Home Buyer on the Prospect of

The Appraisal:

To determine the value of a property prior to purchase or refinancing, an appraisal will be required. An appraisal report is a written description and estimate of the value of the property. This report is necessary to ensure that a lender does not lend more on a property than its value. The lender or broker will hire an independent appraiser who does the following:

1)      Inspects the exterior and sometimes the interior of the subject property.

2)      Compares the property to nearby comparable properties that have sold recently.

3)      Estimates its value based on the sale prices of those comparable properties.

4)      Submits a standardized appraisal report to the lender.

Receiving a Copy:
You are entitled to receive a copy of the appraisal report if you paid for it and if you request a copy in writing. Many lenders and brokers notify borrowers that they are entitled to a copy. Some lenders routinely provide a copy of the appraisal to the applicant when the report becomes available. If you want a copy of the appraisal, be sure to inform the lender at the time of application.

By law the appraiser is not allowed to provide a copy of the appraisal to the borrower, unless they are the client (ordered the appraisal AND the report does not have the name of a lender on the report).

Standards:

National standards dictate the content, format and methodology of residential appraisals and most lenders follow these requirements. Whether you are applying for a government-insured loan or a conventional loan, your appraisal format will be based on standards developed jointly by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Association (FHLMC). The FHA and VA also require that certain additional information be included for their appraisals.

Credentials:
The national standards govern not only the format for the appraisals; they also specify the appraiser's qualifications and credentials. In addition, most states now have licensing requirements for appraisers evaluating properties located within their states. Most lenders deal only with appraisers whose work they know and trust. Appraisers are required to have a certain amount of training and experience before their valuations are acceptable to mortgage brokers, lenders and investors

Valuation Methods:

There are three different methods that an appraiser may use to value residential properties: 

1)      Market value approach

2)      Replacement cost approach

3)      Income approach

Using these three different methods, an appraiser will frequently come up with slightly different values for the property. The appraiser uses judgement and experience to reconcile these differences and then assigns a final appraised value.

The market value approach is the most important valuation method in appraisal because a property is worth only what a buyer is willing to pay and a seller is willing to accept. The market value is based on the actual sales prices of nearby similar homes that sold recently. These are known as comparable sales.

Reports:

Appraisal reports typically include the following: 

1)      General information: Legal description, title restrictions, property taxes and zoning information.

2)      Home description: Square footage, design, detached structures, number and type of rooms, appliances, adequacy of heating/ventilation/air conditioning, plumbing/electrical and overall construction quality.

3)      Site description: Shape of lot, acreage, availability of public utilities, and improvements such as sidewalks and streetlights.

4)      Neighborhood analysis: Includes population density, price stability, availability of public amenities and nearby land use.

5)      Other Improvements: Garage or carport, swimming pool and permanent structures.

Inspection:

The appraiser must also make note of obvious construction problems such as termite damage, dry rot or leaking roofs. Other interior or exterior damage that may affect the salability of the property must also be reported. If construction problems do exist, most lenders require that they be repaired prior to the sale or before the entire loan amount is fully disbursed. This is intended to protect the lender, but it also protects the buyer from problems that might not otherwise be recognized.

Valuation: 

To estimate the value of the subject property, the appraiser reviews the details of recent comparable home sales in the same geographic area. Those properties most similar to the subject property are used for comparison. Similar details should include: Square footage, age of home, date of sale, location, site, design, construction quality, condition and relevant improvements.

The appraiser adjusts the price of each comparable sale (up or down) depending how it compares (better or worse) with the subject property. He or she then reconciles the different prices to determine the market value of the property.

Verification: 

As an additional check on the value of the property, the appraiser also estimates the replacement cost for the property. Replacement cost is determined by valuing an empty lot and estimating the cost to build a house of similar size and construction. Finally, the appraiser reduces this cost by an age factor to compensate for depreciation and deterioration.

It is not uncommon for the appraised value on a property to be exactly the same as the amount stated on your sales contract. This is not a coincidence, nor does it question the competence of the appraiser. Your purchase contract is the most valid sales transaction there is. It represents what a buyer is willing to offer for the property and what the seller is willing to accept. Only when the comparable sales differ greatly from your sales contract will the appraised value be very different.

Problems Inherent In the Appraisal Process: 

Appraisals can cause problems for borrowers in three ways: 

1)      When interest rates remain extremely low, many appraisers are unable to keep up with the large demand. Some can get booked for eight to twelve weeks in advance, seriously delaying loan approvals.

2)      In some parts of the country when home prices are rising very rapidly, appraised values can actually be lower than asking prices. If you are purchasing a home and the appraised value comes in lower than the purchase price, you may have to increase your down payment to qualify for the mortgage.

3)      Low appraisal values can often cause problems for homeowners who want to refinance. This can occur when the homeowner has already used maximum financing (greater than 95 percent LTV) to acquire the property and the value of the property has not appreciated enough to refinance. This can also be a problem when the value of the property has declined since the time the property was acquired or refinanced. Ask your real estate agent for advice on local conditions.