The Role of the Appraisal in Residential Real Estate Lending

I had the opportunity to write an article for my local paper, the Woodland Daily Democrat. Here’s what I came up with:

The Role of the Appraisal in Residential Real Estate Lending

Most of the time when you buy a house or refinance your existing residential loan, the lender will require an appraisal of your house. What is an appraisal? An appraisal is an independent opinion of value about real estate. In this context, the appraisal is a report that describes the subject, the subject’s neighborhood, includes at least one of the three approaches to value used by us appraisers, and includes the market value of the subject home on a given date. The client for an appraisal, even if the borrower pays for the appraisal, is the lender. I write my residential appraisals for lenders, not buyers or borrowers.

Residential real estate lending appraisals use a standard definition of market value from FNMA (https://www.fanniemae.com/content/guide/selling/b4/1.1/01.html for reference).

Key points from the FNMA market value definition:

  • “Most probable price”-My values are not the highest value possible, not the contract price, not the amount you need to complete your refinance. It’s the value supported by evidence in the subject’s competitive market.
  • “Buyer and seller are typically motivated”-Market value assumes no unusual motivations like short sale, foreclosure sale, sale to a relative, etc.

When deciding whether to loan hundreds of thousands of dollars to someone, the lender will evaluate the borrower’s credit history, income, and expenses. My appraisal will be included as part of the lender’s risk assessment. If the lender were to take back the subject home today, how much would the subject be worth? Is the subject worth more than the loan? Are there any issues that would make it difficult to resell? Are there any obvious repairs that might reduce the value of the subject long term? Are there any obvious safety issues that might open the lender up to liability? My appraisal helps the lender with these questions.

Us appraisers serve as a check for over-exuberance in the residential real estate market. The real estate agents and loan officer get commissions only if the loan closes. The lender makes money only if it makes a loan. The seller gets paid only if the home sells. The buyer gets a house only if the loan closes. Since I get paid whether the loan funds or not, the underwriter and I are the only truly independent parties in the typical residential transaction. The lender relies on me to report any issues with the home and to honestly arrive at my opinion of value. If my appraised value is above the amount needed for the loan amount, and there are no other issues, the lender can move forward with the loan with confidence. In those cases where my opinion of market value is lower than needed to fund the loan, my report warns the lender that the loan may be risky.

The independence of the residential real estate appraiser is vital with the housing market crash of the 2000s fresh in mind. We don’t want to go through that again.

Anything to add? What did I miss?

(I’ll add a link to the article once it’s published)

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