Let me start off by saying that I am not an expert on the appraisal business nor do I claim to know all of the details of an appraisers job, rules or regulations.  Nor is this post meant to disparage any individual or the profession in any way.  The information contained in this post is based solely on my personal experiences, interactions and training learned on the job as a real estate agent over the past 10 years. 

The basic function of an appraisal as it pertains to the sale of a home is simple and constant: it is a third party expert opinion of value for a property, meant to protect the buyer and lender from making a bad investment.  Before the "mortgage meltdown," there were far less regulations and restrictions for appraisers to follow when generating a report.  There were general guidelines that all appraisers were taught to follow but they were not set in stone and if necessary an appraiser could bend those guidelines and nobody would question why.  Buyers were buying, lenders were lending, appraisers were appraising and realtors were selling.  It was a shining example of reciprocity, " the quality or state of being reciprocal : mutual dependence, action, or influence."  It was a relationship driven industry where it didn’t necessarily matter how good an appraiser was but rather how many lenders and realtors he/she knew to keep the business coming in.  A lender could call up his/her favorite appraiser, inform them of the purchase price and as long as the value could be loosely justified by comparable sales in the "not-too-distant" past than the appraised value would almost always match that of the purchase price.  It was basically a foregone conclusion and more of a formality that the appraisal was even a part of the loan approval process at all. 

Fast forward to the post apocalyptic mortgage meltdown era where appraisers were fingered as being a key co-conspirator in causing the disastrous collapse of the real estate market.  I’m not going to get into the reasons as to why the inevitable market corrections occurred or who was to blame but needless to say the appraisers were caught in the middle of it all.  As a result, the government came down on the banks and the banks came down on the appraisers and what transpired was an overreaction to a problem which only caused there to be knew and different problems.  Gone are the days where the value of a home is equal to that which someone is willing to pay for it.  If there aren’t exact comps within an exact time frame to perfectly corroborate the sale price, than chances are fairly high that the appraisal may not come in at the exact value that is needed to approve the loan.  When this occurs, it can easily kill a deal if a buyer and seller are unwilling to be flexible.  If an appraisal comes in below the purchase price, than either the buyer has to make up with the difference in cash out of their own pocket or the seller has to agree to lower the sale price, neither of which are easy pills to swallow for either party. 

To make things more complicated, an entirely new industry has been created called appraisal management.  These appraisal management companies called AMCs for short are meant to keep the lender, appraiser and to a lessor degree the realtor at an arms length transaction.  Meaning none of the parties have direct contact and therefore any direct influence on each others responsibility.  On the outside this seems like a good idea but in practice it is has not proven to be so.  The AMC is responsible for assigning an appraiser to perform an appraisal for a lender, however often it is done so with little regard to the appraisers particular familiarity with that town, neighborhood or subdivision.  Anyone that has dealt in real estate on just about any level will understand that it is almost entirely based on location: location, location, location!!!  An appraiser that specializes in single family homes in town A isn’t necessarily going to know enough about the townhouses in subdivision T in Town D, three exits up the highway to be able to form an accurate opinion of value.  That’s not the appraisers fault, it’s the AMC that sent him/her to write the report when they should have been sending someone better suited.  That’s not to say that the appraiser from town A couldn’t make a fair judgment on the value of the subject property by doing proper research and in most cases this is true.  However, what if the appraiser wasn’t aware that the property that sold two blocks away just 3 weeks prior for less money had a pipe burst that ruined the kitchen and living room but it wasn’t reflected in the pictures on MLS because the pipe burst after the pictures were taken and the broker didn’t have time enough to change the description before it was already under agreement. 

It’s not all the AMC’s fault, the government has tightened regulations and banks have enacted new rules to govern how the appraisers do their job.  This has caused the appraiser to inherently be ultra conservative when determining the value of a home which is in stark contrast to years past where appraisers were comfortable in all but over-valuing most appraisals to keep the loans rolling along and the orders coming in. 

The moral of this story is that the appraisal is no longer a foregone conclusion and has become one of the most important and unknown variables in obtaining a loan.  In an age of increased uncertainty and scrutiny, the appraisal is king.  It is for all intents and purposes a thankless job and frankly not one that I envy but do respect.  If there comes a time when you are faced with having to make a concession on the sale or purchase of your home, remember that nothing can get done until all parties are satisfied, which includes most importantly, the lender.