How Does The Property Appraisal Process Work
For Home Buyers, property appraisals give you and your lender an estimate of a home’s market value. It helps make sure your offer, the purchase price, is in line with the home’s fair market value. To make an appraisal, the home is inspected and compared to similar homes in the area that have been sold within the last six to twelve months. While lenders decide who will conduct the home appraisal, this is generally an expense paid for by the buyer. Some of the things that are considered in the appraisal include:
- Sale price of other area homes
- Square footage of the home
- Number of bedrooms and bathrooms
- Overall condition of the home
- Quality of landscaping
- Amenities like swimming pools
- Unique features of the home
- Size and condition of the land the home is on
- Visual inspections of the foundation, plumbing and electrical systems
- Finishing details such as hardwood floors or updated lighting
- Quality of the basement and attic
- Surrounding neighborhood and area
It’s important to know the appraisal is not the same thing as your home inspection, which will occur after your sales contract is signed. The appraisal primarily documents obvious visual conditions, along with a cost and size comparison to other homes. You should receive your report within several days to a week or so.
If you are selling your property, and you have an offer to buy your home you can expect the buyer’s lender to send an appraiser to inspect the house. Before this happens, you need to make sure your home is ready.
Correct any maintenance or other issues related to health or safety. Make any obvious cosmetic repairs you’re aware of. Get rid of clutter and make sure it’s clean. Prepare a list of recent repairs or renovations for the appraiser, include the dates/costs of the repairs along with receipts. A home that looks cared for will can result in a better and higher appraisal.
Be sure to place pets out of the way while the appraiser is onsite and don’t water the yard right before the appraiser arrives. The appraiser will need full access to your home, including the closets, attic and crawl space, etc.
Here are a few of the potential problem areas an appraiser will look for.
- Electric garage door opener not working
- Cracks in the walls, ceiling or foundation
- Leaking pipes
- Roof has less than three years of life remaining
- Water stains on ceilings
- Wiring not up to code
Consumers are often baffled by the home appraisal process. They may feel their home is worth a certain dollar amount, and therefore, the appraised value doesn’t make sense to them. It is important to know that appraisal guidelines are dictated by the lenders and the law. In many states, the lenders must disclose the purpose of the appraisal, as each situation carries its own set of rules.
In essence, lender guidelines force appraisers to put a fair market value on a home based upon comparable sales in the area where the home is located, as the home must be bracketed according to size and value. For example, there is no set amount associated with a great view, pool, spa, bathroom upgrades, etc. If a homeowner installs a custom pool that cost them $30,000, and the local marketplace supports the value of a pool at $15,000, that item will be bracketed as [$15,000] on the appraisal.
Upgrades can usually be expressed at full value in newer homes since they required investing additional money onto the cost of building the home. On the other hand, the amount invested in
upgrading or remodeling an older home is rarely reflected in full in the final appraisal. The reason is the home had value in its original condition, and again, the value of the upgrades must be supported by comparable examples within the same marketplace.
These comparisons must be drawn from current market activity within the last six months. Some lenders may want to look at both
closed and pending sales to see if there is any room for negotiation. This is a safeguard to prevent appraisers from over-valuing the home in question. It is further stated in the guidelines that appraisers can only place a value on homes that have closed escrow. However, when property values rapidly increase within a marketplace, appraisers are generally permitted to make concessions and put more weight on the evidence provided by comparisons to pending sales and listings. This allows for a “real time” appraisal.
Although there is no formal standard to speak of, most lenders give the appraiser a 5% margin of error. If the file is reviewed and the
appraiser is off by 8%, there is a good chance the value will be cut by the full 8%. It is in the best interest of both the appraiser and the homeowner not to push the value up higher than the market will support, otherwise the property evaluation may be exposed to a strict appraisal review.
As a loan adviser, I make it a point to follow lender guidelines at all times, and work within the systems they provide. This promotes a
good relationship with the lender, and smooth closure for my borrowers.