By Bill Gassett – maxrealestateexposure .com
Understanding Real Estate Appraisals
Real estate appraisals are an integral part of the purchase and sale of property, particularly if the buyer is seeking funding from a lender. The appraisal value of a home can make or break a sale, so it only makes sense that so much weight is put upon it.
Whether you are buying or selling, you have minimal control over the appraisal – but that doesn’t mean you need to be in the dark about what it involves and how it is determined.
There are numerous myths about real estate appraisals that people usually discover the hard way. As a buyer or seller, it is essential to have at least a general understanding of how appraisals work.
Below I am going to summarize what you should know about real estate appraisals. Use this as your guide to understand the appraisal process.
- Is there a difference between an appraisal and a home inspection?
Definitely. The vast majority of real estate transactions involve both an appraisal and an inspection, but they are very different things. An appraisal focuses on determining the market value of the home. The value is based on a lot of various factors, including the cost of similar homes in the area.
A home inspection is supposed to identify problems with the home. While an appraisal may look for obvious flaws, a home inspection goes much, much deeper. With certain kinds of loans, however, they can become intertwined.
For example, with an FHA loan, there are certain condition requirements a home has to meet to be approved for an FHA mortgage. It behooves sellers to understand how to make their home FHA mortgage compliant. Why? A significant percentage of home buyers will use FHA financing to purchase a home.
When a borrower is using FHA financing the appraiser will look the home over to make sure it meets the FHA’s minimum standards for the condition.
- So what does the appraisal process involve?
Like a home inspector, an appraiser will go throughout the home to inspect its state of repair, its features, its square footage, etc. Mostly, the appraiser looks for all the factors that determine the general market value of a property. People often ask what does an appraiser do.
The appraiser will go through every room, taking note of all the details, big and small, that are required to accurately compare the home to other homes to measure its value. When all the details of the house are collected, the appraiser can look over the recent sales of similar homes – searching for properties as identical to yours as possible – and make a comparison to deliver the final appraisal price.
- Are there different types of appraisals?
The most common kind of appraisal is when an appraiser visits a property and inspects both the inside and outside of the property. An exterior-only inspection is also possible which is known in the industry as a “drive-by appraisal.” A drive-by appraisal is certainly not as comprehensive and is often used when the lender doesn’t have much doubt as to the value of a home supporting the mortgage amount being requested.
- What will you see in a real estate appraisal?
- An appraisal report will have specific details about the subject property. There will be a side-by-side comparisons of similar properties that have sold and are for sale.
- The appraiser will provide an evaluation of how the real estate market is performing in the area.
- The appraiser may provide concerns in the report about issues he or she feels are harmful to the property’s value.
- There will be flagged descriptions of any significant problems such as cracks in a foundation or water penetration through the roof.
- The appraisal will include an estimate of the average sales time for other similar homes.
- The appraisal will provide whether values are on the rise, decreasing or stable.
- A description of the area in which the home is located such as a neighborhood, country road or busy street.
- Are appraisals necessary?
Appraisals are always a good idea for property transactions, and they are required for any home sale that needs a mortgage. Appraisers use their experience and training to give an accurate view of the value of a home.
Since buyers want to spend only what is necessary, and sellers want to generate as much income from a sale as possible, it just makes sense to decide the value of the home before money changes hands.
Lenders also demand appraisals before giving out loans to protect themselves. If for some reason the buyer defaults on the loan, the lender wants to know that they can sell the property and get back their money. Lenders never want to see a low appraisal on a home purchase for which they are lending money.
- Who is the appraiser and how are they hired?
- The lender giving the mortgage hires the appraiser through a third party company. Appraisers and lenders are no longer allow to be in direct communication.
- Appraisers become licensed after completing licensing coursework and internship hours.
- The appraiser has to be an objective third party who has no financial or other connection to any person involved in the transaction.
- The property being appraised is called the subject property.
- Is the appraisal information available to anyone?
No. The appraisal is owned by the party that orders it – which is not necessarily the party who pays for the appraisal. It’s possible, although rare, the owner of the home will pay for the appraisal to move the sale forward, and find themselves frustrated that they can’t get access to the appraisal information.
If the lender orders the appraisal, no matter who pays for it, then the lender is the party in control of who has access to that information. In such a situation it is up to the lender to inform the buyer or the seller what the home appraised for.
More often than not, however, the buyer is paying for the appraisal as part of the process for getting a mortgage. The mortgage holder is required to give the buyer a copy of the appraisal report by law.
- Is the appraisal the final word on the value of the home?
If you do not like the value determined by the appraiser, you do have recourse. You can talk with the appraiser and ask questions about why decisions were made that you disagree with. It is possible the appraiser missed something.
Everyone makes mistakes, even experienced professionals. It is also possible that your perspective on the value or your home differs from the appraiser.
While you may think that certain aspects of your home are of a certain value, the appraiser may not see it that way. If you are unhappy with the appraisal, you can request another one. Now and then a low appraisal will be fought. Just be sure you have good cause because the most likely outcome is that the new appraiser will produce a similar opinion as the last one.
In such circumstances be prepared to present a valid argument as to why you believe the appraisal is wrong. If you hired an exceptional real estate agent, they should be ready to help you with this.
- Why is your neighbor’s house valued higher than yours?
Many times homeowners are frustrated to discover that their homes are not as valuable as similar homes in their area. They may feel that their homes are more beautiful than the neighbors, they may have made additions that they felt should have added more value, etc.
If you find yourself in such a situation, try to be patient and consider the possible reasons why the homes were appraised differently.
Your neighbor may have more square footage than you realize bigger bathrooms, nicer finishes or any number of things that can make a home more valuable. It’s possible the neighbors made improvements that added value to their home while yours did not.
If you think the appraiser made a mistake, you can always ask him or her why the discrepancy exists.
- How often do you need to get an appraisal?
In most situations, an appraisal is considered valid for six months. However, in specific markets, where home prices are changing rapidly, some lenders may only use an appraisal for three months or so. And remember, the appraiser will only consider finished improvements to the home. You cannot ask them to determine value based on good faith.
Essentially, the value the appraiser comes up with is valid for the day they completed their report. Real Estate values are continually changing. Sometimes an appraisal will need to be re-certified if it becomes out of date.
Also if you are selling a home and have gotten an appraisal don’t think the buyer’s lender will use it. They will not! The lender holding the mortgage will order their own independent appraisal. Quite often sellers will waste their money on an appraisal thinking it justifies their asking price. Sorry, but it doesn’t work that way.
- Can I use my city’s property assessment in place of an appraisal?
A property assessment covers a wide area and serves a different purpose than an appraisal. An appraisal is precise, designed to give the most accurate value of a home at the time of the appraisal. An assessment is intended to get a general idea of what property taxes should be.
Property assessors use their figures as a measuring stick for municipalities to collect a certain amount of money to cover expenditures to run a city or town. The assessed value and market value are two very different things. The appraised value is something different from the assessed value as well.
- Is a Zestimate from Zillow the same as an appraisal?
NO! NO! NO! This cannot be emphasized enough a Zillow estimate is nothing like an appraisal and cannot be used as a substitute. In fact, using a Zillow home value is one of the worst ways to put a value on a property. Whether you are buying or selling a home, a Zillow Zestimate should be ignored. It is a worthless piece of information! There are times when the Zillow value is off by over $100,000 to the actual value.
Don’t be a DUMMY – using a Zillow value is like a bad car crash waiting to happen!
- What does an appraisal cost?
Appraisal costs can vary depending on the complexity of the property. An appraisal of a typical property would be in the ballpark of 300-500 dollars depending on the area of the country.
- How rigid are the standards for appraisals?
It can be tempting to consider a real estate appraisal as guesswork, but that would be inaccurate. There are rigid standards for appraisals that every licensed appraiser must adhere to. There is a lot that goes into the appraisal process that people don’t see.
Lenders trust appraisers to protect them from considerable financial risk, so it is reasonable for everyday buyers and sellers to do the same. Appraisers, however, are human just like everyone else. They can from time to time make mistakes just like you and I. Don’t assume everything an appraiser says is gospel.
Most real estate agents are going to emphasize how vital pricing a home correctly is to the sale of your property. Pricing issues are the #1 cause of why homes don’t sell. If you overprice your property, it’s not going to appraise. Keep these things in mind when trying to sell your home. Hopefully, you now know a lot more about real estate appraisals!
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