Over several years of working in the mortgage and real estate industry, I found a very interesting fact. Appraisals always came in at the estimated value of the home. I gave this estimated value to the appraiser when I ordered the appraisal. When I first started, I believed this was because I knew the real estate market and could estimate the value of homes quite well. I later realized the truth about why I was always close on my estimate.
An appraisal is an independent third party making an opinion of the most likely selling price of a home. The appraiser should not have any other person influence his idea of the value of a home. They should make a trip to the home, take pictures of the home, measure the home, and then find comparable houses that have recently sold in the same neighborhood and take pictures of those houses as well.
For an appraiser to actually do a full appraisal and write it should involve about four to six person-hours, not including travel time. Most appraisers do have staff to assist them with this work so they are capable of handling more appraisals. Many times, they have apprentices do the work, just review the work, and sign the appraisal.
Since I should not have any influence on the appraised value of the house as the mortgage lender, any estimated value I give the appraiser is useless. However, every appraisal order form I ever saw or used needed my estimated value of the house. For the estimated value of the home, I would either fill in the purchase price of the house on a purchase or the amount I needed to get my borrower the best mortgage on a refinance.
I never tried to cause an appraiser to commit mortgage fraud, but I would stretch the value of a home to make my mortgage easier. I also used reputable appraisers that would tell me if my value was too high. If this did happen, other appraisers would give me the value I wanted.
One such instance occurred on a foreclosure buyout. The borrower had two appraisals from two years earlier for $300,000. This value was plenty to work with, and since it was two years later the value should be the same or higher. When my appraiser reached the house and looked at it, he called to inform me he would have trouble reaching $225,000. He then suggested me to call one of the previous appraisers, which I did. This appraisal office was an hour from the home, but a half an hour I received the completed appraisal in my email inbox. That appraiser obviously had the ability to stop time, because he did at least eight hours of work in a half an hour. Not only that, but the house appraised for exactly $300,000.
Another occurrence where I had trouble with a value came on a home purchase. Three years earlier, a couple purchased a home for $295,000, they were going through a divorce and needed to sell. The purchase agreement was contingent upon the byer’s ability to obtain a second mortgage after the sale for repairs to the home. My borrower signed the purchase agreement for $275,000, which should leave little issue in the value of the home being more than the purchase price. After my appraiser went to the home, he called me and told me it would be difficult, but he can make the home worth $275,000. I asked him why. He then told me that the home was only worth about $265,000, and the real estate agent overpriced the home. This would then kill the purchase because the buyer would not have the ability to obtain the money for repairs to the home. I then received a phone call from a very angry listing agent; who proceeded to tell me my appraiser did not know what he was doing, I needed to learn whom I worked for, among other things. I trusted my appraiser and knew he could always support his values; as for whom I worked for, I thought it was the person borrowing money from my company not the listing agent. After this phone call, I definitely knew whom I did not work for, and that was the listing real estate agent. She then sent a different appraiser to the home and I received an appraisal, for a house worth $265,000, declaring a value of $325,000. When I looked at the appraisal, I knew I might have trouble, because all of the comparable houses were outside the neighborhood. Luckily, I was able to complete this transaction, but the buyer had a worthless appraisal.
I do not mean to say that all appraisers are bad, but they do have an interest in finding the value real estate agents and mortgage lenders tell them. I was not a large mortgage lender; I only employed seven people at the most. However, the appraisers I used had an interest in keeping me happy, because I would send each of them at least ten appraisals per week. At $250 to $300 each, that amount of money does add up. I was by far not their largest lender, but most people do not want $2500 or more each week walking out the door.
I never encouraged appraisers to inflate values to the point of fraud, but a five percent fluctuation is reasonable. I always preferred reputable appraisers, because if the value was too inflated I could lose a loan because of an underwriter review of the appraisal, and that benefits nobody. Many other lenders were not so caring, and many appraisers simply rubberstamp a value for what the real estate agent or lender tells them. End buyers of mortgages also know the problem with appraisals, and many actually have a banned appraiser list.
Hopefully the value on your appraisal is correct, but there is a decent chance that the value is higher than it should be. I would estimate that of all the appraisals my company received, at least 80% had a value that was higher than it should have been. This not only caused lenders to lend more money on homes, but also contributed to the overinflating of home prices and ultimately the crash of the housing market. If you are interested in knowing the true value of your home, contact an appraiser and ask them for a low-end value of your home.
