A loan appraisal primer

Many of you have had to have a certified appraisal completed on a piece of property that you were either buying or refinancing. Most likely it was a requirement by the lender - among many others. Why did the lender need the appraisal report?
First, let's clear up who the appraiser works for. Even if the buyer or the person refinancing pays for the appraisal, the appraiser works for his client - which according to federal regulations is the entity who engages the appraiser and orders the appraisal. In most cases that is going to be the mortgage broker or lender. So since the appraiser is working for his client, what is it the client wants to know?
A lender wants to know the market value of the property to determine if the collateral is valuable enough to secure the loan. In short, the lender wants to know if the sales price is too high. If it's not, they also want to know what can they get for the property if the borrower walks away -which is an important consideration in this market. So the primary purpose of the appraisal is not to tell the borrower what the property is worth, although that can be a secondary use.
If you think the appraised value is too low, you can probably ask for another appraisal, but you will be out another appraisal fee. Some lenders will let you hire your own appraiser to prepare a report to challenge their appraiser's opinion of value. If you do, make sure you hire one that is very familiar with the neighborhood where the property is located. Most lenders now use Appraisal Management Companies who in turn hire appraisers based mainly on the lowest bid. I have heard that here in Birmingham appraisers from Tuscaloosa (approximately 50 miles away) have come here to do appraisals just because these AMCs could get them cheaply. They don't know anything about our neighborhoods and their value is usually a low ball opinion of value. Needless to say - that kills the deal.
So don't despair if you've paid an appraisal fee and the value comes in too low. There are ways to challenge the appraier's opinion of value and if you did your due diligence, then you know what the values are in the neighborhood before you even start. Of course it wouldn't hurt to consult an appraiser before you get started. You may be able to negotiate a lower fee for a briefer report than what lenders require.
More to come! So keep watching this space!!!