Active Appraiser: March 30, 2014
My bank said they ordered an appraisal for my loan, but no one ever came inside the house. Does this sound right to you?
For certain types of loans, such as home equity loans, banks follow specific federal guidelines (called Interagency Guidelines) which allow for the bank to use an exterior-only appraisal from a licensed or certified appraiser in some cases. These types of exterior appraisals are typically used in low-risk lending situations, and can also used by banks for pre-foreclosure, loss-mitigation, and similar situations. Since the property is only observed from the street, the homeowner may not even know that the appraiser’s visit took place.
With exterior-only appraisals (sometimes referred to as “drive-bys”), assumptions are made about the interior, sides (if not visible from the street), and rear of the property, as well as the site in general, based on the limited viewing of the property, along with public records, any records in the local real estate MLS system, aerial imagery, or file information the appraiser has on the property, as long as the sources are determined to be reliable. For example, the appraiser may see that the visible parts of the property are in average condition displaying little-to-no needed repairs, so he could assume that the entire property is of similar condition. Or, based on the county records, the appraiser could assume the subject has a covered back patio, a fireplace, and a detached utility building, none of which is visible from the street. Keep in mind, these exterior-only appraisals are not typically ordered for first-mortgage loans, such as when you buy a house.
For first mortgages, a full appraisal is usually conducted, which includes the appraiser viewing the inside and outside of the property. In these situations, the inventory of the property is observed by the appraiser (rather than making assumptions, as in exterior reports). However, it is important to remember that the appraiser is not a home inspector, so he will still make certain assumptions. For example, the appraiser may assume the utilities are functional, the structure is sound, there are no health hazards, and so on, as long as there is no evidence to the contrary.
There are some situations where the bank can loan without the use of an appraisal. If there is ever any question, remember this: a borrower can ask to review copies of all valuation reports that the lender used.
I got my own appraisal a few months ago because I was thinking of listing my house for sale. Now I want to refinance, but my banker won’t take that appraisal.
There are several factors at work here.
First, banks are required to order their own appraisals, ensuring certain Appraiser Independence regulations are met. For a privately ordered appraisal, such as for a legal matter, a trust, an estate following a death, or a pre-listing appraisal, these regulatory safeguards are most likely not met. Banks and lenders have internal departments and staff that carry out and monitor the appraisal-ordering procedures, although some choose to use third parties.
Second, an appraisal has specified Intended Use and Intended Users. To follow federal rule, appraisers must identify the Use and Users of an appraisal report. Examples include: to determine a property’s market value to aid in listing it for sale by the homeowner and real estate agent, to determine market value for divorce purposes by Mr. Smith and his attorney, and so on. The Use and User for lending appraisals may often be to evaluate the property for mortgage purposes by the lender.
Why is this so important? The Use can impact what the appraiser is trying to solve: is it liquidation value, market value, a range of values, before- and after- remodel values, a future anticipated sale price? And the Intended User can be a very important factor in the level of detail and information that the appraiser provides in his report. For example, writing for a lender, the appraiser would not hesitate to use terms such as “bracketing”, “highest-and-best use”, “super-adequacy”, “regression analysis”, and so on; these terms could confuse many homeowners, agents, or attorneys, unless there was further explanation in the report. Consider that the appraisal written for you, a homeowner, may not have contained details about the availability of public utilities, a cost to fix flaking paint, a photo and description of the crawlspace, and so on; for some lending purposes, though, these items may be expected by the lender. In some cases, there are specific requirements for legal, tax, and estate appraisals that wouldn’t even be mentioned in other appraisal reports written for other clients.
There are a variety of reasons you might order a private appraisal, so be sure to discuss with the appraiser exactly what it will be used for.