STEP 31 – TO SELLING YOUR HOME – WHAT IS AN APPRAISAL?

You may be wondering “What is an appraisal anyway and when does it occur?”

If you are, you aren’t alone. We get asked this question all the time after we’ve made an offer on a house, had the inspection done and made it through attorney review. The rest of the process including the appraisal, underwriting and title are a bit fuzzy to most people. In addition, you might be wondering:

These are all great questions! For answers see below for a great article from the National Association of Realtors®.

So what do you do if you’re the buyer paying $400,000 for a home, but the appraisal only comes in at $350,000? Uh oh. We’ve got a problem. See below for another article on what your options are in that situation.

But what happens if you’re the buyer paying $400,000 for a home and the appraisal value comes in right at the purchase amount price? Is this a good or bad thing? PANIC (just kidding). This is definitely a good thing as it means the bank will give you a loan for the full amount of the purchase price.

As the buyer, all in all it’s best when the purchase price comes in at or close to the purchase price.

Questions? Contact us at andi@andidyer(dot)com or 360-734-6479.

This content is not the product of the National Association of REALTORS®, and may not reflect NAR’s viewpoint or position on these topics and NAR does not verify the accuracy of the content.

BY  SARAH SIDDONS

A home appraisal will determine if the asking price is lower or higher than the actual value of the property.

You’ve found your dream home. The asking price is $300,000 — an amount you’ve already been pre-approved for by your bank. But is the home really worth that amount? That’s the question at the heart of the home appraisal. The worth, or value of the property, will determine how much a lender is willing to give you to buy that particular piece of real estate.

This all-important step in getting the financing you need is the home appraisal — an oftentimes-confusing part of the mortgage process in which both buyer and seller must depend on the expert opinion of a stranger. A real estate appraisal is simply that — the expert opinion of a certified, state-licensed professional who determines the value of a piece of property. If your $300,000 dream home is really worth only $200,000, then the home is overpriced.

A home appraisal also protects the bank from getting stuck with property that’s worth less than they’ve invested. And it protects you from paying too much for a house simply because it was love at first sight. The home appraisal is a no-nonsense factor in a decision that is often emotional for the buyer.

A home appraisal is not the same thing as an inspection. If you’re buying a home, you’ll want to hire an experienced home inspector to point out any potential problems that could turn into costly nightmares in the future. Property appraisers will likely make note of any obvious issues, but they won’t test your heat and air, check the chimney or determine if your plumbing is up to code. That’s the job of the inspector.

In this article, we’ll take a look at the methods appraisers use to value property and find out what’s included in the appraisal report. We’ll debunk some common myths — for example, will dirty dishes in the sink affect your home appraisal? What about a wet basement? We’ll find out where the appraiser gets the information that determines the value of the property. And, if you get a low appraisal, what happens next?

The appraiser looks at the asking and purchase price of other comparable properties when making an appraisal.

When you apply for a mortgage, your lender typically requires the property to be appraised by one of their approved appraisers. This practice helps create more consistent appraisals and gives you assurance that the appraiser is properly licensed and certified. Even though the home appraisal is the lender’s requirement, it’s the borrower’s responsibility. You usually pay for it as part of the mortgage costs at the time of closing. The cost is typically around $300 but can be more depending on the price of the property.

There are two primary appraisal methods for residential property. In the  sales comparison approach,  the appraiser compares the property with three or four similar homes that have sold in the area, often called  comparables , or  comps .  The analysis considers specific components, such as lot size, square footage of finished and unfinished space, style and age of house, as well as other features such as garages and fireplaces.

The  cost approach  is used more for new property and is based on reproduction costs. The appraiser estimates the cost to replace the structure on the property if it were destroyed. The appraiser then looks at land value and depreciation to determine the property’s worth.

The appraiser gathers information for the appraisal report from a number of sources, but the process often begins with a physical inspection of the property inside and out. Additionally, the appraiser may look at county courthouse records and recent reports from the local real estate multiple listing service.

The appraisal report generally includes:

A common misunderstanding is that the appraisal amount is only for the house itself. In fact, the figure appraises the total value of the home and any other permanent structures, along with the land that the house is built on. This appraisal figure also determines the loan amount you can get to buy the property.

Now you learn that your dream home is valued at $249,000 — a full $51,000 lower than the asking price! Your lender won’t loan more than the appraisal. So what do you do? On the next page we’ll explore how both buyers and sellers can recover from a low appraisal.

WHAT DO THE APPRAISERS REALLY LOOK AT?

A common myth about the home appraisal is that curb appeal and general tidiness of the home will help bring a higher appraisal amount. While overall maintenance of the home and surrounding property is certainly a factor, details such as dirty dishes in the sink or a lawn that needs to be mowed do not affect the appraisal.

An appraisal of $249,000? The home seller learns that his $300,000 asking price is much higher than the actual property value. If you are the buyer, this figure means that the amount you can finance on the property is much lower than you expected. An appraisal value that is considerably lower than what you have offered should be a red light — a warning that you may be paying too much for the property. So is the deal over? Is it time to panic and throw in the towel? Can anything be done?

First, take a look at what may have caused the low appraisal. It might be due to factors that the homeowner could correct, such as repairs or maintenance. If that’s the case, the appraiser may be willing to take a second look and adjust the appraisal accordingly.

You always have the option to order a second appraisal. This may be a good idea if the first appraiser is inexperienced or unfamiliar with the area where the property is located. However, be sure to use an appraiser from a list recognized by the lending institution. It’s possible that a second appraisal will uncover mistakes the first appraiser made. If you believe that an appraisal is simply not an accurate representation of the property’s value, and the appraiser is not willing to listen to your concerns, you can go to your state’s licensing agency for appraisers and file a complaint.

From the lender’s standpoint, however, the mortgage transaction is at a standstill until something else happens. Perhaps the seller will lower the asking price or carry a second mortgage to make up the difference. Or, as the homebuyer, you may be willing to increase your cash down payment. It’s possible that both buyer and seller can negotiate compromises that will satisfy the lender.

If, however, negotiations fall through and the appraisal is still too far below what the bank is willing to finance, then there’s no choice but to cancel the transaction. You probably signed a purchasing contract stating your offer for the property, but it likely contains a loan contingency. This is a statement that allows you to cancel the contract and receive any deposit you paid the seller if you can’t qualify to buy the property at the agreed terms.

A home appraisal is more than just another cost added to the buyer’s bottom line. It’s a protection for everyone involved in the home-buying process. It will help you make a more informed decision about purchasing a home.

Questions? Contact us at andi@andidyer(dot)com or 360-734-6479.

This content is not the product of the National Association of REALTORS®, and may not reflect NAR’s viewpoint or position on these topics and NAR does not verify the accuracy of the content.

STEP 31 – TO SELLING YOUR HOME – WHAT IS AN APPRAISAL?

Andi Dyer Real Estate