It wasn’t an offhand comment.  I’ve heard him say this in front of dozens of agents and I’ve heard him repeat this in several continuing education classes.  With over 35 years of Colorado real estate law experience, not to mention a sterling reputation in the real estate community, do you think he might be on to something?  I tend to defer to his judgment.

A History of Appraisal Fraud
As pretty much everyone knows… before the real estate meltdown, appraisers were cherry picked by lenders and influenced by brokers.   A handful of fraudsters were artificially inflating appraisals, bringing in phony buyers, and running away with the closing proceeds.   Independent appraisals were anything but independent.

The result was much needed reform, including a system where lenders can no longer select the appraiser and brokers are prohibited from direct contact.  

The Appraisal Merry-Go-Round

Appraiser in Training

The current system of lender ordered appraisals involve a round-robin selection of the appraiser.   The appraisal firm is paid a set fee, whether or not the appraisal is accurate, and with no regard for whether the deal closes or not.   While this increases the independence of the appraiser, it also means there are no rewards for high-quality work and no punishment for lousy work.

Can you imagine hiring your employees by round robin?   Would you even take a chance on a hair dresser selected by random chance, with no tips allowed for a job well done?

For the bank, these “good enough” appraisals are fine because they only need to justify an 80% Loan to Value (LTV).   Plus, the lender isn’t risking their own money and plans to sell the loan on to Fannie or Freddie.   For buyers taking the ultimate risk, these “good enough” appraisals doesn’t really cut it.   Buyers are putting their hard earned money at risk and they don’t want to purchase a home for more than the market will bear.

The Buy Side Appraisal
Buyers can engage their own appraiser, just like a lender, but unlike the bank they can choose who they’d like to perform the analysis.   Yet seasoned home buyers and sophisticated investors know that appraisals are not always an accurate indication of a property’s value.

The reality is that one appraisal can vary wildly from another, especially in a small market like Boulder.  When a buyer agrees to pay for one, often reluctantly, most feel the appraisal should come in higher than the contracted purchase price.   With costs approaching $400 for this supposedly professional analysis,  experienced buyers paying cash are hesitant to pony up for it.   Unlike the appraiser they hire, they’ve already been inside other available houses  and often seen what’s already sold.   For this reason alone, most would rather do their own analysis.

The Sell Side Appraisal 
Sellers will also occasionally have an appraisal done.  Their hope is that an appraisal which comes in higher than the asking price will help them lure a buyer seeking value.   Of course, if the appraisal doesn’t come in higher, they have the option of reducing their asking price or disregarding the appraisal entirely.  There is nothing forcing a seller to reveal a low appraisal to the buyer.

In some cases, a high-appraisal justifies the price but only if the comps are fair (recent and representative of the property in question).   Serious buyers who have done their homework are already aware of the property’s value and for the reasons mentioned above, are likely to disregard an inflated appraisal entirely.  For this reason, sell-side appraisals are highly suspect.  

Appraisers Don’t Write Checks
I had a deal fall apart yesterday, based on what appears to be an inflated appraisal.   Of course, I’m not mentioning names or addresses here.   It’s a small real estate community in Boulder and I certainly don’t wish to compromise future negotiations by being a thorn in the side of another broker in Boulder.   My simple wish is for appraisers who stand behind their work to be willing to buy the house they’ve appraised at that value.   Or, if the house is unable to find a buyer at their appraised price in a given period of time, agree to refund not just the appraisal fee but a penalty for being wrong.

Now that would be a system of risk and reward I’d buy into.  Sadly, the flow of funds to an appraiser is truly one way.  

Cover MY Tush
A final note.   For all buyers, paying cash or otherwise, my standard advice is to go ahead and get the appraisal.   For CYA purposes, I must recommend this action, despite a lot of evidence which points to its clear lack of value to cash buyers.    My way of paying penance for being forced to recommend something of dubious value is to offer extensive analysis and review of the comps.    We’ll analyze and discuss, analyze and discuss until the cows come home if it helps you feel more comfortable with your investment decision.     Although Boulder’s market is healthier than most, ultimately you will take the risk of owning a high value asset in an uncertain market.  My goal is to help you understand and feel confident in that decision.