Prior to the financial meltdown and great recession of 2008, banks that were underwriting the loan got to select the appraiser to evaluate the value of the property as collateral for the home loan. In some ways, this makes sense. Banks are a part of a local ecosystem, and local appraisers with a long amount of experience in one area are often the best appraisers for an area, even if they aren’t the cheapest. The downside to this, as we discovered, is that banks can also choose corrupt appraisers that will agree with the valuation needed for the loan regardless of the actual value of the property.
As a result of changes to the law to prevent this abuse, banks are no longer able to directly pick the appraiser that will evaluate the property. This obviously does a great job of eliminating fraud created by an unethical lender and appraiser working together. It also creates a new problem, which is appraisal quality.
Banks now contact Appraisal Management Companies that have a set of appraisers on their roster. The management company receives the request and randomly assigns it to an appraiser on their team. While the bank can select the appraisal management company, they can no longer directly select the appraiser. However, if the appraisal management company is unscrupulous, they may assign the property to a cheap, under-qualified, and out of area appraiser resulting in a poor appraisal that may not reflect the actual value.
What’s a home buyer to do? My first recommendation is to always work with a local lender in your market. For San Francisco real estate I highly recommend Tracy Andreini and her team at Opes Advisors/Flagstar Bank. In addition to being a phenomenal lender, her bank works with a local San Francisco appraisal management company that has some of the best and most experienced appraisers in San Francisco on their roster.
My second and third recommendations? Work with a local lender, work with a local lender!
And remember, regardless of who orders and conducts the appraisal, one thing hasn’t changed: it will be your responsibility as a borrower to pay for it in full.