If you’ve ever been involved in buying or selling real estate, you know that an appraisal is often needed to determine the property’s fair market value. But just because you have an appraisal in hand doesn’t automatically mean you can trust the valuation that’s been given. 

As any experienced real estate agent will tell you, appraisals aren’t always accurate or reliable. That’s why the appraisal review process is so important.

An appraisal review takes a close look at the appraisal itself to see if it was done properly and makes sense. The review verifies whether the appraiser used solid methodology and came up with a reasonable value estimate. It also gives stakeholders a chance to challenge the appraisal if they have legitimate concerns about the valuation.

I want to walk you through the appraisal review process so you understand how it works. This is crucial knowledge for anyone involved in a real estate deal that requires an appraisal. 

An effective review is the best way to ensure buyers and sellers receive fair market valuations they can count on.

In this article, we’ll cover:

• When appraisals are needed in real estate transactions
• What an appraisal review involves
• Validating a sound appraisal report
• Challenging an appraisal with questionable conclusions
• Working with appraisers to resolve differences
• Options if you can’t come to an agreement
• Why proper appraisal reviews matter for real estate

Let’s start by talking about some common situations where you’ll need to get an appraisal in the first place.

When Appraisals Are Required

Lenders frequently require appraisals when financing real estate purchases. The appraisal provides an independent, professional opinion of the property’s market value. This helps protect the lender by ensuring the property is adequate collateral for the loan. 

Appraisals may also be needed in other situations, such as:

– Estate planning and estate resolutions

– Insurance coverage

– Eminent domain and condemnation cases

– Property tax assessments

– Divorce settlements

– Business valuations

– Financial reporting

Any time an objective, supportable estimate of value is needed for real estate, an appraisal performed by a qualified professional appraiser is useful.

Understanding the Appraisal Review Process

The appraisal review process analyzes the quality and credibility of the appraisal report. Appraisal reviews are typically performed by a different appraiser than the one who completed the original appraisal. 

The reviewer appraises the appraisal itself, not the property. The reviewer does not perform their own separate valuation.

Appraisal reviews evaluate multiple factors about the original report:

– Completeness – Does the report contain all required components, descriptions, analysis, and disclosures?

– Methodology – Were appropriate appraisal methods and techniques used? Were they applied correctly?

– Supporting data – Does data for comparable sales and other inputs appear legitimate? Does the analysis seem reasonable given the data?

– Appraiser objectivity – Does the report appear biased in any way? Are valuations supported by evidence rather than influenced by other motivations?

– Report quality – Is the report logical, coherent, and understandable? Does it comply with appraisal standards?

– Value conclusions – Most importantly, does the estimated value seem reasonable and consistent with market evidence?

Appraisal reviews aim to validate sound valuations and identify flaws in defective or careless appraisals. Even if the final value conclusion seems reasonable, major errors elsewhere in the report may invalidate the credibility of the entire appraisal.

Validating the Appraisal Report

The first goal of an appraisal review is to validate whether the appraisal was conducted appropriately and makes sense. The reviewer analyzes factors like:

– Site inspection – Did the appraiser personally visit the property? Did they take quality photographs? Did they note any obvious issues?

– Data sources – Does the report cite legitimate sources for sales history, tax records, multiple listing services, and other data points?

– Comparable sales – Were recent sales of similar properties appropriately identified as comparable sales? Did the appraiser make apt adjustments for differences such as location, size, condition, amenities, etc.?

– Valuation methods – Were proper appraisal techniques used? For example, the cost approach, direct sales comparison approach, and income capitalization approach? Were they properly applied?

– Appraisal logic – Do the descriptions, analysis, adjustments, and conclusions throughout the report make sense given the available market evidence?

– Report formatting – Does the report follow professional appraisal standards and convey information clearly?

– Appraiser qualifications – Does the report show the appraiser has the appropriate education, expertise, experience, and local market knowledge to perform the appraisal competently?

If the appraisal report seems reasonable, logical, thorough, and compliant with standards, the valuation can typically be validated. Minor issues may be present in even good appraisals, but major flaws call the entire report into question.

Challenging the Appraisal Valuation 

While appraisal reviews endeavor to validate sound valuations, it is also important to challenge reports that appear defective or unfounded. Some common reasons to challenge an appraisal include:

– Inappropriate comparable sales – The comparable sales don’t seem sufficiently similar and/or recent sales of more comparable properties were overlooked or omitted.

– Faulty adjustments – The logic or calculations behind adjustments to the comparable sales are flawed.

– Limited data sources – The appraiser failed to utilize available relevant data that may contradict their conclusions.

– Unjustified assumptions – Key statements regarding property condition, features, market conditions, or other issues are not properly substantiated. 

– Math errors – Calculation errors are present, affecting adjustments and final value determinations. 

– Biased conclusions – The report seems slanted to achieve pre-determined results rather than letting the objective data guide valuations.

– Non-compliance issues – The report fails to comply with appraisal standards and lacks information that may influence values.

– Value conclusions – Most importantly, the final value conclusions don’t appear justified when compared with actual data on recent sales of similar properties.

For an appraisal review to dispute valuations and other conclusions effectively, solid evidence must demonstrate there are legitimate problems with the appraisal. Unsupported criticisms carry less weight. Reviewers build the strongest case by citing data sources, comparable sales, industry standards, and examples from the report itself to illustrate flaws.

Working with Appraisers to Reconcile Differences

Good appraisers want to perform competent work that withstands scrutiny. If an appraisal review uncovers material issues, the reviewer should contact the original appraiser to discuss concerns directly. Many differences can be resolved this way.

The appraiser may point out information the reviewer overlooked or clarify their methodologies, allowing the reviewer to gain comfort with the report. Occasionally, the appraiser may realize they made mistakes and pursue revisions or further research to correct the report. Open communication between professionals is an effective way to achieve accurate, well-supported valuations.

If significant disputes remain after discussing concerns with the appraiser, a second appraisal may be commissioned from a new appraiser. The original appraiser may also formally rebut criticisms to the client. Further due diligence and candid debates regarding the available data can facilitate equitable solutions.

Alternatives if Differences Cannot be Reconciled   

In some instances, an original appraiser may refuse to admit errors or differences of opinion may remain even after extensive research and analysis from all parties. At this point, alternatives to consider include:

– Appraisal desk review – Have a licensed appraiser who specializes in appraisal desk reviews analyze the reports to determine which one complies with standards and appears best supported.

– Independent appraisal – Commission a new appraisal from a neutral third party with no connection to the original appraisal or review.

– Appraisal arbitration – Hire an experienced appraiser arbitrator to review the appraisals and any additional relevant data to issue a binding value conclusion. 

– Legal action – As a last resort, legal action may be pursued if the appraisal report is deficient enough to warrant it or if negligence or fraud are suspected.

With cooperation and diligence, most appraisal disputes can be resolved to the satisfaction of all parties. But bringing in outside experts for further review provides options when differences remain unreconciled.

Conclusion

Appraisal reviews play a critical role in real estate valuation, ensuring appraisals deliver credible opinions of property value. When valuations impact major financial transactions, trusted solutions that all parties can confidently accept are essential.

A thorough, impartial appraisal review analyzes the original appraiser’s work, validating sound valuations or challenging unsound conclusions with solid supporting evidence. Open communication between the reviewer and appraiser can reconcile many differences. But additional reviews, arbitration, or legal action may become necessary if concerns remain unresolved.

By understanding best practices for the appraisal review process, stakeholders can work together to produce fair valuations backed by accurate data and analysis. Reliable appraisals and appraisal reviews help create a more efficient real estate marketplace for all.