Appraisals – The Bank’s Safety Net

Obtaining an appraisal is part of any real estate transaction that involves a conventional or conforming loan.  The purpose of the appraisal is twofold: (1) it protects the buyer from overpaying for a property and (2) it protects the bank from lending in excess of its expected loan-to-value appraisal.  An inaccurate appraisal, however, can prevent a deal from closing if it is not addressed quickly and professionally.

What Is An Appraisal And How Is It Obtained?

According to the National Mortgage Alliance, an appraisal is “a written estimate of a property’s market value completed by an appraiser.  The value is based upon a market analysis of recent sales prices for similar properties in the area, and the property’s physical condition.”  Appraisals are conducted by appraisers licensed by the California Bureau of Real Estate Appraisers.

The appraisal is typically ordered by the lender and paid for by the buyer of the property.  Because the buyer pays for the appraisal, the buyer is technically the “owner” of the appraisal report.  However, prior to January 18, 2014, buyers had to specifically request a copy of the appraisal report from their lender in order to obtain a copy.  The federal government amended 12 CFR 1002.14 on January 18, 2014 to impose an affirmative duty on lenders to provide buyers with a copy of the appraisal report.  Sellers, on the other hand, do not have an absolute right to view the appraisal report without the consent of the buyer.

The Purpose Of An Appraisal In A Real Estate Transaction

As noted above, the appraisal serves two purposes.  First, it provides assurance to the buyer that he or she is not overpaying for the property.  Second, and more importantly, it dictates the amount that the lender is able and willing to loan.  When lenders extend credit secured by real property, they extend a loan based on a percentage of the lower of either the appraised value or the sale value.  For example, if a purchaser plans to purchase a home costing $1,000,000 with a 20% downpayment, the lender will lend the lower of $800,000 or 80% of the appraised value.

Issues Arising From Appraisals And How To Resolve Them

The appraisal can present significant issues in a real estate transaction if the property does not appraise for the sale price.  Using the above example of a 20% downpayment and $1,000,000 purchase price, the appraisal will not present any issues so long as the property appraises for at least $1,000,000.  However, if the property appraises for less than $1,000,000, the lender will lend only 80% of the appraised value.  For example, if the property appraises for $900,000, the lender will lend $720,000 rather than $800,000, leaving a gap of $80,000 between the amount of the loan and downpayment.

There are several ways to deal with a below-value appraisal.  The most obvious method, but least desirable method for the buyer, is for the buyer to pick up the difference.  In the above example, this would require the buyer to make a downpayment of $280,000 rather than $200,000.  An alternative method, which is least desirable for the seller, is to reduce the sale price to the appraised price, which effectively forces the seller to take less money out of the deal.  Often, neither party will be willing to make the above concessions, causing the deal to be cancelled and the property placed back on the market.

It is possible, however, to challenge an inaccurate appraisal.  Appraisers, like anybody else, often make mistakes.  Appraisers are also often unfamiliar with the area in which they are appraising a property, and as a result may compare the subject property to other nearby properties that are not necessarily comparable.  This is where having a knowledgeable real estate agent on your side can be invaluable.  An experienced and knowledgeable agent may be able to put together information to challenge the appraisal.  That information will be passed on to the appraiser who will review it and, if appropriate, adjust his or her findings.

Esquire Real Estate Brokerage, Inc. has had success in the past challenging deficient appraisals to ensure the timely close of deals.  If you would like to further discuss how Esquire Real Estate Brokerage, Inc. can help you in the Los Angeles real estate market, feel free to give us a call at 213-973-9439 or send us an email at info@esquirereb.com.