Appraisers have been accused of being “speed bumps” in the lending process. We frustrate buyers, sellers, loan officers and, sometimes, real estate agents. In some ways, I can understand their frustrations but does that mean they should bypass getting an appraisal? Nope, not at all.
The purpose of an appraisal is collateral protection. The appraisal lets the client know that they are loaning on a property that is worth what they are loaning. The property is also the collateral for the loan. If the loan defaults the bank needs to be assured that they could possibly resell the property to recover the funds. Although appraisers can’t see into the future to know what the property will be worth in the coming years, they can determine if it is truly worth what the loan is for today.
Of everyone involved in the buying and selling process, appraisers are the only truly neutral party. The appraiser has no skin in the game. If the house sells or doesn’t, if the selling price changes, if the loan gets approved, none of it makes any difference at all to the appraiser. Their part is simply providing the client, usually the lender, with what the value is on the property.
Fannie Mae and Freddie Mac, the big players in the mortgage industry in the United States, have started a trend wherein they allow some mortgage loans to go through without an appraisal. However, they do have a lot of limitations and restrictions that apply before the appraisal can be bypassed, there are a lot of T’s that need to be crossed and I’s that need to be dotted before they can get a Property Inspection Waiver (PIW). That term, Property Inspection Waiver, is a bit of a misnomer. As it’s being used now, a PIW has nothing to do with the inspection, it is an appraisal waiver. You might find this article very helpful when looking for a mortgage or a loan.
I know a lot of real estate agents and almost all of them encourage their buyers to have a home inspection done. That inspection protects the buyer from buying a home that has hidden problems and it protects the buyer’s trust in their agent as well. Most agents have it in their contracts that they recommend that inspection. If the buyer does decide to skip having an inspection done, the agent will usually have a record that it was, at least, offered and could provide liability protection.
I want real estate agents to think of the appraisal process the same way. I would highly recommend that you consider the liability in waiving an appraisal. Say your buyer didn’t have an appraisal done on that home they just closed on and sometime after the sale it comes to light that what they paid was $50-75,000 less than the home would have appraised for. Not only is your buyer going to be very unhappy, do you not think there’s some liability issues there?
If you run into a situation where, for whatever reason, there is a PIW on a property I’d recommend that you consider the services of a licensed or certified appraiser anyway. Not for the buyer, not for the seller, and not for the lender but for your own peace of mind. Spend the very small, insignificant amount of money it will take to get a private appraisal on the property. Now you’ll have some assurance about what the buyer is getting into. Agents, if for nothing else but to protect yourself, encourage your buyers to get an appraisal despite what Fannie and Freddie do on the loan side of the process.
For more information on this subject, please download and listen to The Appraiser Coach Podcast Episode: 464