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Why Do We Even Need An Appraisal?

I’ve always thought it’s weird that we put so much emphasis on the home appraisal. I understand why we are forced to do them. Before a lender approves a new mortgage or refinance, it commissions a professional appraisal to verify the value of your home. The lender checks the appraisal figure to ensure the home will sell for at least the amount of money it is lending — otherwise, the bank may be out of pocket if it has to foreclose. However, not everyone needs an appraisal to complete the underwriting process. Some lenders routinely waive the valuation for low-risk transactions.

Some people are surprised by this, but in my 17 years as a real estate agent, I’ve probably had around 75 cash buyers, and not one of them paid for an appraisal. Not one! The reason is, that the average person buying a home looks at an assortment of homes online, previews 5 to 15 homes in person, then makes a decision on their offer price based on homes they’ve seen and how this one compares to them. If this home has more upgrades or a better location, then they feel it’s worth more money. If this home needs a lot of work, they offer less money. Ultimately though, they are typically happy with the price they agreed to, so they don’t feel it’s necessary to pay an appraiser $500 to tell them the home is worth what they’re willing to pay. Why spend the extra money when I already feel it’s worth that price to me?

Lately, though we are beginning to see more lenders waive the appraisal altogether. Some loan applications, including mortgages purchased by Fannie Mae and Freddie Mac, are run through an automated loan approval system that tells the lender the minimum valuation figure required to support the requested loan. Sometimes, the system accepts the borrower’s loan application without the need for an appraisal. Put simply, this means the lender accepts the sale price, or the estimated home value, as the actual value of the property. Usually, only strong borrowers with significant cash down will achieve an appraisal waiver.

Having said that, I recently sold a home outside of Platte City, Mo for $623,000. The buyer was putting down $423,000 cash from the sale of their previous home and only financing $200,000 with a bank. Surprisedly, the bank still ordered an appraisal of the home and forced the buyer to pay for it. Let’s think about this for a second. The bank is loaning $200,000 on a $623,000 home. If the buyers stop making their payments, the bank can foreclose on the entire property and sell it at auction for a HUGE profit! If I were the buyer’s agent, I’d call the bank personally and tell them my clients are not going to pay $500 for an appraisal because this is ridiculous. If the lender has any concerns over the value of the home, they can see all the photos and information online via any real estate website. Anyone with a brain can see this home is worth more than the $200,000 the bank is lending them.

While writing this article, I looked back through the 40 homes my team sold in the first 5 months of 2022 and found seven of the lenders waived the appraisal altogether. As we see more detailed information gets entered into the Fannie Mae and Freddie Mac databases in the coming years, I anticipate we will see even more appraisals waived in the future. That’s fine with me. It saves my clients more money in their home purchase.

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