Why Lenders May Disagree with the Appraisal

There’s always that momentary fear when a broker sees the email from the appraiser in their inbox.

What value will be assigned to the borrower’s property?  Will they disagree with the appraisal?  Does it match what the borrower has suggested?  Will it reveal some ugly issues?  Is it enough to close the deal?

Thankfully, more often than not, everything is okay.  The value supports the amount needed and the feeling of impending doom quickly dissipates without surprise.

But then the appraisal is submitted to the lender for review and the loan amount is reduced?

Why would the lender simply not accept the value of the appraisal?

After all, the appraiser is on the lender’s approved list, the comparables were good, and there are no adverse influences revealed.  So, what happened?

Well, it is not because the appraisal is wrong.

You see, appraisals look to the past for comparables to establish value.  The lender, on the other hand, considers what the property will be worth in a year or 2 in case they have to foreclose.

In a stable and balanced market, the lender will generally proceed based on the appraisal.  However, in an unstable market where there is a risk of property prices falling, the lender will be forced to take the appraised value as a starting point.  The lender will then apply a discount based upon what they feel the price risks might be in that market.

Essentially, the lenders are taking the appraisal as one piece of evidence in the whole picture of the property’s value.

For some lenders, this discount may be a formula and for others it may be based on a general market trend.

In an unstable market, it’s wise to prepare your borrower in advance.  They’ll need to understand that the value in the appraisal may not be the value that is determined by the lender.  Brokers should be ready to help the borrowers understand the lender’s reasoning when faced with a discounted appraised value.