In regards to appraisals hitting sale prices, let me first acknowledge that there are some appraisers who wouldn’t know how to appraise a property if they weren’t given a target value to hit. What can I say? Every occupation has it’s idiots and it’s those idiots who make life miserable for everyone else who’s trying to do the right thing. I can’t tell you how frustrating it is to have to come in after one of these guys and clean up their mess.
But there are legitimate reasons for appraisals coinciding with sale prices, too.
Any sales comparison analysis will result in a range of reasonable value indicators – sometimes very narrow and sometimes a little wider, depending on the quality and quantity of applicable data. As a result, Appraisals are almost always rounded to the nearest $1,000 or $5,000 (or even higher increments for the mega-houses) because to communicate it as an exact number implies an unrealistic level of accuracy. While it might be more honest for appraisers to communicate their opinions as a value range rather than a pinpoint number, most clients and users of appraisals are more comfortable with the single number. It’s easier for them to work with a single number than have to get into judgement calls of their own.
Most appraisers adhere to the theory that a sale resulting from adequate exposure in the market will generally be indicative of the market value, unless there’s some wrinkle to it. If a sale price falls within that reasonable range it’s customary to assume that the “tie goes to the runner”. For most homes this range is less than 3% of the total, so we’re not talking about situational ethics or anything like that.
It would be foolish and impractical for an appraiser to just pick an arbitrary number other than the sale price in such a case. I mean, for an $800,000 sale would it make any sense to conclude to a $795,000 value even though the $800k was also within the range? That kind of stubborness would do nothing but create problems for the lender’s underwriting even though that number is also reasonable.
A large percentage of appraisals used by lenders do come in at value, but that’s not the same thing as saying all appraisals will come in at a sale price, because they don’t. There are some deals that fall out of escrow, especially now. There are some deals that get shopped around to several lenders before they find one dumb enough or lazy enough to accept a faulty appraisal. It’s VERY common for loan originators to shop appraisers until they find one that’s cooperative and for there to be multiple appraisals performed on a single property until one of them comes in at the desired number.
As these lenders start taking losses, they are tightening down on their underwriting and that includes greater scrutiny of the appraisals they’re using. Unfortunately, they don’t get into this mode until after they’ve already made too many risky loans. It’s very frustrating for us.
