Nov. 25, 2008 - Don't Rely on The Appraisal as your "safety net"

Changing markets create the need to update our thinking on various segments of the home buying process. Back in March of 2006 I wrote this post on the role of the appraisal in your home purchase.

While the basic principles of where the appraisal fits in the process have not changed, the expectation of where the appraisal is going to fall, has reversed.  Up market vs. Down market can affect an appraisal dramatically.  That is why it is very important for you to understand how an appraiser derives a home's value.

Below is how I personally expect markets to function on a long term basis.  An appraiser uses hindsight to determine the value of a property.  Consequently in an up market, theoretically the appraisal should come out lower than sale price.  If one values the property based on the last 3-6 sales in the last 3-6 months, clearly in an up market appreciation would be somewhat contained by the lender protecting themselves from markets advancing at too rapid a pace.  We all know that is not what happened in recent history, and the Country and Banks are now suffering as a result.

But where do we go from here, and how does that affect YOU as a home buyer?  Moreso than EVER in most of our lifetimes, you need to NOT depend on the appraisal as a barometer of value.  In hindsight in a DOWN market, the appraiser is ALWAYS looking at higher priced sales.  If the market is dropping at a faster rate than an appraiser will apply at the end of the process, the onus will be on you to know where your local market is going. 

Often appraiser guidelines are national to a greater extent than they are local and micro local.  The appraiser works for the bank, not for you, even though you pay the cost of the appraisal.  We all know how well the appraisers covered the butts of lenders over the last few years...a great big NOT!  Likewise YOU should not depend on the appraisal to cover your butt as to home price in your real estate purchase.

Understand that appraisers use hindsight...you must use all resources at your disposal to determine not only where the market IS, but where it is heading in the hyper-local market of where you are buying a home.