How Does An Appraiser Come Up With A Property Value?

I have been hearing a lot of people commenting on the appraised value of their home whether for a purchase or a refinance.  Many stated that the value has come in low due to appraisers not wanting to have the value too high because they might lose their license or the lender will get very cautious.   That couldn’t be further from the truth. 

An appraiser is required in this market to find comparable sales within the last 3 months, within .5 miles from the property, 1 outside the neighborhood, and an active listing.  What are the most recent sales?  They are foreclosures and short sales.  That is what is selling so that is the fair market value.  Yes, it is artificially deflated but it is the “true value” in this market. 

On a purchase transaction many want to see the appraised value $50,000 or more above the purchase price because they picked up a newspaper or turned on the TV and heard it’s a buyers market and so and so got this incredible deal.  Although this is great from a psychological standpoint, it means nothing.  Think about it for a second.  If you are buying a home for $300,000 and it appraises for $350,000, you are very excited because you feel you have an instant $50,000 of equity in your home.  Wrong again.  Remember how an appraisal is done.  It is based on the most recent sales.  What is the most recent sale now?  You guessed it, your purchase transaction for $300,000.

This is a buyer’s market and buyers dictate the price of a home.  That means the “true value” of a property is the amount someone is willing to pay.  So whether your appraised value comes in $5,000 above your purchase price or $50,000 that doesn’t necessarily determine how great of a deal you got.

Most of the transactions that come across my desk do not have a large gap between the purchase price and appraised value.  What makes these transactions such a good deal is that they are one of the lowest sales in the neighborhood.  Remember, you are not buying the market but you are buying a specific home, in a specific area, for a certain price.  Now please keep in mind that although I close a lot of transactions per month I am the whole market.  That is why this is just my opinion.