Real Estate AppraisalReal estate appraisal and understanding it's possible effects on your transaction, will keep you ready for any possibilities and able to maneuver accordingly. A real estate appraisal helps to establish a property's market value or 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 in your deed of trust, 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 current market analysis, or CMA, with an appraisal. Real estate agents use CMAs to help home sellers determine a realistic asking price or selling range that their home should sell in. Experienced agents often come very close to an appraisal price with their CMA’s, 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
What You'll See on a Residential Appraisal Report Real Estate Appraisal are very detailed reports, but here are a few things they include:
Residential Real Estate 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.
Cost Approach 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 or rebuild 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:
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. Don't panic if the appraisal is low.
The contract on your home is signed and details are progressing nicely. The
buyers felt it was safe to go ahead with inspections, and the results were The Phone Call Everyone gets a phone call. The home appraisal is $8,000 less than the sales price. Buyers, sellers, and agents all panic--is there anything you can do? Keep Your Cool One or both parties may have another contract that hinges on a successful completion of this one, and getting bad news can make everyone a basket case, especially when it's close to closing day. It's easier to work through the problem if you stay calm, so keep your cool and develop a plan, because there are solutions to make the sale move forward. Possible Options Seller Reduces Price Hold on, that's not the only solution, but it is a common one. Would the seller be willing to reduce the price of the home? If the buyers are seeking a mortgage, they can probably back out of the contract due to the financing contingency, since the low appraisal will affect the way the lender views the home. The seller may be willing to negotiate to save the sale. A cash buyer used to be protected with a contingency clause that states she can back out of the deal if the home doesn't appraise at or above the sales price. With the new contracts in NC, now you have a due diligence period that states that they can walk away before the due diligence date for any or no reason, so it's best if you can come to an agreement to save the deal. Buyer Pays More Down The buyer may want the home badly enough to make a larger down payment, but don't assume that will correct the problem. I've been involved in home sales where buyers were prepared to pay additional money down to make a deal work, but lenders would not approve the loans. They did not want to finance a property that the buyer went into with a negative equity, even if the buyer was willing to take the risk. Seller and Buyer Negotiate Seller and buyer come to an agreement, both giving a little to make the deal work. After all, it's better for all parties if both give a little and come to terms than to start the home search and buying process all over again, and to have to put the house back out on the market and start over. Dispute the Real Estate Appraisal Ask the lender for another appraisal. The lender may send out a new home appraiser or ask the original appraiser to re-evaluate the property. With the real estate market as crazy as it is right now, some lenders are sending appraisers from 2 to 3 hours away to appraise a property. These appraisers typically have no local market knowledge and can make mistakes on evaluation. Ask your lender where the appraiser came from to do the real estate appraisal. Ask your agent to find out which houses were used as comparables. Does the agent agree they were good comps? Most appraisers haven't seen the comps up close and personal the way agents do. The home appraiser might have unknowingly used houses that needed a lot of work. If poor condition is verified, ask the appraiser to investigate the comparables to see if adjustments should have been made. Does the Contract Price Include Personal Property? Home appraisers only put a value on real property, the land and the improvements to the land. If the contract includes furniture and other types of personal property, it won't be a part of the appraisal. Buyers should pay for it separately. In our new contracts, this is another item that is spelled out. Make sure that the agreed upon purchase price does not include any personal property. If it does, take that out of the equation, and bring the numbers within range. Is the Seller Paying Funds to the Buyer at Closing? This often works, but it can be killed by a low appraisal. Always talk with the lender about their policies and the proper wording for this type of agreement. Then be prepared to deal with it if the appraisal comes in low. Bottom Line Back to Real Estate Articles Investors Corner Main Sandhills Real Estate Page Sandhills Condos and Townhomes
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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 property like acreage, square footage, bedrooms, bathrooms, garage,
etc.
acceptable. The closing date is on target. Everyone is waiting for the results
of the real estate appraisal so that a loan commitment letter can be issued. No
one is too worried, because the house sold for an appropriate price, and
appraisals have a magical way of coming in just where they need to be.
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