All Appraisals Are Not The Same
All appraisals are the same, right? Not really, and today I’m going to explain the differences between several different types of appraisals that could mean the difference between a home appraising for contract price or not.
For the record, I will state that the goal of every appraisal is to estimate the market value of a home, usually for lending purposes. Appraisals can be performed for other reasons besides lending, however, for purposes of our discussion here we’re going to be discussing an appraisal that is done in order to obtain a mortgage loan.
The only appraisal that use to be done, and that most people are familiar with, was a full appraisal by a licensed or certified person who would physically inspect the property and then write up the report and deliver it to the lender. If you were buying a home and the loan officer told you that they needed to get an appraisal this is what they were talking about.
Better-Cheaper-Faster
In today’s faster-better-cheaper world, everybody wants things done more quickly, for a cheaper price, and they want it
to be done better or more accurately than in the past. While all of these characteristics are desirable individually it is sometimes difficult to bring them all together at one time.
I’m sure you have seen the faster-better-cheaper image that illustrates the different scenarios possible when these three factors are desired. They go something like this: If you want it good and fast it will be expensive if you want it good and cheap it will be slower, and if you want it fast and cheap it will have lower quality.
The bottom line message is that you have to pick the two factors that are the most important to you because you cannot have all three. It seems that Fanniemae and the lending industry have hopped onto this bandwagon and they are dragging and pulling appraisers along with them.
In the quest to provide faster and cheaper alternatives to banks and mortgage companies, Fannie Mae has developed alternative appraisal products for their customers. But like forcing a square peg into a round hole, we are finding out that indeed it is very difficult to manage to have all three of these elements together at one time.
I’ve been an appraiser for over thirty years and I’ve been a business owner for 24 years so I know the importance of being competitive and adjusting to the market. I also know the importance of producing a good product or service, however, I believe that the services that we are being asked to perform are not producing the best results for the economy or the lending industry.
3 Types of Appraisals
I believe real estate agents are advocates for their buyers so today I would like to share three types of appraisals that you should be aware of and how they compare to a traditional appraisal by a licensed or certified appraiser.
Appraisal Waiver – An appraisal waiver is exactly as it sounds. Whenever an appraisal waiver is used a traditional appraisal is not utilized to determine the market value of the assets the bank will be lending on.
Instead of getting a traditional appraisal, the bank will use an Automated Valuation Model or AVM. An AVM is very similar to a Zillow Zestimate and utilizes computer algorithms to estimate the value.
The bank’s AVM is not the same as a traditional appraisal. It satisfies bank regulations and is adequate for a bank’s internal use, however, it does not provide valuable information to the homeowner about the market value of their largest asset
If the waiver is utilized it is difficult if not impossible to use it to write an appraisal contingency into a contract because it is not an appraisal. The borrower also has no recourse in the future if they find out that the bank did not value their home correctly.
Agents can recommend to their buyers that if a waiver is used they can still get an independent appraisal to make sure they are not overpaying for the house. This can provide them with peace of mind when purchasing their largest asset.
Desktop Appraisal – A desktop appraisal is performed by a licensed or certified appraiser, however, they do not physically visit the property. They utilize other information sources for the physical characteristics of the property.
The challenge with a desktop appraisal is obtaining accurate and reliable data to base a value opinion on. The main data sources that are relied upon with desktop appraisals are public records and MLS listing information.
While these sources can be good for certain types of information, they can be sketchy for other types of data that are key to the appraiser in providing an accurate and reliable opinion of value. An appraisal is only as reliable as the information being used and if it is not very dependable the value will not be either.
If an MLS listing exists and there are plenty of pictures this can be a great help to the appraiser. One of the biggest challenges with desktop appraisals is getting accurate square footage, however, if an older appraisal is available and the property has not changed then the living area can be taken from it.
This type of information call always be used in the listing sheets so if a prior appraisal is available using as much physical data from the report in the listing can help the appraiser greatly.
Hybrid Appraisal – Lastly, the hybrid appraisal is yet another alternative that the buyer might be presented with. This type of appraisal utilizes both a live person visiting the property and a certified appraiser crunching the numbers to arrive at an opinion of market value.
You might think that this is a great compromise between the full traditional appraisal and the AVM, however, there are still some concerns with this option. Again, the concerns come from the quality of data utilized in the analysis.
A hybrid appraisal is completed by involving more individuals than just the appraiser. While it is my personal opinion that the appraiser/business owner should be the one making these types of business decisions Fannie Mae has taken it upon itself to instruct the appraiser on how to run their business.
When completing a hybrid appraisal the data collection is done by a third-party inspector who could be a real estate agent or someone else. It should be noted that Fannie Mae does not allow this collection to be done by another appraiser, such as a trainee, within the company that is performing the appraisal.
Because there are currently no certification requirements for third-party inspectors it is possible that the data collected may not be up to the standard that appraising requires. I will say that appraisers outside of the company performing the appraisal can act as inspectors, however, the fees are usually so low that none are interested.
The third-party data collector is responsible for obtaining detailed property data that the appraiser would typically get including measuring the house for accurate square footage utilizing ANSI standards. The appraiser is then required to sign off on this second-hand information.
The majority of appraisers do not feel comfortable using this information due in part to stories of situations where the data accuracy left a lot to be desired. Most are concerned that they will not be able to produce a credible report with a reliable opinion of value.
Items that need to be considered with the observation of the property include the following:
- lot features such as topography,
- functional utility of the house,
- adjacent property uses, and
- property characteristics and conditions including both interior and exterior
Items like these can have a significant impact on the value and it is important for the inspector to know what they are looking for. Because the data collected as well as its accuracy is important those collecting it should have some time of certification so that those using it will have peace of mind, however, this is not the case.
As an agent, being aware of the type of appraisal ordered can mean the difference between a property appraising for the contract price or not. Inaccurate property data can contribute to inaccurate appraisals.
If the lender for your client is using either of these three types of traditional appraisal alternatives you might want to consider if this is a wise choice. You can either request a traditional full appraisal or if that is not an option you can recommend that they get their own private appraisal to get the most accurate appraisal results.
Conclusion
Being proactive during the appraisal phase of the home purchase can mean the difference between a smooth closing and one that is plagued with an inaccurate appraisal that results in delays and frustration. If you have any questions about these appraisal alternatives feel free to contact me and as always thanks for reading.
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