar age – they won’t use newer houses if the subject property is older
• Similar condition – a dated house won’t be compared with renovated or updated properties
• Similar location – they want houses in the same neighborhood or general area
• Same market – they are looking for houses that have closed within the last 3 to 6 months
• Similar styles – ranchers will be compared to ranchers, colonials to colonials
• Similar features – 3 bedroom, 2 bath houses will be compared to 3 bedroom, 2 bath houses
• Functional usage – they don’t treat finished space the same. Basements, attics, low ceilings and partially finished rooms aren’t considered equal in value to the main floors of the home. This is a really mis-understood part of how they obtain a value for a home.

All of these factors can be manipulated -- particularly actual features. They will mathematically adjust prices to make their comparables more “like” the subject. For example, a very similar house sold but it had four bedrooms, not three. They’ll “take away” that bedroom and adjust the price to see how it would compare with their subject. 

The Sticky Wicket Issues 

Appraisers are under great pressure because if they can’t support the sales price, the purchase can fall apart. To protect the integrity of the system, their reports are reviewed by other appraisers. These reviews look for “red flags” that indicate a value was made to save the transaction. These can include: 

• Giving similar value to finished basements & attics as they gave to the rest of the home, and/or counting these spaces as full square footage.
• Having very large mathematical adjustments to make their comparables “similar” to the subject
• Going outside of the neighborhood when similar properties have sold that are nearer to their subject.
• Using closed sales that are too old when newer sales are available.

An Appraiser’s role has become very important in our current market. When values were increasing every year, loan companies felt fairly comfortable that higher future prices would protect their loans if an Appraiser was overly rosy in determining a home’s value. Now that we are entering more normal times that have slower appreciation, Appraiser’s reports are being scrutinized far more seriously. Banks don’t want houses that go to foreclosure with mortgages higher than the current market value.  

Be thankful that your loan company is looking out for your well fare. They are protecting your, as well as their investment.

Leigh Hulcher is the Managing Broker of Napier ERA’s Carytown office. She has been a Realtor since 1994 and with her appraiser husband, Ron Cloninger, become a serial Buyer…Renovator… Seller. She’s lived it so she can knowledgably help you through every stage of the home buying and selling experience.

Questions for Ask the Agent can be submitted to asktheagent@richmond.com.