Specialized Buyers Agent Answers Real Estate Questions
Q.We are moving to your area this spring and are looking for an agent. One of the questions I am asking is how the appraisal fits into the pricing of a home. No one has adequately answered my question. Can you? T. Triolla, Los Angeles, CA
A. Well, I will certainly try. First, let me say that I have seen a lot of confusion about appraisals stemming from the mistaken impression people have that the appraiser is the one who knows the true value of the home. Not true. The market knows the value of a home. Think of the market as someone with a color video of the home—allowed to consider the aesthetics of light, decor, setting, neighborhood status, proximity to town centers, time on the market, availability of alternatives, etc. The appraiser is like a black and white still camera—he or she can only consider a set of criteria such as size, previous and very recent sales, age, lot size, etc. Do you see the difference?
The appraiser is most often brought in by the buyer’s lender to provide back-up that the lender (or the secondary market) requires to validate the loan amount. The buyer pays for this as a fee but is not the party who hires the appraiser, who therefore has no duties to the buyer. The lender is the party relying on the appraisal. Federal law permits buyers to have copies of the appraisal, which I think is a good thing but adds to the perception that it is somehow intended to be for the buyer’s benefit. Most courts have agreed with me and have held that a buyer has no direct cause of action against an appraiser hired by a lender. But that may be changing. Earlier this year, the Court of Appeals for Arizona held that an appraiser retained by a lender to appraise a home in connection with a mortgage might owe a duty to the buyer. It will be interesting to see if that line of reasoning starts to become the law elsewhere.
So, an appraisal does not set the price. Indirectly, though, it can affect the price if the buyer has an “out” in the agreement for a failure to get the mortgage he or she has applied for and the appraisal come up short. This is most common where the buyer is borrowing most of the price and the lender has to justify the price to make the loan. It is less of an issue where the buyer puts more money down. In the former case, the lender will refuse to loan the full amount and the seller will have to decide whether to accept a lower price or lose that buyer under the contingency. Many times the parties reach a compromise but it is not automatically a price reduction. People often think that is the case.
Appraisals have become the bane of the real estate community lately because the lenders are no longer accepting the appraisers’ results without strict scrutiny (and many lenders are applying much tougher standards than in the past). For example, the appraisal could be supported by 6 past sales ranging from low to high and in the past the lenders would accept an average or look at the specifics of the homes to see which were most like the subject one. Now they are more likely to only look at the 3 lowest regardless. This makes it hard for communities to sell at increasing prices in an up market following a down one.