Appraisals can’t be influenced by owners

Question: In your previous column on establishing the current market value of property inherited from an estate, you said, “It’s important to get an appraisal at the time they inherit the property, and since appraisers have some leeway in how they value a property, they should let the appraiser know that they would like to see a ‘maximum’ market value to set their cost basis as high as possible.”

When we appraisers complete appraisal assignments, we sign a report that includes this certification: “My compensation for completing this assignment is not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal.”

If our report is formally investigated by the state or federal authorities, and it is found that we violated this provision, then we can have sanctions placed against us, which can include losing our license as an appraiser.

Certified Appraiser (name withheld by request)

Answer: You are correct, and thanks for pointing that out.

First, a little background: Appraisers have a professional obligation to determine the “fair market value” of a home.

Of course, rarely do they have an identical home that has recently sold nearby that they can use as a “comp” (comparable home sale) for purposes of calculating a home’s value. So appraisers have to make adjustments to the sale price of similar homes in the neighborhood that have recently sold to account for differences such as square footage, style of home, overall condition, amenities such as a view.

This is where it gets subjective, because the adjustments that the appraiser makes to the sold price of the comps is what determines that estimated market value of the home being appraised.

In the past, appraisers were sometimes pressured by mortgage companies, banks and real estate agents to be very generous in making the adjustments to the comps in order to increase the value of the home being appraised to the highest value possible.

This resulted in mortgage lenders sometimes loaning more money on a home than it was truly worth, and this was part of the cause of the “mortgage meltdown” of 2007-08.

As a result of the mortgage industry collapse, appraisal rules were strictly tightened in 2009 and mortgage companies were no longer allowed to put an estimated value on the form when they ordered an appraisal.

Before that, it was common practice for mortgage companies to tell the appraiser what they thought a home was worth before the appraisal report was completed.

In some cases that was done to influence the appraiser’s market value of the home, but in most cases it was merely intended to determine if the home’s value was in the ballpark needed for a loan.

Regardless of the reason, it is now strictly illegal for lenders to indicate any kind of estimated value when ordering an appraisal.

As a mortgage company owner, I am well aware of the rules related to appraisals ordered for a mortgage loan, but frankly, I was not aware that the 2009 restrictions also apply to appraisals ordered by private parties.

Therefore, I want to correct my previous column and say you may not tell the appraiser what you think the home is worth when you order an appraisal on a property you have recently inherited. You must use a licensed appraiser to establish your cost basis in the property because a “Broker Price Opinion” from a real estate agent is not acceptable for IRS tax purposes.

You will just have to wait and see what the appraiser comes up with as the fair market value because you are not allowed to give him or her a hint ahead of time.

Steve Tytler is a licensed real estate broker and owner of Best Mortgage. You can email him at features@heraldnet.com.

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