Understanding the Appraisal within the Mortgage Process
To some, I'm sure they think that the appraisers says "Best I can do is a buck fiddy," and that's it. However, today we walk through what steps there are in an appraisal, and why the appraiser may not be able to use your "comps."
Research - Before I step foot on a property I research all available information about the property that I can. MLS photos, tax records, prior sales, third party info. I reach out to an agent (if it's a sale) to ask for a list of improvements and any other relevant data to be provided.
Observation - I arrive at the property and seek to confirm or deny the research that I already found. Did the agent say renovated when they just slapped on paint and new fixtures? Did the tax record inaccurately measure the home? Are there any issues that would keep the home from obtaining the desired financing (Conventional - FNMA Selling Guide/ FHA/USDA/VA - HUD 4000.1)
Research - Now the real work begins. Market area definition, comparable selection, adjustment calculation based on data. How much is a half bath worth in that particular market? How much is the 11th bath worth (hint: not much)? Are there higher appealing styles in this micro market? Etc
Report - Based on the research, the report in a sense "writes itself." Many times during the report writing process the appraiser will revisit the research phase because they may have missed an element and need more data.
Review - The report is delivered, and now the review begins. In any government-backed transaction, the report will be given a risk score from 1-5 and a grade on whether it is possible the appraised value is under/overvalued. Different GSE's have different tools, but the most famous is Fannie Mae's Collateral Underwriter. Based on the risk score, the appraiser will receive a higher/lower level of human review. This last step is vital and is designed to keep mortgage fraud out of the market.
Appraisers are intimately aware that if they throw just any "comp" in the report it could 1) Risk their job, and 2) risk their CU score being higher. Time and time again agents ask me to "If you go three miles away there's a sale," when I have three perfect comparables next door. Not only would that be an act of fraud, but it would never make it past review and you're still not going to close on your loan.
In a hot real estate market, home values go up by people bringing cash to the table... not by appraisers committing fraud. I do not envy the task of the agent that has to say, "You need to bring $10,000 to the table in order to make this work," but that's why you're paid the big bucks.