Underwriting: Why do we appraise in-house?

underwriting appraisals

We do our underwriting in-house, and there is no charge to our borrowers for this service. Why don’t we use third party appraisers to value the collateral? In our experience, some third-party appraisers do not understand the local market as well as we do. In Baltimore, neighborhoods just a few blocks away from each other might have vastly different profiles in terms of the sales prospects of homes.

Recently, a borrower from out-of-state asked us to review a third-party appraisal he had gotten for certain properties in Baltimore. We immediately noted that the third-party appraisal contained a fatal flaw – it used comps that were located over 1.5 miles away from the subject properties. In this situation, he was basing his whole investment on this third-party appraisal.

Another flaw we tend to see in third party appraisals is that not only is the neighborhood of the “comp” totally different in terms of salability, but the comp property is not even comparable. Here are a few examples of common mistakes we see:

  • The subject property is outdated in terms of its finishing’s, whereas the comp property is fully renovated (e.g., stainless steel appliances, granite countertops, refinished floors, etc.).
  • The subject property has one configuration whereas the comp property has a different configuration. For example, the subject property might have two bedrooms and one full bathroom whereas the comp property has four bedrooms and 2 ½ bathrooms.
  • The subject property has an unfinished basement whereas the comp property has a fully finished basement.
  • The comparable sales are not at all recent and are therefore not reflective of current market pricing.
  • The comparable properties are still active listings.

The appraisal is intended to reflect the true market price of the property—what it would likely sell for if it were put on the market today. If it is inflated, it will ultimately not serve the borrower well. For example, borrowers of short-term hard money loans will seek to sell the property based on an inflated appraisal and they may lose money on the deal if it does not sell for that value. In addition, borrowers of short-term hard money loans will often seek to refinance those loans, and often do so with local banks with whom they have a preexisting relationship. Those local banks understand the real estate market and an inflated appraisal will not go unnoticed by them in the negotiations for the refi.

Another reason that we do our appraisals in-house is so that there are no surprises for the borrower. The commitment we make to a borrower on our term sheet is not subject to a last-minute adjustment that often results with other lenders because of a lower than expected appraisal. A lower than expected appraisal will result in the borrower needing more money at the last minute to bring to closing.

In conclusion, when looking to flip a property, always base your investment off a conservative number that you know you can sell the property for–anything over that price will be a bonus.