Exploring the Role of Real Estate Appraisers in Chicago

Welcome to the world of real estate appraisers in Chicago, where the true purpose of their work may surprise you. With over 150 million dollars worth of property sold and more than 300 successful transactions in 2022 alone, I'm here to shed light on how appraisers make money. The appraisal industry is often misunderstood and confusing, but it is crucial to understand its dynamics, as it significantly impacts real estate transactions. Approximately 90% of home buyers and sellers lack a clear understanding of the incentive structure and the influence appraisers wield. So, let's dive into the world of real estate appraisers and unravel the truth.

First, let's define the role of an appraiser. An appraiser is typically hired by a third party to determine the value of your home. They employ various methods, including comparable data and comparative market analysis, to arrive at an accurate valuation. While we won't delve into the specific methodologies today, it's important to know the different approaches used by appraisers. These include the comparison approach, where the value of your property is determined based on recent sales of similar properties in the neighborhood. Another method is the cost approach, which estimates the value of your property based on the cost of constructing a similar property. Lastly, the income approach is used for rental or commercial properties, valuing them based on their income-generating potential.

Now, let's address the burning question: how do appraisers make money? Undoubtedly, money plays a pivotal role in influencing the outcome. In a residential real estate transaction, where a buyer is purchasing a property like 123 Main Street, the common belief is that the appraiser represents the buyer's interests. However, this assumption is false. In reality, the appraiser works on behalf of the bank and serves the bank's interests in the property. The appraiser does not work for you, the home buyer; they work for the bank (or mortgage lender), plain and simple.

Let's illustrate this with an example. Imagine you want to purchase 123 Main Street, listed at a million dollars. Since you don't have the full amount, you seek a loan from a lender like Scotty at Cross Country Mortgage. You plan to put down 20%, which amounts to $200,000, and need an $800,000 loan. Scotty informs you that they need an appraiser to assess the property's value to ensure the bank's security in case you default on payments. Here's the crucial part: you, as the buyer, will be paying for the appraiser's services. The appraiser will charge around $595 or $600 in Illinois to come out and inform the bank that the property is worth the million dollars you intend to pay. The bank seeks this assurance to have recourse if they need to foreclose and sell the property to recoup their loan amount, potentially earning even more.

Understanding who pays the appraiser and whom they represent is vital because appraisers aren't primarily concerned about you as the buyer or seller. The bank wants to lend as much money as possible since they profit from the interest charged on loans. Consequently, appraisers are inherently motivated to make the numbers work in favor of the purchase price. If an appraiser consistently returns valuations lower than the purchase price, they may jeopardize their working relationship with the bank, as it restricts the bank's lending capacity and profitability.

To put this into perspective, in my experience with 300 transactions in 2022, only five appraisals came back below the purchase price. This means that in 295 cases, the appraisal aligned with or exceeded the purchase price. This situation may seem absurd, but it underscores the reality of the appraiser's role. As a home buyer, this knowledge is crucial because an appraisal is a safeguard for the bank, not a definitive indicator of your property's value. Even as a seller, obtaining an appraisal doesn't hold much significance since your property's true worth is determined by the offers you receive on the market.

I hope this blog sheds light on the intricacies of appraisals, the role of appraisers, and the incentive structures that drive their work. If you have any further questions, please comment below, and don't forget to like and subscribe. We regularly release informative videos, and I, Ben Lalez, a Chicago real estate expert, am here to address your queries. Feel free to pick up the phone and give us a call.