One of the many steps involved in purchasing a home is to order an appraisal. Appraisals are frequently confused the comparative market analyses, but are very different in purpose and also in effect.
A comparative market analysis is ordered by a seller who needs to come up with a good asking price on a home, but isn’t nearly as detailed as an appraisal, which is ordered by or on the behalf of a lender. Lenders use appraisals to determine whether to give you a home loan on a particular property.
When you buy a home, you do so using the money the bank lends you—but you secure that loan to the home. The home is the collateral, and if something goes wrong and the bank has to foreclose on you, it’s the home they seize and resell to pay back the loan. An appraisal helps them determine whether the property has adequate resale value to justify lending you the money.
Appraisers may be members of the lender’s staff, or they may be independently contracted. Sometimes the bank chooses the appraiser, but sometimes they leave the decision up to you. It’s usually best to use someone the bank is familiar with; otherwise they may not trust the appraiser you select and subject the appraisal results to additional reviews and delays.
It’s important not to select an appraiser who has any financial or personal connection to you and who can be considered an objective observer. You’ll need to be prepared to pay the cost of the appraisal when you apply for your mortgage.
The house which you want to have appraised will be referred to as the “subject property” on the appraisal report. An appraisal report is very detailed and will include not only an overview of the property itself but also comparisons with similar properties in the area (called “comparables”) and a sketch of the overall state of the local housing market. This provides a context for the appraisal report.
If there are any flaws to the design of the house or any safety related problems, the report will contain notes about those problems. For example, a damaged roof, a poorly designed driveway, or a weak foundation would all make it into an appraisal report on a subject property. The report will also contain the appraiser’s estimate of what the average sale time on the property is based on historical fact and future prediction. The comparative analysis with the other properties can help establish this estimate as well.
Even though the appraiser is looking for potential safety issues with the house, you must not confuse the appraisal with an actual safety inspection. There are a lot of issues which appraisers do not check for at all; you need to hire a professional safety inspector to check those things out for you.
Ultimately the goal of the appraisal is to arrive at an estimate for the actual market value of the subject property. This can be done in a couple of ways. The most common approach for older properties is the comparative one.
Since there are of course differences in comparable properties, these differences have to be compensated for in the appraiser’s calculation of the value of the subject property. The result is an imperfect estimate, but usually one which is good enough for the lender’s purposes. If the property was recently constructed, then the costs which went into its construction may be known. If they are, then the total cost of the property is also known. If market conditions have changed greatly, the appraiser may need to make adjustments for that as well.
When the lender looks at the appraisal, they will want to see an average or shorter than average estimate for the time to sell the property. If they see a long duration listed they will be concerned that they may lose money if they cannot sell the house quickly should you default. They will want to see that the house is in good condition, is safe, and has no major detractors which would slow a potential sale of the property.
Even if the lender rejects the appraisal, you can try to get some of the problems with the house fixed and then try again, or even order a second opinion from another appraiser. Whatever you do, don’t give up right away if your loan gets rejected—with some fixes or with a second opinion you may be able to get the lender to change their mind.