Wednesday May 17, 2017

How Home Appraisals Work

One of the first steps in purchasing a home is to get an appraisal on the home.  The appraisal will attempt to determine the real value of the home—not its asking price, but how much it would likely actually sell for in an open market.

The appraisal is required by your lender because the lender wants to be sure that they won’t be lending you more money than the home is actually worth.  That way they are less likely to find themselves in a losing investment.

Home appraisals are regularly confused with comparative marketing analyses (CMAs).  CMAs are commissioned by people who are selling their homes in order to help them establish an asking price.  CMAs are not as detailed as appraisals.

Don’t mess up and order the wrong type of report, because no lender is going to accept a CMA in place of an appraisal.

Who are home appraisers?

Usually these are either contracted agents licensed according to state regulations or members of the lender’s staff who are likewise licensed.

Sometimes you are allowed to choose an appraiser on your own, in which case the lender will review the results before accepting them.  You are responsible for the appraisal costs, and usually will pay for them at the time you apply.

What are some of the details which are included in home appraisals?  Part of the appraisal will take the form of a comparison with several similar properties.  In the analysis, the property you’re considering purchasing will be called the “subject property.”

The state of the real estate market and also the physical environment in the area will be taken into account, and if there is anything about the subject property which could make it difficult to sell at any future point, those issues will all be noted down.

If there are any construction flaws, they will go in the report, and the history of the subject property will also be recorded along with an estimated average sale time. 

A couple of different approaches can be taken to analyzing an appraisal and coming up with an estimate.  The first type is known as a sales comparison approach.

This is a method based upon comparing the subject property to other similar properties nearby.  During this process, the houses which are being used for the comparison are called “comparables.”

These comparables are used to hypothesize the price that the subject property would sell at, taking into account the differences between the subject property and the comparables.

The other approach in an appraisal is called the cost approach.  This involves simply adding up the building costs of a recently erected home, and then estimating what it would cost in current prices to rebuild the property with all the same features.

As a home buyer, you should note that an appraisal is not the same thing as a home inspection.  It may give you some indication the home is in fairly good shape, but specific appliances aren’t going to be tested.  You may buy the home and still find things wrong with it that the appraiser didn’t find.

There are several red flags for which lenders get from appraisals.  One is if the estimated value of the home is less than its market price.  This will cause the lender to be concerned that they won’t be able to cover their investment in you.

Another is long sale times.  If the house seems to sell more slowly on average than the houses nearby, the lender will be alarmed.  Other stalling points may include features which aren’t necessarily drawbacks, for example a private shared roadway leading to the property. 

So what do you do if the appraisal does come up low?  One thing you can do if you have a lot of cash on hand is to make up the difference in value yourself.

If you do this, then the lender isn’t taking on any additional risk.  Another idea is to negotiate with the seller and see if you can get the seller to lower the price.  Oftentimes, especially in this market, this is a viable solution which works great for everyone. 

You can also attempt to revise the lender’s view on the situation by getting a second opinion in the form of another appraisal.  If you think that the first appraiser truly may have made errors, this is a good idea.

Along with getting a second opinion on the home, you can also compile a list of sales on comparable properties.  This can provide further evidence to the lender that your property’s value is indeed higher than that at which it was initially appraised.

An appraisal is a huge step forward in buying a home.  Do your best to get an appraiser you trust from the beginning, but if the estimate comes out low, don’t hesitate to look into other options to try and get the home you truly want!


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