The appraised value is the value of a property in the expert opinion of a qualified appraiser or valuer.
Factors that play a part in valuation include:
- Type of property
- Age of property
- Size of property
- Number of rooms
- Proximity to amenities
- Recent transaction prices of comparable listings
An appraisal is most often conducted in the stage of a real estate transaction process where the lender needs to obtain a professional opinion of the real value of the property in question so that they do not underwrite a mortgage above the appraised value.
It would serve a critical role in determining the maximum approved loan amount after factoring in the loan to value.
A loan exceeding the appraised value of a house will be ridiculous and instantly put the lender under a lot of risks.
The importance of an ethical appraiser is essential as a rogue appraiser can easily pay a significant part in mortgage fraud.
For example, if a home is purchased at a legitimate market value of $100,000, a borrower might only be able to obtain $80,000 loan at 80% LTV. However, if a dishonest appraiser gives the property an appraised value of $125,000, at 80% LTV the borrower would be able to obtain $100,000 loan. The borrower can then use the $100,000 to fully pay for the house with 100% financing.
For this reason, appraisal companies are often appointed by the banks themselves. This is why lenders have enormous influence over appraisers, which can be unhealthy in an open economy.
The fees for their services however, are borne by the borrowers.