10
Mar
10

appraisal dodge can mess up your closing

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.

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2 Responses to “appraisal dodge can mess up your closing”


  1. 1 eValueLogic
    March 10, 2010 at 11:49 pm

    “With the advent of the HVCC and Appraisal Managements Companies, some appraisers have begun not completing the “Cost Approach” on the appraisal.”

    This is the funniest thing I have read all day. A real estate appraisal is to develop an opinion of value for Mortgage/Lending purposes. Not insurable value.

    The Depreciated Replacement Cost Approach (its full, technical name) asks the appraiser to measure land value by sales comparison, to add construction cost new, to deduct depreciation in a variety of categories, and to add profit. The result is an indication of value.

    Appraisers seldom apply cost analysis. It is generally viewed as an approach divorced from the market where income or sales rule.

    In other words, a cost approach is only necessary in a limited number of appraisals for credible assignment results. Any typically it only applies to new construction or homes less than a few years old. After that, too many things become subjective and the results aren’t credible.

    By the way, this has been the rule for over 20 years. It is nothing new as the author would have you believe.

    • March 11, 2010 at 1:45 am

      Actually, I’ve read some other things today that were funnier than this piece but I guess that’s all subjective in nature.

      From an appraiser’s perspective, eValueLogic is correct, the appraiser’s value is to develop an opinion of value for Mortgage/Lending purposes. But appraisals are also used for other purposes beyond helping to establish a current market value and that was the point of the post. Some appraisers may not be aware of that. The article points out that appraisals are also used for insurance purposes. Lenders require insurance (obviously, to protect their collateral) and they require said insurance based upon either the loan amount or cost (The Depreciated Replacement Cost Approach) approach. If there is no cost approach completed the lender (me) bases the insurance requirements on loan amount.

      We recently received a VA appraisal (which, btw, does not require the The Depreciated Replacement Cost Approach) that had the property valued at $225,000. The loan amount was closer to $229,000 but the insurer would not issue a premium for that amount. This property was on an acre+ and about an 1,800 square foot home and the insurer would not write a policy for that. Lots of land compared to improvements. Built in 1996, btw, not new or recent construction. VA may not require it and the lender may not require it (cost approach) but the cost value was significantly less than the loan amount.

      The insurance premium for the loan amount of $225,000 was more than twice the cost value. This borrower could have afforded the higher insurance premium but 1) why should the veteran do so and 2) doubling an insurance premium could negate a loan approval, and that’s the point of the article. We approved the loan with the lower policy amount, essentially saving the borrower about $90 per month.

      And I’m not certain where the eValueLogic is from and its certainly possible that it’s not customary for appraisers to complete the cost section but if borrowers who pay for an appraisal and don’t get that section completed it could be costing them not only unnecessary monies but possibly an approval. I’ve been a lender for over two decades and seen appraisals from California to Florida and the cost approach has typically been included as part of the standard appraisal fee. Only recently have I seen the cost value left blank.

      Anecdotal maybe, but suddenly our the cost section on our appraisals have been neglectee. I stick to my story.


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