Appraisal Standards

Appraisal standards are protocols laid down by the Federal Government to determine the way in which commercial and residential real estate appraisers should conduct their business. The appraiser's job is absolutely crucial in allowing lenders of money to make accurate lending choices, both of which properties to lend on, and how much to lend on them.

The lenders are the ones who engage a real estate appraiser in the vast majority of cases. These appraisers will look over the site, the land, and also the property on the land, to try to estimate a selling value for the property. The appraiser's findings are sent back to the lender in the dorm of a report, which should be supported by photographs.

The other vitally important part of the appraiser's job is to perform a detailed assessment of the sale values of other properties. These properties should ideally be of a very similar type, age and condition to the property being assessed, and should also be in a very similar area. This similarity of area is not so much a function of location, but more a function of the area's property selling for very similar prices. Statistics are far more important than location, as property values can differ markedly over very short distances.

Appraisal standards are an attempt to directly regulate the appraisal process, which can obviously have a substantial impact on the welfare of not only the lender, but also the buyer and seller involved in any individual transaction. The lenders will find their money being put at risk if the appraiser does not carry out his duties properly. The greatest risk to the lender comes if the appraiser does not notice a major structural fault in the property.

The transaction can appear to have gone smoothly, but if a severe fault later comes to light, the lender can be stuck with having to take back a property which can then not be sold for the value of the money which was loaned on it. It is critical that appraisers carry out structural surveys meticulously.

The seller can also be compromised if a valuation is not accurate. Unless the property is in an extremely desirable area, the chances are that the seller will have pitched his sale price somewhere near the value he actually expects to receive for the property. A substantial difference in valuation can deter buyers, and send them to other comparable properties in the area.

From the buyer's point of view, a low valuation can mean having to try and negotiate a lower price with the seller, or having to raise extra money to cover the difference. Unless the property is at the top of the range, and would have sentimental value to the buyer, the buyer is more likely to just look elsewhere.

As from the first day of this year, a new watchdog exists in the appraisal industry, sponsored by the two largest lenders of mortgage financing. This is regarded as one of the most significant changes in the mortgage business for many years. If the system is seen to work, then the prevention of artificially inflated prices can only be in the whole industry's best interests. It could lead to an industry wide raising of appraisal standards.

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