Are Appraisers Still Necessary?
Over the years there have always been some who lack appreciation for real estate appraisers. When an appraiser appraises a property at or around the contract price in a purchase, some feel like we are just "justifying" or "rubber stamping" a pre-determined price. Some probably think "of course it appraised for that" because the appraisal met their expectations. Since a person's own expectations are usually valued more than other information from other sources, the data in the appraisal is minimized in their mind. Good appraisers never appraise a property with the goal of just "hitting" the purchase price as a target. Our work should not be based on a predetermined number. That being said, there have at times been a small handful of bad appraisers out there in which that has been the case. I believe that there are not many of those kinds of appraisers left. Thank goodness! Many times the value estimated by the appraiser is around the same amount as the purchase price. When this happens it means that all of the work that the appraiser has made to estimate the market value of the subject simply reflects that the purchase price is reflective of the market value of the property being appraised.(Based on the definition of market value being used in the appraisal)
Sometimes the estimated market value comes in below the purchase price. In this case, some just simply dismiss our work as appraisers. In this situation some accuse the appraiser of not working "hard enough" on the appraisal or of not knowing what we are doing. I assure you that this notion is the farthest thing from the truth.
However, when the appraiser's estimated market value is around the same amount as the contract price, does that mean that the appraisal was a waste of time and money? Imagine going to a physician once a year to get a physical. Every year, the doctor says that we are healthy with no issues. Would we value the doctor less because they told us what we wanted to or expected to hear? Or would we be relieved to know that a professional who has extensive training and skill has confirmed our hopes that we are healthy? We value the doctor's opinion. And what if they say that we need to make some adjustments to our life to better our health? Would we do our best to follow their advise? Of course! We would value that knowledge.
When a real estate appraiser estimates the market value of a home to be at or around the contract price on a purchase, why is it that some in the industry feel like the appraisal is not necessary? It's because some do not have an appreciation for all of the work and research as well as education and experience that it takes to perform a credible appraisal.
Going back to our analogy, what about a person who never sees a doctor and just assumes everything is okay? If that person develops a serious health issue, they may not know about it until it is too late to do anything about it. That could be a fatal mistake. By the way, in a case like that, a very ill person will eventually have to see a doctor anyway. They may end up having to see many more doctors than if they had just had a routine physical. So they avoided using a professional, which did nothing but create a situaton in which they will need more help from a doctor or doctors than ever before!
Likewise, if appraisals are not made by appraisers with the education, training and experience needed to estimate a credible market value on properties, what happens if a property is being sold over or under market value? Who will make the determination? An automated valuation module (AVM) or a BPO that does not offer the extensive research that an appraisal offers? Or an assembly line style approach to appraising in which the process is parceled out to different individuals who may not know what kinds of things will affect value in or on a property? That will only expose the process to even greater causes for errors and risk? When I go do a doctor for a physical, I want to see and talk to a real person, not a machine. I want a diagnosis from a person who has the education and experience needed to detect a problem that may not be obvious. The same holds true with real estate appraisals performed by qualified real estate appraisers. Appraisers can detect things that an AVM cannot detect. Some examples would be functional obsolesces, condition issues, market trends and making sense of data in which a deeper analysis of the macro and local markets needs to be reconciled. There are many other things that AVM's and other valuation methods including BPO's fall vastly short of when it comes to valuing a property.
What will happen if appraiser's are replaced by AVM's or the appraisal process is parced out in such a way that the appraiser's work is minimized to a degree in which it becomes more of an assembly line style product? In my opinion, it will lead to conditions that are even worse than those experienced in 2008. When this happens, guess who the banks and investors as well as government entities are going to call to figure out a supportive and reliable market value of homes as market conditions spiral down again? Appraisers!
So the next time the appraiser estimates the market value of a home in a purchase to be around the same as the contract price, be happy that the purchase price is supported by the market. And if the estimated market value is below the contract price, understand that this is probably not a wise investment and save yourself a lot of grief down the road.