Understand Appraisal
(Facts About Residential Real Estate Appraisals)
Appraisals are an Important Part of Your Home Buying Transaction
A real estate appraisal helps to establish a property's market
value–the likely sales price it would bring if offered in an open and
competitive real estate market.
Your lender will require an appraisal when you ask to use a home or
other real estate as security for a loan, because it wants to make sure
that the property will sell for at least the amount of money it is
lending.
Don't confuse a comparative market analysis, or CMA, with an appraisal.
Real estate agents use CMAs to help home sellers determine a realistic
asking price. Experienced agents often come very close to an appraisal
price with their CMAS, but an appraiser's report is much more
detailed--and is the only valuation report a bank will consider when
deciding whether or not to lend the money.
About Appraisers and Appraisals
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Appraisers are licensed by individual states after
completing coursework and internship hours that familiarize them with
their real estate markets.
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The lender might use an appraiser on its staff, or
contract with an independent appraiser. If you are allowed to choose
the appraiser, and it isn't someone the lender is familiar with, the
results might be subject to review before they are accepted.
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The appraiser should be an objective third party, someone
who has no financial or other connection to any person involved in the
transaction.
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The property being appraised is called the subject property.
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You will probably pay for the appraisal when you apply for your loan.
What You'll See on a Residential Appraisal Report
Appraisals are very detailed reports, but here are a few things they include:
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Details about the subject property, along with side-by-side comparisons of three similar properties.
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An evaluation of the overall real estate market in the area.
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Statements about issues the appraiser feels are harmful to the property's value, such as poor access to the property.
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Notations about seriously flawed characteristics, such as a crumbling foundation.
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An estimate of the average sales time for the property.
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What type of area the home is in (a development, stand alone acreage, etc.).
Residential Appraisal Methods
There are two common appraisal methods used for residential properties:
- Sales Comparison Approach
The appraiser estimates a subject property's market value by comparing
it to similar properties that have sold in the area. The properties
used are called comparables, or comps.
No two properties are exactly alike, so the appraiser must compare the
comps to the subject property, making paperwork adjustments to the
comps in order to make their features more in-line with the subject
property's. The result is a figure that shows what each comp would have
sold for if it had the same components as the subject.
The cost approach is most useful for new properties, where the costs to
build are known. The appraiser estimates how much it would cost to
replace the structure if it were destroyed.
So What Does the Appraisal Mean to You?
Your personal approval is accomplished early in the loan process, but
final loan commitment usually hinges on a satisfactory appraisal. The
bank wants to be sure its investment is covered in case you default on
the loan.
If the property appraises lower than the sales price, the loan might be
declined, but that isn't the only hurdle it must pass. Other facts on
the appraisal can be a problem, too:
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The bank probably won't like it if the estimated time to sell the property is longer than the area average.
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If the appraiser notes that entry to the property is from
a private, shared road the bank might want to see a road maintenance
agreement signed by everyone who uses the road, verifying that
maintenance is shared by all parties.
Those are just a few examples of negatives that could stall your
purchase. The lender will study the appraisal carefully before
determining whether or not the property qualifies to serve as security
for your loan.
An Appraisal Isn't a Home Inspection!
Appraisers make notations about obvious problems they see, but they are
not home inspectors. They do not test appliances, look at the roof,
check the chimney or do any other typical home inspection tasks. Never
count on an appraisal to help you determine if the home is in good
condition.
If the Appraisal Comes in Low
Don't panic if the appraisal comes in low, because there are often steps you can take to make the deal work.
If the appraisal uncovers other problems, remember that most problems
are correctable. Try to keep your cool and work through issues one step
at a time.
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