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The Definition of 'Appraisal' is Changing...

Posted by Rob Schaerer on Friday, November 4th, 2011 at 2:23pm.

In everyday terms an Appraisal is generally used in real estate to indicate a reasonable value for a property, or more specifically, what an educated buyer who is knowledgable of the market would reasonably pay for a property.

If you have been a property seller in the past couple years, you know that this definition just doesn't slice it anymore.  The definition of appraisal has really changed recently to be more down the lines of this: an estimate of the value of asset to be used as collateral for securing a loan.  Now on face value those two definitions could be similar, however, there are very specific differences.  With the first definition, an appraisal is what a buyer would pay, with the second, it is an assessment of what a lender is willing to lend against a property -- it is more a risk-assessment for the benefit of the lender.  Two very different things when you put it into application.  

I have dealt with multiple instances (and have heard about many more) where a property has received multiple offers from ready, willing, and able buyers on a property that, when appraised, appraised for well below what all of the buyers had offered for the property.  For example, a property was listed at $339,000, and we received 4 offers on it, 1 at the list price, 2 just below, and a third below those, all offers were above $334,000.  When the appraiser appraised the property for the purchaser, the appraiser valued the property at $332,000 (more than $2,000 below the lowest offer that we received for the house).  

What impact will this have? Because the appraisals are not really taking into consideration the specific differences within properties (layout, specific updates, style upgrades, etc...) in houses, they are comparing homes that should justifyably sell for a lower price with homes that have been well cared for and tastefully updated as though it is comparing apples-to-apples.  This, in effect, is normalizing the appraisal values for homes, and as a matter of fact, if you are a seller with a property in poor condition that hasn't been updated in an area where there have been home selling that are updated, you should be rejoycing right now, because you have won this hand.  

In the future, I think that buyers and sellers in general are going to realize that the properties value is higher than what the bank will loan against the property, creating a situation (and some may remember these days) where the majority of the homes that are sold are bought by buyers that put a significant amount down at the time of purchase.  

In the mean time, with so many changes being made to the financial industry, everyone -- buyers and sellers alike -- is going to need to strap in because it is going to be an interesting ride!

-Rob

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