With the advent of the HVCC and Appraisal Managements Companies, some appraisers have begun not completing the “Cost Approach” on the appraisal. There are two values on a residential appraisal, the “Market Value” which uses comparable sales to establish value and the Cost Approach which makes a determination how much a property would cost if replaced from scratch.
Appraisal Management companies often negotiate lower appraisal fees with appraisers. Instead of making $350 on an appraisal an appraiser might agree to a smaller amount of say, $250, in return for steady business from the appraisal management company. Appraisers can then cut corners and one of those corners is not completing the Cost Approach in the appraisal.
While lenders certainly use Market Value when making a loan decision it’s the insurance company who needs the Cost Approach. That’s what the insurance company might have to pay out if the property had been destroyed.
Problems occur when insurers are forced to use the Market Value to establish premiums, often far more than a Cost to rebuild. That means people might not qualify for a loan due to higher premiums. It can also mean a potential delay in closing if the appraisal needs to be updated by the appraiser to include the Cost method.
Good loan officers always check for this but always ask your clients if they’ve not only reviewed their appraisal but received a competitive insurance quote comparing both Market Value and Cost.
You’ll be a genius.