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| Understanding Appraisals | |||
| Whenever a buyer is securing a loan
to purchase a home, the lender will require an appraisal to determine
a fair market value for the property. However, this process can often
confuse both the buyer and the seller, especially if the appraised value
differs from what either party is expecting. But understanding how the
appraisal process works can make a world of difference and save you some
frustration.
Once the buyer informs their lender of their purchase, a lender will hire a licensed appraiser. The appraiser must work with specific guidelines dictated by the lender, forcing the appraiser to put a fair market value on homes based on comparable sales in the same area for homes of similar size and value. To determine comparable value, the appraiser will “bracket” the specific features of the home based on the other properties. For example, there is no universal dollar figure associated with a great view, pool, spa, bathroom upgrades, etc., so if a homeowner remodels a kitchen that cost them $30,000, but the local marketplace supports the value of a remodeled kitchen at $15,000, then the item will be bracketed as [$15,000] on the appraisal, showing only the value supported by sales of homes with similar remodeling. It is important to note, however, upgrades can usually be expressed at full value in newer homes, because upgrades increased the cost of building the home. The upgrading or remodeling of an older home is rarely reflected in full in the final appraisal because the home had “intrinsic value” in its original condition, off-setting some of the remodeling costs. The comparisons used by the appraiser must be extracted from current market activity, typically the homes sold during the previous six months. Some lenders will also look at pending sales to see if there is any room for negotiation. This provides the lender with a safeguard to prevent appraisers from attaching too high a value to the home in question, although lender guidelines state an appraiser can only base his/her opinion on the value of homes which have actually closed escrow. However, when property values are increasing drastically within a market, the appraiser is generally allowed to place additional weight on evidence provided by pending sales and listings—allowing for more of a "real time" appraisal. Once the lender receives a typed appraisal report from the appraiser, they will review the appraisers numbers and they will typically allow a 5% margin of error. However, if the value is reviewed by the lender and the appraiser is determined to be off by a larger amount, say 8%, there is a good chance the value will be cut by the full 8% as will the amount the lender will loan. The result: the buyer and seller are going to have to negotiate for the difference in cash or agreed listing price. Therefore, it is in the best interest of both the appraiser and the homeowner/seller not to try to push for a value higher than the market will support Additionally, the lender may require some repairs
be completed before the loan is approved, and often the appraiser will
be required to return to the property to review the repairs were completed. |
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