OfflineReal estate investors and hard-negotiating consumer real estate buyers alike have experienced a surprise during their process from contract agreement through closing. They have done thorough research, compared many properties, done value calculations, and generally dissected the property to find out everything positive and negative about it. They aren’t “in love” with the property; they’re in love with the “numbers.”
Because they’ve done their research and value models and they’re hard negotiators, they work the seller into a corner and cut a super-discounted purchase price on the property. They are elated, ready to move through the transaction to closing and to own a property at a deep discount to current market value…UNTIL the appraisal comes through. By way of example, instead of seeing that they bought a $200,000 property for $120,000, they see an appraisal at somewhere between $120,000 and $130,000.
To understand why this is common, we must understand who the appraiser is working for. It’s not the buyer, and it’s not the seller. It’s the lender. The lender is providing the mortgage financing and wants to be certain that their investment is covered and they can recoup it in case of a default by the buyer/borrower. Because of this, an appraiser is held liable if an inflated appraisal causes losses to the lender outside of normal risk levels.
So, if you’re an appraiser, and you’re tasked with valuing this bargain property, what would be the incentive for you to show just how great a deal the buyer has negotiated? As the appraiser, you’ll want to err on the side of caution, be conservative, and provide the lender with a value that will allow the deal to happen but not over-inflate the worth of the property.
By placing a market value of $130,000 on this property you know is worth more like $200,000, the appraiser is telling the lender that they can probably sell it for this amount in the case of a default. Why tell them they can sell for $200,000, as you’re just taking on more liability for your fee of a few hundred dollars.
Knowing this, you can be confident that you did make a great deal, as you understand the realities of the situation and duties and motivations of the appraiser.
Doug Clark
As a retired appraiser, I appreciate your honest post on this matter. It is completely correct. Yes an appraiser is supposed to show the most likely market value on a property but that must be also weighed in the balance of lender requirements and risk reduction. In this day and age, all but the seasoned lenders (i.e. more often underwriter who careless if the buyer is getting a steal of a deal) freak out when there is an immediate 35% instant equity. They immediately think someone is scamming the system. Rather than slow down the transaction and cause the buyer all sorts of problems, the appraiser opts to bring in a lower (but still higher than the purchase price) appraisal.
Thanks for not accusing the appraiser of being an idiot.
I did not know this; thanks for sharing!
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