If you are purchasing real estate (or have in the past) you’ve heard the word “appraisal.” Whether you are on the buying or selling side, the appraisal will have an impact. I have found there is a lot of confusion about what an appraisal is, how it affects a transaction and what kind of control there is over it.
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.
The main objective for a professional appraisal in most real estate transactions is to provide the lender with the information to know how much they can safely loan on a property.
Low appraisals have been an issue with many contracts in the last 5 years. According to the National Association of Realtors (NAR), “Twenty-one percent of NAR members in January reported delays on contracts, and thirty three percent said they had contracts fall through. An increase in the past year of contract cancellations or delays has been blamed on more lenders declining mortgage applications from stricter underwriting standards and low appraisals coming in under the agreed upon contract price.”
Here are some things you need to know and can do to help with the appraisal process.
Who hires the appraiser and who do they work for?
The lender hires the appraiser. The appraiser works for the lender, not the borrower (even though the borrower pays for the appraiser). However this relationship changed in May 2009 when Fannie Mae and Freddie Mac established HVCC (Home Valuation Code of Conduct), a set of guidelines to create a sort of firewall between the lenders and appraisers. HVCC created rules that it hoped would prevent inflated appraisals. So now no one has a direct relationship with the appraiser.
Does an appraiser have the obligation to reveal defects to the buyer?
Some people think an appraisal will reveal the same things as a home inspection, which is not correct. The appraiser does have a responsibility to survey the physical condition of the home and disclose potential problems. It is not however a substitute for a professional home inspection.
How long is an appraisal good for?
It is a lenders decision but the standard is up to a year, however the environment over the last five years has made lenders not want to go over 6 months. There is also something called a re-certification of value which is less expensive than a whole new appraisal. Remember an appraisal is a snapshot of a property at a moment in time.
What options do I have if the appraisal comes in lower than the purchase price?
There are three 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.
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. Data that is used to complete an appraisal 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 culdesac), proximity to desirable schools, parks and the like, lot size, size and condition of the home, age of the home and general market conditions.
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.