Beginning the loan application process without any idea of the actual value range of a property is something similar to launching a space exploration without knowing where you are going. Throughout the last twenty plus years, I have been asked continually to support the same kind of idiotic practice, by loan officers, mortgage brokers and borrowers alike. It is a practice that I candidly term as “Value Roulette.”

Value Roulette typically begins in the loan application process when both the borrower and loan officer have no real concept of a property’s true market value, and it is perpetuated by two issues, 1. a homeowner’s, borrower’s or lender’s need and 2. ignorance (lack of information), although in some cases it has been motivated by greed and stupidity. This compilation is an effort to put an end to this frustrating, time consuming, costly and dangerous practice.

There are many loan officers who recognize the importance of knowing the value of a property before they begin, and probably explains why they like real estate purchases. You see, everything is neatly spelled out in the purchase and sale agreement, which includes a fixed value and down payment. No guessing where to begin.

The number one job of a loan officer, as I see it, is managing the borrower’s expectations throughout the loan process. This is relatively simple in real estate purchases because the value is anchored and there generally are no surprises.

Unfortunately, the process is more difficult in cases of refinancing, as the value expectations are not based upon a fixed value, but rather the borrower’s needs. It even gets more complicated when the borrower has recent reference points upon which they have based their expectations. They could be based upon other sales they know about in their neighborhood, active real estate listings or even rumors of market values from homeowners in the area who have recently financed or had an appraisal completed.

In most cases, the entire loan process is dependent upon a property’s value, so one of the first things a loan officer will generally ask the borrower for is a list of assets, particularly the real estate that is going to be used as collateral, along with its Current Market Value. Unfortunately, the best estimate that most owners usually have is the Assessed Value from the County Assessor, which accompanies each year’s tax bill. Since these values, for a variety of reasons, are typically below Current Market Value, when asked, most owners and loan officers make a wild guess, and report a “Guestimated Value.”

The loan submission process takes about eight hours of client interface, data and documentation collection and paperwork preparation for the average loan officer. Sad to say, it is often through this interaction and long before the appraisal assignment is even ordered, that the “magic number” and the borrower’s expectation is established.

Anyone should be able to recognize the problems with this approach. This is a situation where everyone’s time and expectations are based upon a gamble. (Round and round and round it goes… where it lands nobody knows.)

Some mistakenly believe that getting an appraised value is a matter of negotiation between the loan officer and the appraiser.

Recently a conversation with one of our staff sounded like this: “Can you hit $300,000…” “No…” “How about $290,000…” “No…” “What can you hit…” “Looks like the top of the value range is $250,000…” “Are you sure you can’t get it a little higher…” “Yes…” “OK, I’ll take $275,000…“ And the begging and pleading go on, with little recognition that the conversation could be considered coercion.

So, just what is an appraiser and how is the appraisal system supposed to work?

“An appraiser is one who compiles and analyzes voluminous data of problematical accuracy from sources of dubious veracity and derives therefrom a numerical quantification of unquestionable necessity, analogous to a nebulous and euphemistic concept representational of value commensurate with ambient configurations of the open market and promulgates thereby a precise written declamation which delineates his observation, deliberations and conclusions all done while he feigns absolute ignorance of the avaricious machinations of Buyers, Sellers, Brokers and Lenders, compensated only by that penurious stipend known as the professional fee.” Author Unknown

Now, let’s see if I can make this a bit more understandable.

The Appraising process is actually made of two different parts: The Appraisal Process and the Appraisal Report. To most, the common term Appraisal is thought to be the finished product or the “Report” but it is in fact a representation of both parts together. Inside the industry, however, Appraisal actually refers primarily to the process itself. Simply put, an appraisal is an opinion of value or the act and process of estimating value.

Qualified appraisers have the education, training, and experience to estimate the current market value of property in accordance with the industry standards. They typically charge fees based on the type of appraisal report required and the amount of work and travel involved.

An appraiser may appear to only spend a short time inspecting the property, but this is only the beginning of the process. Considerable research and collection of general and specific data must be accomplished before the appraiser can arrive at a final opinion of value.

As the appraiser analyzes the data pertinent to a real property valuation report, consideration must be given to the site and amenities as well as the physical condition of the property. The report will include a description of the property under consideration, the property’s condition, its utility for a given purpose and the appraiser’s opinion as to its probable monetary value on the open market.

Remember, the appraisal does not create value; it merely interprets the compiled market data used to arrive at the value estimate.