Comp Check: The Code Red of Real Estate Appraisal

How can laws be enacted to govern a practice that both does and doesn’t exist? Comp checks exist; anyone in the real estate appraisal business can tell you that. And yet comp checks do not exist because in the strictest sense, they’re not legal. How did this unusual gray area creep into the real estate appraisal business? What’s being done about it? And what exactly is a comp check anyway? Read on …

Someone purchasing a house will typically go to some sort of lender. In order to structure the proper loan for the potential home buyer, the lender needs to know the correct value of the property. The lender contacts the real estate appraiser and orders an appraisal, and structures the loan around the property’s value. So far, so good.

But sometimes the lender can only structure a loan if the property’s value falls within a certain range, say $400,000 to $500,000. Some of these lenders will contact an appraiser and ask for a “comp check.” To do a comp check, the appraiser logs into a real estate database and checks the sale prices of similar homes in the area of the property in question. The appraiser then contacts the lender and informs them of the price range. If the price range is not what the lender was looking for, the lender won’t bother with the expense of having the actual appraisal done.

As if that area were not gray enough, the appraiser who does the comp check doesn’t get compensated for it. So why in the world would an appraiser do a comp check in the first place? Generally, there’s an unspoken understanding that if the appraiser does the comp checks, the lender will send the bulk of their actual appraisal orders to that appraiser. Gray areas indeed.

Recent laws and updated codes of conduct have been enacted to eliminate the practice of comp checks-though not directly because, remember, they don’t exist. We’ll address those new laws in a future blog. But the takeaway is that if you’re going to have an appraisal done, do some research to make sure you’re dealing with an honest, experienced, ethical real estate appraiser. Something like a comp check won’t affect you directly, but it’s nothing you want anything to do with.

By: Present Value

Tags: comp checks, home appraisal, house appraisal, house values, purchase home, refinance loan
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