An appraiser has a far different role than the inspector that goes through a home on the market and writes up a report on its condition. Real Estate Appraisers operate under certification by one of two trade organizations: The Appraisal Institute and the National Society of Real Estate Appraisers. Both organizations maintain rigorous professional standards and have mandatory ongoing education programs.
Appraisers not only inspect the property but evaluate its value within the context of its location. An appraisal report will discuss interior work and finish, improvements, site, neighborhood, and a valuation section that addresses the value of similar homes in the neighborhood based on recent sales.
The “fair market value” of the property can be based on the cost of replacement; the “comps” – that is, recent sales of similar properties – and in some cases, the potential income of the property. Some evaluations combine a little of each.
Prior to a home purchase, the lender will have a home appraised after an offer has been made. The appraiser has knowledge of the offer and often returns with a valuation that closely matches the offer. Sometimes that is due to a reasonable offer guided by a seasoned real estate agent; in the past, sometimes the appraiser was perhaps more interested in continuing his business relationship with the bank.
A study of 300 foreclosed homes done in 1985 by the Mortgage Guarantee Insurance Association showed an average variation of appraisals done during the sale and appraisals for a foreclosure to be 20%. Some of these cases may well have been on properties that had not been kept up, in neighborhoods that were deteriorating, or during a housing downturn. Nonetheless, it led to considerable tightening of the professional standards for appraisers.
If you are considering buying a foreclosed property it may be worth your while to hire your own appraiser in order to evaluate the risks involved in the purchase. It is important to have some history on the neighborhood. You may find an extended period of homes losing value, based on sales prices over the last few years. You may find repair issues that the appraiser for the FHA or HUD missed. You should be able to make a knowledgeable purchase based on your interest and not the sellers.