What does an appraiser do? Part 2

Remember, an appraiser when hired by a mortgage lender to conduct an appraisal for purposes of making the load, is essentially the eyes and ears of the bank. They’re supposed to be unbiased and objective, and they will attempt to validate the contract sales price of the property (known as the “subject property”) for the lender making the loan for the luxury real estate.

What if the appraisal comes in less than the contract sales price?

Besides a difficult inspection, this is one of the most stomach-dropping moments in a real estate transaction. Everything seems to be sailing along just fine until boom, the lender shares the bad news that the appraisal came in less for the luxury real estate property. The buyers might not have the additional funds to come out of pocket or might not want to. When this happens, the buyer’s agent will typically share the appraisal report with the listing agent (unless prohibited by law, etc.), so they can see and understand the shortfall and how the appraiser arrived there.  The appraiser will evaluate backwards and forward looking for discrepancies, errors and bad information as well as submit comparable sales they feel should be considered. Typically, the appraiser will refute the data submitted. Although minor tweaks could be made, it’s usually not enough to pull the value up.

As a result of today’s lending guidelines, the lender can rarely, if ever, throw out the appraisal and order a new one. The buyer and seller can elect to renegotiate the price, which could also put all the other terms in the contract up for grabs. This means that any closing costs, items the sellers were willing to leave as well as the closing date could be up for discussion. If the seller must come off their price by a certain amount, they might not be willing to do as much or want to close sooner or later in exchange for the hassle. Worst case, both parties can walk away. It’s rare, but it can happen. Sometimes an appraiser brings the value in so low that the damage is irreparable. The appraiser might not be familiar with the area or have experience with the kind of home being appraised (unique, higher-end, waterfront, niche property, etc.), which hurts everyone involved in the transaction. Determining value is an intrinsic skill that is built over years of working with properties in a variety of neighborhoods, including Napa Valley real estate, and truly knowing and understanding the fabric of those communities inside and out. Knowing every home, floor plan, how the homes were constructed, who the builders were, lot sizes, views, etc., is not something that can be gleaned from data on an MLS sheet.

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How is an appraiser chosen?

This is the million-dollar question buyers and sellers wonder about. Who chooses them? The answer is no one. The assigned appraiser is typically in a pool of appraisers that come up in a rotation by a third-party appraisal management company that the lender uses to put everyone at arm’s length in the transaction. The appraiser is randomly assigned, and no one can request a particular person.  While agents are often familiar with some appraisers more than others and might see them come up in a lender’s appraiser pool, there are plenty of appraisers an agent might not be familiar with who could be given the luxury real estate property to appraise.

Are there bad appraisers?

Just like agents, some are better than others. Some appraisers are more intuitive, detailed and have a better grasp of their market. Others are more reasonable and allow some leeway within reason with the comparables they choose as well as their adjustments, whereas others are more conservative. No two appraisers necessarily see things through the same looking glass, just like agents.

Can you talk to the appraiser?

Appraisers are to remain neutral, so beyond providing information or answering any questions they might have about the Napa Valley real estate property, neither the agents involved in the transaction, the buyer, the seller nor the lender cannot influence them in any way.  Agents cannot ask them what they plan to bring the value in at ahead of time. As a matter of practicality, some appraisers might give agents a heads-up that they are having difficulty bringing the value in at the contract sales price and ask for assistance with comparables.  This is often indicative of the reality to come. A seller lurking around the house while the appraiser is doing the appraisal is not helpful and may only exacerbate the situation.

Pointing out the obvious or how much money was spent doing x, y or z is not productive. Therefore providing details of upgrades and what has been done to the Napa Valley real estate home in advance of the appraiser’s visit is strongly recommended.  A seller can have this information for reference in the home, but there is no need to go into a dissertation of each item and the history of what was done and why.  If there is an extenuating set of circumstances that need explanation, then it might be helpful to have the listing agent convey all that information to the appraiser at the time of their visit.

What keeps appraisers accountable?

Just like real estate agents, an appraiser’s license is on the line with their work, each and every time. Appraisers have been under scrutiny like never before, especially in the post-real estate market crash era.  They cannot pull numbers out of thin air, and everything they put on an appraisal report must be verifiable, justifiable and have an explanation. Underwriters review appraisal reports when they are completed for accuracy and might scrutinize what was done on the report and ask the appraiser for more information.  In short, educating luxury real estate sellers on what the appraisal process entails will help to manage expectations from beginning to end. Sellers with a realistic outlook of the process and an understanding of what is and what is not within their control, as well as their listing agent’s control, have the best chance of navigating through this milestone successfully, no matter the outcome.

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September Tue, 2019