Do I Really Need an Appraisal?

For this post, I am speaking to those that do not have a good understanding of what an appraisal is or what appraisers do.  That was once me. Years ago, I was a pre-school teacher and mom of three young children.  My first husband and I bought our home and later refinanced it.  During these processes, I just signed all of the paperwork without really having much understanding of the home loan process at the time.  I didn't know the difference between the appraiser, the surveyor or the home inspector.    That marriage did not work out, for reasons I won't discuss here, but later I began to date an appraiser. Except I still didn't have a good understanding of what an appraiser was and I kept referring to him as a surveyor.  Fortunately, that didn't deter him and 16 years ago this month we were married!  Yes, I was married to an appraiser so I really needed to understand what he did.  I began to really appreciate the work and 12  years ago, I left my teaching career and became an appraiser myself!  It has been a great experience and I haven't regretted it.  All of that background is the basis for my understanding that there are others, like I once was, that do not know what an appraiser does or the value of an appraisal. Hopefully, this will shed some light.

What is an Appraisal? 

An appraisal is an opinion of value.  For this post, I am referring specifically to an appraisal of real estate performed by a professional licensed appraiser.  If you are purchasing a home or refinancing your home, your lender most likely will require an appraisal.  The appraisal will be the opinion of value of the real estate- what it is worth.  In this modern day of googling, I know that you can google "what is my home worth?" or "value of my home".  You will instantly have a multitude of links available to you.  You just type in your address and with one click you get the "value" of your home.  Why would you need an appraisal?  What you need to know is that the online clickable value estimates are not opinions of value performed by someone who has a license, who has experience and training in matters of real estate value.  The online estimators, such as Zillow's Zestimate, are not appraisals.  They are computer algorithms based on data available about your home and the homes around you.  What you need to know is that the data used for this type of automated valuation method is not always accurate.   The size of your home or others may be off, the quality and condition of your home or others may not be known or considered.  In a previous post, I wrote about Zillow's Zestimate in "How Accurate is your Zestimate?"   When an appraisal is performed by a professional appraisal you can have confidence that the appraiser knows the market area, will measure and consider the condition of your home as well as additional improvements to your home (pool, barns, workshops, etc).  The appraiser will use his or her knowledge of the market area and different techniques to derive value attribution of the different aspects of your property.

Importance of an Unbiased Opinion of Value

When an appraiser is performing an appraisal on your home, the appraiser will be impartial, objective and unbiased.  The appraiser's role is to provide an opinion of value of the property without any coercion or pressure to conclude a certain value.   It so important to have a valuation performed by someone who does not stand to lose or gain based on the outcome of the appraisal.  Sometimes the opinion of value will be less than the agreed upon sales price, sometimes it will be more.  The appraiser's role in the mortgage transaction process is to provide the lender with an opinion of value of the collateral.   Let's say you put a contract on a house for the list price, but the list price was way more than other similar properties in a neighborhood.  The lender will order an appraisal, the opinion of value of the appraisal would be lower than the contract price.  At that point, the contract could be renegotiated or if you really wanted the house at any cost, you would have to pay cash for the amount over what the lender will loan to you.

A Warning About Appraisal Waivers

FNMA has been collecting data from all of the appraisals that are sent through their Collateral Underwriter (CU).  They now have an option for borrowers to waive the appraisal under certain circumstances.  The idea is to have a way for consumers to save a little money and time in processing the loan which sounds great and my former self as described above would have agreed but please keep in mind what this means for you before you decide to waive the appraisal.  If the home (collateral for the lender) meets certain requirements based on the data that FNMA has in their system, then the borrower has the option of waiving the appraisal. This means that the loan could go through without an analysis of value from an appraiser being done.  The value would come only from the data analytics in the CU. There is a risk of having the loan go through and the value of the home being less than the loan amount.  This is called being underwater.  An appraiser is experienced in knowing the market, knowing what things to look for when observing a home and knowing which sales within a market area are truly comparable.  Without a human element of analysis of the data available, there are way too many things that could be skewed and off.  Remember earlier, when I discussed the online "values" that are available.  This can be very off in many instances.    For most of us, our home is the largest purchase we typically make and having an appraisal will safeguard you from paying more for a home than it is actually worth. 

Different Types of Appraisals 

For this article, I have focused only on appraisals that are done for mortgage lending but there are many other reasons consumers would need appraisals.  Pre-listing appraisals are done to help sellers know the value of their home when setting a list price.  These are particularly helpful for properties that are unusual or unique in their area.  Divorce appraisals are done when assets are divided during a divorce settlement.  Estate appraisals are used when settling an estate.  Tax appeal appraisals are used when a homeowner is needing to appeal the assessor's value for tax purposes.  There are more types than these listed but I wanted to let consumers know the variety of appraisals available and the value that appraisers provide. 

Qualifications of Appraisers

It is important for you to know that appraisers did not just start appraising yesterday or even last month.  To obtain an appraisers license there are many hours of working under an experienced appraiser (apprenticeship), classroom hours and tests to take before an appraiser can obtain their license.  This can take a year or more to obtain the classroom hours and experience.   You can have confidence that the appraiser is qualified in matters of real estate value and determining the value of your home.   You can have confidence that their opinion of value is reliable.  This is not to say that appraisers always get it right and there are things that you can do if you think the opinion of value might be off but appraisers are the most qualified to make an opinion of value.

The Value of an Appraisal

So, if you are like I once was, with little understanding of what an appraisal is or the purpose of an appraisal, I hope this gives you information so that you can make informed decisions about purchasing a home, refinancing or many of the other reasons you might need an appraisal.  In this day of data overload, remember the human element.  A computer model cannot replace the human experience and knowledge that an appraiser provides.  There is value in this!  The answer to the question "Do I really need an appraisal?"  most often is a resounding yes!  I will add that there are times in certain instances an appraisal is not necessary and we have advised many potential clients of when they really might not need an appraisal.  It is our desire to provide only services that are needed.  We recommend that you consult your local, trusted appraiser. 

Helpful Resources:

How the Appraisal Works in the Home Buying Process - DW Slater Appraisal Blog

How Accurate is Your Zestimate? - DW Slater Appraisal Blog

Is the public trusting Zillow too much?- Sacramento Appraisal Blog

What Would Happen if There Were No Appraisers? -Birmingham Appraisal Blog

Have Confidence in the Appraiser, the Professional - DW Slater Appraisal Blog

Should I Get a Property Inspection Waiver?- Birmingham Appraisal Blog

Disclaimer: All information deemed reliable but not guaranteed. The information is meant entirely for educational purposes and casual reading only and is NOT intended for any other use.  This information is NOT intended to support an opinion of value for your appraisal needs or any sort of value conclusion for a loan, litigation, tax appeal or other potential real estate or non real estate purpose.  If you’d like to obtain additional information or order an appraisal for your specific needs, please contact us at www.dwslaterco.com.