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What do I need to know about appraisals?

An appraisal is done for a lender by a state-licensed appraiser. In a purchase, the purpose of the appraisal is to justify to the lender that the price being paid for the house is reasonable based on recent comparable sales (comps) of similar properties in the same area. It is unusual for a purchase appraisal to come in below or above the purchase price. In a refinance, the appraiser doesn’t have a sales price to use as a baseline, and usually starts using your estimated property value as an initial guide. The appraiser then uses sales of comparable homes that have closed within the last six months, and currently listed comparable homes, to determine a final value. An appraisal is not necessarily an accurate guide to the market value of a home. Despite the efforts of lenders and state and federal regulators to standardize appraisals, there is still a lot of subjectivity and flexibility in the appraised value.

Two important factors to consider:

• In an affluent market like northern California, with many unique homes, the comparables that the appraiser chooses, and how the appraiser adjusts their value to bring them into line with the property being appraised, can have a big impact on the end result.
• In choosing comparables, the appraiser is required to use homes that are close geographically, and have similar square footage and room counts. This tends to minimize important features that determine property value. Amenities such as a spectacular view, great floor plan, first class home theater, may not be given their real value. Conversely, negatives—a bad floor plan, a hillside home that gets little light, etc.—are hard to quantify, and a ‘problem’ house may appraise for more than it would sell for in the marketplace.

If you feel that your property has been appraised for less than it is worth, and it is affecting your ability to get a loan, you may be able to work with your lender to have the value raised. You must identify other comparables that the appraiser can use to justify a higher value. If that doesn’t work, and you are working with a mortgage broker, ask if there another appraiser who might see things differently. Sometimes the only way to get the appraisal you believe is fair is to find a new appraiser by switching lenders—but this doesn’t always work. In a situation where the appraised value is very important—a divorce, probate, or some other financial settlement—you may not want to rely on an appraisal obtained by another party. Remember, appraisals always have a degree of subjectivity, and if you want to be sure you are being treated fairly, get your own appraisal done.

Although a licensed appraiser can be found online, it is better to get a referral from a real estate agent or lender. If you contact us, we can refer you to an appraiser we have experience with who works in your area. To check the qualifications of an appraiser you are working with, you can visit the website of the California Office of Real Estate Appraisers.