Everything you need to know about appraisals

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If you’ve bought ot sold a home or even refinanced your mortgage, you’ve surely encountered the term “appraisal.” But what is it? An appraisal is just an informed evaluation from a professional appraiser. It attempts to define the market value, which is used by banks, lenders, and buyers and sellers.

It comes after a thorough and detailed inspection of the property in question, at which point the appraiser compares his or her findings to similar properties that are selling in the same neighborhood.

Appraisals are conducted by professional appraisers. They are neutral third-party professionals that base their findings only on independent market data and material facts, not serving any one person’s self-interest. To maintain high professional standards, appraisers undergo thorough training, examinations, and state licensing and are heavily governed.

Residential Real Estate Appraisers work with single-family homes up to a million dollars as well as multi-family buildings up to four units. Certified Residential Appraisers can also work on valuing properties over one million dollars.

There are three parts to any appraisal process:
1) The inspection.
A licensed appraiser will come to the property and gives it a detailed inspection, compiling information that will help them compute its value.
2) Finding comparable properties.
One of the most important parts of an appraiser’s job is finding similar homes that have sold, are active now, or pending sale. They use these as a basis for comparison with the subject property, adjusting the value based on characteristics of the subject property and other factors.
3) The appraisal report.
Finally, the appraiser releases an official report that documents his or her findings, including their professional opinion for the present market value of the property.

When are appraisals ordered? Every time there a mortgage loan (refinance or purchase) is underway, an appraisal is ordered to determine that adequate value is there. Additionally, appraisals can be ordered when a home is sold without a mortgage loan, and possibly in other situations like a divorce, total asset evaluation, or probate.

Why do lenders always require an appraisal? Lenders know that an appraisal safeguards their investment when issuing a mortgage loan. If the property wasn’t worth the stated sales value or loan amount or had serious flaws or problems, the mortgage lender could end up losing a lot of money. So appraisals, while not fail-safe, help them mitigate their risk.

So what factors do appraisers consider? Appraisers look at a long list of factors when valuing a property. Four of the main factors they consider include:

1) Demand:
The current market need for people to buy and live in such a home.
2) Utility:
The specific home’s ability to fit the needs of future owners.
3) Scarcity:
Inventory, or a number of other homes in the area and on the market.
4) Transferability:
The simplicity and ease with which the property can be sold or transferred to another owner.

While an appraised value is a “snapshot” of present value at that exact period, an appraisal report also takes into account the future potential growth in value, as well as economic, social, governmental, and environmental factors that could impact the home’s value going forward.

What property characteristics do appraisers look at? Appraisers inspect a long list of factors that make up your home, including:
Foundation.
The exterior condition of your home.
Roof composition, age, and condition.
Square footage.
How many bedrooms and bathrooms.
The age of the home.
The general condition.
Amenities.
HVAC system.
General maintenance.
Home improvements and remodels.
Additions.
Windows.
Landscaping.
Pools, fireplaces, outdoor living, and permanent extras.

How do appraisers go about calculating the market value of a property? Appraisers use the comparable sales price approach to determine a value, comparing your home to others on the market that have sold recently, called “comps” or comparables.

They’ll look for comparable properties that have sold in the same area or neighborhood within a few months. If they can’t find those (or enough of them), they move out to a larger geographical area and also track sales up to 6 months previously.

It’s important to note that an appraised value and sale price are not the same. In fact, the appraised value is a professional opinion what the home is currently worth, but sometimes, buyers and sellers agree on a price that is higher or lower than the appraised value.

A more common situation that arises is when an appraiser’s value is lower than the purchase price, which creates a serious red flag for the lender. But it doesn’t need to be a deal breaker, as buyer, seller, and the lender can renegotiate based on the lower appraised value. For instance, the seller can lower the asking price or the buyer can make a larger down payment or possibly set up funds in escrow for improvements to the home that will increase its value after the closing.

So don’t think of the appraised value as the concrete “price” of the home or a value set in stone (it can change dramatically with only one or two more sales in the same area), but a great estimate of fair value.

Who owns the appraisal? The party who ordered the appraisal owns it, and that usually means the borrower. In fact, the appraisal company cannot legally release the report to anyone else without written authorization.

Appraisals are only valid for mortgage lending for up to a year after they’re issued. But borrowers may consider can ask an appraiser for an updated value after about six months or more, at which time they issue a re-certification of value without having to order a whole new report.

Is there anything a homeowner can do to influence their appraised value. Of course, they can keep the property in good condition, make all necessary repairs, and possibly remodel or upgrade. It also helps to keep your home clean, uncluttered, and looking neat when the appraiser comes to inspect.

Even better, make a list of any repairs or remodels you’ve done and provide those to the appraiser, including any value-adding new materials or appliances.

Additionally, your realtor may offer a list of comparable properties for the appraiser to consider, which may help your case.

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