If you are purchasing real estate (or have in the past) you have heard the word “appraisal.” Whether you are on buying or selling end, the appraisal will have an impact. I have found there’s a lot of confusion about what an appraisal is, how it effects a transaction and what kind of control there is over the appraisal.
Appraisal (as defined by the NMA –National Mortgage Alliance): An appraisal is a written estimate of a property’s market value completed by an appraiser, a professional objective third party. The value is based upon a market analysis of recent sales for similar properties in the area and the property’s physical condition.
Why are appraisals conducted? The main objective for a professional appraisal in most real estate transactions is to provide the lender with the information to know how much the mortgage lender can safely loan on a property.
Who are the appraisal professionals? Professionals are state-certified and licensed. As a result of the Dodd-Frank Wall Street Reform and Consumer Protections Act of 2010 and its broad reform of financial services, there have been many new guidelines put in place. Here are examples of the guidelines:
- A lender must use a licensed and bonded appraiser.
- The appraiser must be experienced.
- The appraiser must be familiar with the neighborhood. Does he or she routinely work far away?
- The appraisal must include adequate and relevant comps.
- Were any of the comps artificially depressed because of a motivated seller situation?
- Did the appraiser take into account all available information on the property?
- Did the appraiser properly credit the valuation of a property equipped with a new roof, a solar system, home theater/structured wiring, hot tubs or other valuable and desirable amenities?
What data is used to create an appraisal? Some people think an appraisal is done by a formula (like price per square foot) or it is taken from the tax roll, which is incorrect. Appraisers assess the existing data about the property to complete the appraisal. That data includes: recent comparable sales of properties in the area of the home, location of the home (i.e. on a main street or on a cul-de-sac), proximity to desirable schools, parks and the like, lot size, square footage, updates and/or recent improvements, age of the home and general market conditions. Because this is a snap shot of a moment in time, each appraisal has an “expiration date.”
What happens if the property is appraised for less than expected? The lender can now reconsider financing on the property. If the buyer still wants to proceed with the purchase of the property they have basically four options:
1) The seller can reduce the price.
2) The buyer can waive the appraisal and pay the extra out of pocket.
3) The appraiser can reconsider his/her opinion if new evidence can support a higher value.
4) A second appraisal can be requested if the data supports it (buyer should be prepared to pay for the new appraisal).
A low appraisal can be overcome with compromise and a good negotiator.
What should my broker/agent do? A good broker/agent will arrange to meet the appraiser and accompany them while they do the inspection of the property. Sometimes this can cut down on errors because the appraiser can verify things on the spot. The broker/agent should also have a package for the appraiser with comps and other relevant information. The broker/agent should also request a copy of the appraisal report from the lender and the law requires this be done within 30 days.
Our spring online Professional Real Estate Investor Class starts this coming Thursday, would love to have you join me.