Are Mortgage Appraisals Lower Than Market Value?

Recently, two different couples voiced their disappointment over an appraisal done on their homes for a mortgage.

One man explained: "Five years ago, we arranged a mortgage to buy our home. A few weeks ago we received a call from the bank's mortgage representative. She said that we needed an appraisal. She was retiring and the bank wanted the appraisal on file, something she did not do when we purchased. We agreed but the appraiser, a guy from Toronto, evaluated the home for only $167,000. Our home's value has to be more. I'm told appraisers tend to value a house for less than it is worth."

Another, a past client was toying with the question, "Should I renovate or move?" She explained, "We recently talked to our mortgage company to increase the mortgage on our home for improvements. The lender explained that the Bank required an appraisal. Well the appraiser's price was far lower than what my home would sell for, and I'm very upset about it."

This is a common belief. Here are 8 thoughts to consider.

1. The bank may ask for a conservative opinion or the appraiser may have chosen to err on the side of caution. This can happen. Yet the objective of most appraisal requests by a lender is to verify market value--the most probable market price.

2. If the intent is to stay in the home, why be bothered by a housekeeping matter required for bank records.

3. Appraisers analyze recent comparable sales, as do Realtors, to arrive at an estimate of market value.

4. If selling is the goal, however, and to position your home in the market correctly, a real estate professional also reviews current competitive homes listed for sale.

 5. In any case, existing market conditions need to be added to the mix. Is it a seller's market, a buyer's market or a balanced market?

6. If the appraiser is from out of the area, he may not have a good feel or understanding for our marketplace and could be off the mark as a result.

7. Appraisers are required to come up with a number. A well performed evaluation should fall within a range of value, say around $5,000. Only an actual buyer and seller negotiation can accurately arrive at a number.

8. Market value opinions can vary. However, good opinions should fall within a 5% variance. If an opinion does not, that opinion should be suspect. Too often a sales representative will voice an opinion that the Seller wants to here, which accomplishes nothing, other than to make the Seller feel warm and fuzzy--but leads to disappointment.

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