WHo benefits from an over appraised house?
September 6, 2009 4:51 PM   Subscribe

Buying my first house: Who benefits from the over appraisal?

I have a feeling our house was over appraised and I cannot figure out why this would be done and yes I have googled.

It was appraised for $40,000 more than the selling price.
I am in the United States.
Any information - relevant or not will be most appreciated.
posted by will wait 4 tanjents to Home & Garden (18 answers total) 2 users marked this as a favorite
in Texas your property taxes are based on the appraisal, so the taxing entity would stand to benefit here.
posted by busboy789 at 4:55 PM on September 6, 2009

Response by poster: Ouch. Never considered that. Thank you.
State of Georgia here
posted by will wait 4 tanjents at 4:58 PM on September 6, 2009

Response by poster: Whom else could possibly benefit?
posted by will wait 4 tanjents at 5:03 PM on September 6, 2009

Best answer: The appraiser, because a high appraisal allows the deal to go through and a low one will kill it. So an appraiser who consistently comes in high will be known as a "team player" who is good to work with, from the perspective of the agents and brokers.

Possibly you, since the loan-to-value may matter in terms of how good a loan you can get, whether you can avoid PMI, whether you can get a home equity loan, etc.
posted by Forktine at 5:16 PM on September 6, 2009

A house appraising for more than its recent (or immediate future) sale price is normal, not something sinister that reflects the unwanted interests of other parties and might come back to hurt you without you doing anything.

You are among the people who might benefit-- you now have $40000 (more) equity in your house, from some perspectives.

It could also hurt you if you took out a loan against that $40000 in "equity" and then had to sell, as you'd be unlikely to be able to get the appraised value and would have to bring cash to closing. But for it to hurt you in that case, you'd have to actually take out that loan.
posted by ROU_Xenophobe at 5:19 PM on September 6, 2009

Response by poster: @Forktine
This makes more sense. My "agent" wanted this guy to appraise the house even though he was a no-show for two set appointments. We got a great loan -- only 5% fixed.

I understood how I could benefit, but it just did not make sense that it was all for me. LOL
posted by will wait 4 tanjents at 5:25 PM on September 6, 2009

Response by poster: @ROU_Xenophobe Also we are in for the long haul. We are not trying to flip this house. Just live and update it room by room.
posted by will wait 4 tanjents at 5:33 PM on September 6, 2009

By the time the commission and stuff comes back to your agent, if you did actually pay 40,000 more for it, your agent would literally only see a couple hundred bucks difference. So I don't think it's some conspiracy in that sense.
posted by toekneebullard at 5:35 PM on September 6, 2009

Response by poster: No! I am paying the 40,000 less. This is concerning to me.
My Zen cannot possibly be this strong.
posted by will wait 4 tanjents at 5:37 PM on September 6, 2009

maybe the seller was willing to take less than the appraisal because they were in a hurry.
posted by water bear at 5:46 PM on September 6, 2009

The question to ask yourself is who all pays the appraiser. Usually the state sends in a separate appraiser, unrelated to the transaction. They're motivated to appraise high for tax revenues, to some degree.

If it's the lender or broker, it's a repeated game; if the house is appraised for lower than the selling price, it really hurts the lender. In theory, the lender wants an honest appraisal, since they're counting on the difference between the home value and the resale value to buffer them from defaults. Alternatively, if you've already taken out the loan and bought the house, it might be the case that the lender wants documentation to securitize it with Fannie / Freddie, who require downpayments etc.

If you pay, a high price is useful for debt:equity ratios. A high appraisal would mean you have to lose that 40k in equity before defaulting makes sense. On the other hand, if you're looking to appraise a home before buying, you'll be looking for a low appraisal to talk the seller down with.

On preview, if your agent picks an appraiser, the agent's main interest is to earn commission. If the appraisal comes in lower than the loan amount, that's a hosed deal. It's similar to the subprime mortgage lenders, who "originated" loans and then sold off the payments to someone else (sometimes multiple someone elses). So they're working in your short term interest, but you could be on the hook if the sale price is more accurate than the appraisal, especially in a downward market. It's the difference between paying your loan off early in hard times, and defaulting.
posted by pwnguin at 5:48 PM on September 6, 2009

Response by poster: @pwnguin
Quite honestly our agent has gone above and beyond. I was hoping he was making some money on this but protect myself as well.
posted by will wait 4 tanjents at 6:03 PM on September 6, 2009

I assume your appraiser is a member of the Appraisal Institute. The institute has an ethics committee/review board that handles appraiser complaints and which will review poorly performed / fraudulently performed appraisals. Consider reaching out to it.
posted by prunes at 10:23 PM on September 6, 2009

Sorry, I forgot to include a link in my post: http://www.appraisalinstitute.org/about/ethics/ethics_problems.aspx
posted by prunes at 10:24 PM on September 6, 2009

There is so much wrong information in this thread I don't know where to begin.

Any bank that resells their mortgage (90% of them) will have to use a third party service that randomly selects an appraiser. Why? Because thats the new regs put into place since the recent house bust. Fannie and Freddie will only buy loans that have had this type of third party appraisals done.

Now if your working with what is called a "portfolio" lender (IE. a Bank or Lending institution that does not sell its loans) then they can hire whomever they please to do the appraisal.

Additionally appraisals that are done through the commercial venue have ZERO effect on Tax valuation. That is done with a completely different set of criteria.

In the end no one REALLY benefits from an over appraisal except maybe the seller who gets to have the loan close. It can hurt the banks and the consumers in the long run (as we've seen) as well as hurt agents too (they were all touched by this burst as well.

The new third party program has its own issues though... appraisers who are unfamiliar with the area or homes and are coming back with numbers too low, the consumer who has to front the extra cost of the third party system and a process that takes more time. Its a trade off and recent unrest because of the new regs have created a few changes for the better.

Here is a good recent article on the topic. Mercury News
posted by crewshell at 11:20 PM on September 6, 2009 [1 favorite]

Both times my house was appraised in the space of a few months, it came in at exactly the selling price. The appraisal was paid for by the lender in both cases. This allowed the deal to proceed smoothly. I have a friend who reported that she had the same experience. This was in California.

When I bought a house in Virginia, the state sent out an appraiser at the time of sale and then again periodically to adjust property tax valuations. It was a commonly held belief there that the appraisals erred high to inflate revenues.

I'm kind of cynical about appraisals now.
posted by jewzilla at 11:58 PM on September 6, 2009

We just bought a home (closed on the 27th) and at the closing we got to see the how and why's of the appraisal. We saw 3-4 local comparable properties, what they had and didn't have compared to ours, and how that affected (positively and negatively) the value of our home. Pretty interesting.

Our appraisal came in around $4,500 under our offer, and we insisted that the seller come down to the appraisal price (we weren't willing to spend more than the house was actually worth, and neither was our bank). Luckily the seller agreed to this.

I was surprised that the appraisal come in as low as it did. From talking to other people who had recently purchased homes, and to others in the business, it seemed that everyone thought the appraiser would come back at or above the final offer (to be a "team player" as Forktine mentioned). The fact that it came back lower, and that the seller dropped their price to the appraisal, worked out in our favor (and ultimately in the seller's favor, as the house was sold at market value).
posted by spikeleemajortomdickandharryconnickjrmints at 12:09 PM on September 7, 2009

Response by poster: TY crewshell jewzilla and (copynpaste) spikeleemajortomdickandharryconnickjrmints

I was happy for all of the feedback and majority rules it was just to get the banks to listen and approve. I am glad to know that -- not really having a firm grip on understanding the process. Thank you everyone.
posted by will wait 4 tanjents at 9:15 PM on September 8, 2009

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