After you have applied for a loan for a particular home, the lender will go through several qualifiers before finalizing the loan such as examining your credit and reviewing the home inspection report. The final qualifier is the appraisal of the home.

This is important to note because appraisals are often ordered just before closing. If the appraisal isn't ordered until a week or so before closing, it may leave very little time for the appraiser to do his/her job and could put the loan at risk should a problem arise such as an appraisal failing to meet the contract price. It has happened to some buyers, particularly in quickly appreciating markets, that the appraisal didn't fall below the selling price, and sales price negotiations had to be reopened just before closing. Needless to say, neither buyers nor sellers nor agents take this turn of events very well.

Why do we need appraisals?

Appraisals are crucial to the lender's decision to loan money because the appraisal report is part of the collateral or security for a loan. They provide an unbiased estimate of the value of the property based on three approaches to determining value. Appraisers use factors such as the comparative market analysis (CMA) from MLS information systems, and they cross check this information with personal interviews with those providing information to the CMA such as real estate agents and taxing authorities. They also view the property in person, taking home improvements and special features such as lot desirability into consideration. These approaches are part of the sales comparison approach. More information on appraisals can be found at Ameritech, which offers a Q & A on appraisals and why they are necessary.

Who are appraisers?

The appraiser is often an independent contractor who works for an assortment of clients. A client can be anyone from the lender to the seller. A client could be a divorcing couple who are trying to hammer out a divorce settlement. It could be the owner of an estate who is trying to determine whether to hold on to a property or sell. In the loan application process, however, the appraiser works for the lender, for it is the lender who calls for the appraisal.

Depending on the type of property and the availability of certified appraisers, lenders are most likely to use certified appraisers affiliated with organizations such as Appraisal Institute, National Association of Independent Fee Appraisers (NAIFA,) the American Society of Appraisers (ASA) or the American Society of Farm Managers and Rural Appraisers (ASFMRA) among others. Like Realtors, these individuals are subject to a strict code of ethics and standards of practice. Appraisers of choice must be state licensed or certified, after completing a minimum of classroom hours and work experience, and passing a state-mandated test.

After the savings and loan crisis of the late eighties in which so many properties were overappraised, the appraisal climate is very strict today. Many appraisers carry errors and omissions insurance as a protection against liabilities of appraisal. The best protection for them is giving an honest, fair evaluation of the property. It is not in their best interest to over-value or under-value any property. Experts say that it isn't worth the costs in time and productivity to defend a poor appraisal, not to mention losing a golden goose - the lender that provides steady work.

The appraisal is often misunderstood by consumers, real estate agents and builders who assume that the results of the appraisal report will equal the highest-selling home in the area. Many consumers mistakenly believe that since they pay the loan application fee, that the appraiser works for them, not the lender.

Rarely will a lender accept an appraisal which has been ordered by a borrower or a builder. The appraisal will simply be given to an approved appraiser for verification. The appraiser will then double check the information in the appraisal and report back to the lender.

What happens in an appraisal?

When a lender is considering a loan, s/he will go to the institution's preferred list of appraisers and assign one of them to perform the appraisal. The appraiser will begin with field work - going to the property and inspecting the property for about 30 minutes, taking into account homes in the neighborhood. S/he will look at the features of the home and calculate such factors as the number of square feet, the layout, floor plan, number of rooms, number of baths, updates, and the general condition and appeal of the home.

The appraiser will have a copy of the CMA for the home's neighborhood, and will then tour the neighborhood and look at the homes that have recently sold, or are for sale. S/he returns to the office and begins the written portion of the report by verifying information on the CMA report. Because agents do not report the same information to the MLS, the CMA may have missing data on some homes. The appraiser will then call the agents to find out certain things about the property that may be in question. S/he will also question information which seems out of the ordinary, such as a very low or high selling price in the area. Sometimes a CMA report will include comments from the agent that are not available to the home buying public such as "motivated seller - estate liquidation" or "foreclosure - quick sale desired."

The goal of appraisal is to find the typical buyer and seller in the area. Most appraisers will disregard comparables on homes that are out of the ordinary, such as a home that has been sold cheaply under distress.

An appraisal report can be as long as fourteen pages and take as long as six hours to prepare, due to the verification process of the information.

Because the appraiser is not versed or trained in mechanical inspections, a separate inspection, ordered by the buyer, is recommended. An appraisal is not a guarantee or endorsement of the condition of the home.

Desktop underwriting

The wave of the future are software programs such as Fannie Mae's desktop underwriter, a software program that was introduced two years ago to provide lenders with information with which to lessen the time and costs of underwriting a loan. Although the program uses vital statistics and information from the public domain, such as tax rolls, Fannie Mae does require that an appraiser drive by and look at the home, but unlike traditional underwriting, the appraiser does not go indoors. The lender then performs his/her own evaluation in house, looking at value per square foot.

A possible disadvantage for consumers is that the lender is not going to lend above the average, which would hurt those buyers who are shopping for homes that don't fit the neighborhood profile or who are buying a home in a rapidly escalating market. A weakness in desktop underwriting is that if you have a nice house, you might get burned. By the same token, if most of the homes in your neighborhood have been updated, and yours hasn't, you could be helped.

Unlike traditional appraisals, desktop underwriting factors in the atypical buyer and seller. A street-side inspection can't take into account extraordinary circumstances such as psychological or financial factors which may affect the selling price of a home. How a home is financed may affect the sales price. If a home is owner financed the sales price is likely higher than the comparables will show. If a home has sold 15 percent below the market because someone died in the home, that will not show up in a desktop. Someone who is trying to get out of an estate could negatively affect values in the whole neighborhood.

A good appraisal will include credible sources, correct information, the sellers and buyers must be typically motivated, homes must be close in size, age, and condition, and the location or market area must be easily determined.

What if the market is changing?

Value can be supported by pending sales. In a rapidly changing market such as relocation destinations in which housing values can increase as much as 19 percent a year, the appraisal can be adjusted with pending sales. In new home subdivisions where builders can change prices as often as quarterly, home values are more difficult to set and the only reliable appraisal must include pending sales.

In slow markets, appraisers may suggest that sellers obtain a listing appraisal. If the seller chooses an appraisal company that is on many lenders' lists, the seller can then turn the appraisal into a selling asset. The buyer can use the appraisal if s/he chooses one of the lenders on the appraiser's list. The fee will be saved and the loan will progress more quickly.

Sound shady? It isn't. The appraisal is still a third-party evaluation. It won't pay the seller to inflate the value of the home because the market will determine the selling price. After it sits for six months, the seller and the market will know it was overpriced.

The appraisal is still a tool for the lender no matter who orders it.

If you have a need for an appraiser, you can find one in your area at the Real Estate Appraisers Directory at RE-Appraisers.com, The National Appraisal Network,Inc., is an appraisals site to help you appeal taxes, eliminate private mortgage insurance payments (PMI,) or evaluate assets in the dissolution of divorce or other partnerships.