Appraisals - A Critical Part of Any Real Estate Transaction

September 17, 2012
In any real estate transaction in which the prospective buyer is purchasing with a loan, the appraiser has the power. Since the real estate downturn, the rules for appraising property have changed to try and correct the
perceived irregularities that pushed appraisers to over valuate properties. Lenders now are required to go through independent appraisal management companies so as not to influence the outcome of an appraisal. When this system first began, appraisers could often come from areas that were at some distance from the subject property. Another innovation was the use of automated valuation models (AVMs) that use public records rather than on-site observations. (Perhaps they are similar to the algorithms that sites such as Zillow use.)
In a changing real estate market, and I believe that our present market is a changing one, appraisals become a challenge. The most common method to appraise a property is to use the comparative market approach (CMA) that looks at closed sales of similar properties. Other than location, age and size, it is a judgement call as to how similar two properties might be. The other judgement call is a determination as to whether the market is declining, stable or rising.
With a limited number of comparable properties available for comparison, the appraiser really needs to rely on his/her knowledge of the surrounding area. The appraiser's expertise can either make or break a sale. Over valuation were a problem in the past. At the moment under evaluations are becoming a problem to a recovering real estate market.