If you seek to borrow money from an institutional lender such as a bank to purchase your new home, you can be sure of at least two things: mounds of completed paperwork and a visit by an appraiser to your intended property.
It is the appraiser’s job to determine whether the apartment or single-family house provides enough collateral to back up the loan in the event of default. As we all know, when the value declines below the value of the loan, the homeowner is said to be underwater, owing more than the property is worth.
That’s not a happy situation either for the lender or the owner.
Appraisers note many aspects of the property — condition, square footage, number of baths and so on. They also analyze comparative sales nearby, preferably in the same building in the case of a co-op or condo.
Essentially, brokers engage in the same process, albeit in far less methodical way. But the similarity almost always ends there.
The key distinction between all but the most enterprising appraisers and real estate brokers is how much they know about the market. For the most part, appraisers rely on historical data, gleaning from records of closed transactions what comparable properties are worth. Or were worth — what buyers paid for them.
In other words, appraisers depend on history, though the best ones will make an effort to learn recent sold prices that are not yet on the record.
Good brokers, on the other hand, rely on their knowledge of the current market to gauge the value of the property in question. They gossip with each other, visit open houses, consider what is selling and what is languishing, assessing why one property might be worth more than another that, on the surface, appears nearly identical.
After all, pricing is the single most important feature of a successful sale, and it’s a broker’s responsibility to get it right.
When an apartment or house goes to contract, the listing broker provides its appraiser with the price and may supplement that information with a collection of comparable sales. (That’s why the appraised value so often just happens to be exactly the sale price.)
You can count on brokers being sure that the price represents the market value at a moment in time, while appraisers often need to be convinced of a number that may merely appear to be too high.
Of course, a price may be distorted. That situation can arise for a number of reasons such as the desperation of a buyer to acquire the place next door, live in the same building as a relative or be on the verge of homelessness because of pressure to move as the result of divorce, relocation or the sale of his or her current residence.
I’m biased, I know, but an honest broker’s take on the market always will be more persuasive to me than an appraiser’s. It is not that I don’t respect many of those I meet: It is that they have one function and we have another.
Brokers must be on top of the market, while most appraisers can know only where the market has been.
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022