Now that we’ve covered the basics of appraisals, it’s time to talk about some of the positive and negative aspects of appraisals. Appraisals, without a doubt, are a good idea. Without them, the potential for mortgage fraud would be rampant and housing prices would more than likely inflate at a rate that the average consumer would never be able to keep up with.

The Positive Side of Appraisals

Think of appraisers as a disinterested third-party. They have nothing to gain or lose (they get paid either way) for coming up with a certain value on a home. Their main function is to be sure that the sellers, buyers, and agents are not colluding (or acting alone) to take more money for the house than it’s worth. The lender is giving the buyer a lot of money and they are taking every precaution to ensure that they don’t lose money on the transaction (like any business, their goal is to make money).

Before the housing crisis, appraisers were much less restricted than they are today. Sadly, there were some appraisers that took advantage of this and they were a piece of the puzzle that helped decimate the housing market.

The Negative Side of Appraisals

After the housing market crash, appraisers took a lot of heat for overvaluing properties nationwide (and especially in some of the more famous crash-markets such as California, Florida, and Nevada). By overvaluing properties, lenders were able to justify larger and larger prices for homes and as housing prices continued to inflate, the bubble was just waiting to burst.

Since the crash, appraisers have had to perform under tighter standards than they were used to. This has in many cases has had a negative impact on appraisals. Homes that should appraise (or meet value) are not appraising and buyers, sellers, and agents are at times frustrated and at a loss. It’s not uncommon for an appraisal to scuttle the sale of a home these days.

The basic reasoning is that lenders have placed a lot of blame on the appraisers and make them more responsible for “erroneous” appraisals. If they overvalue a property, they risk losing the banks business if the home were to foreclose and be found to be valued at a lesser price. This sets up a dangerous situation where appraisers are afraid to value a property too high, so they may just undervalue the property for safety’s sake.

If you’re buying a home for $100,000 and the appraisal says the home is only worth $90,000, it’s up to you and seller to come to terms (lowering the sales price) or you to make up the $10,000 difference…or back out of the deal. None of these are good situations, so you can see how an undervalue appraisal is something most people don’t want to see.

The problem gets worse when an agent receives an appraisal and can see clearly that the appraiser knows little about the area – we’ve seen houses that were undervalued by as much as $100,000 in our office. Looking through one recently, it was clear that the comparable sales the appraiser was using were horrible choices (the idea behind comparable sales is to find homes that sold recently that are comparable in size, use, and style (ie, you wouldn’t compare a two bedroom home with vinyl siding to a fifeteen bedroom mega-mansion)). Although you can try and protest an appraisers ruling, it is very rare to see it make any difference.

When these situations arise, it can be very frustrating for all parties involved and it’ll definitely help you to have a good agent at this point, as the contract is now in danger of falling apart (no loan more often than not means no purchase). Some remedies can be performed to try and get both parties back to the negotiating table, but it can be tough. I know several agents who have kept a transaction alive during this period, but it takes experience and determination, so be prepared.

image courtesy of Images_of_Money

If you’re buying a home, you’re going to hear the word appraisal more than a few times. Knowing what one is and why you need one is pretty important, as is knowing some of the pros and cons of appraisals. Appraisals have been a very big issue with transactions lately, so with that in mind, I thought I’d take some time to talk about them and what they mean to you…as a buyer and a seller. For this first post, let’s just limit ourselves to what appraisals are and why they are necessary. Please note, when I use the word appraisal, I am not talking about what many people mistakenly call “tax appraisals” – we’ll need to cover that in an entirely different post.

What is an appraisal?

An appraisal is defined by Merriam-Webster as:

: an act or instance of appraising; especially : a valuation of property by the estimate of an authorized person

In the case of homes, a licensed appraiser is called on by the lender to value the home. This appraisal is then used by the bank to justify the cost of the home and back up their findings that determine whether or not they will make the loan to the buyer.

The actual appraisal process involves taking local comparable sales and area conditions in order to come up with a appraised value. This is similar to the process your real estate uses when determining the fair market value of your home when you put it on the market, but involves additional factors and considerations and must be done in compliance with appraiser licensing laws.

Why do I need an appraisal?

If you’re buying a home that involves a mortgage, you will need an appraisal. The appraisal is the bank’s proof that the home is really worth what you’ve agreed to pay for it. The idea is to give them the comfort of knowing that the home is worth that much and they’re not getting scammed or ripped off.

Banks will require an appraisal and if it comes in lower than the price you’ve agreed to pay for the home, the bank will not lend you more than the appraised value. For instance, if you’ve agreed to buy a house for $100,000 and it appraises for $99,000, the bank will only make the loan based on the $99,000 figure, so it would be up to you as the buyer to come up with the additional $1,000 in cash on your own or back out of the sale. This can become an issue as we will discuss in an upcoming blog post. The idea of appraisals is safety, security, and fair value for all involved.

Recently, appraisals have become a hot button issue, as appraisers are being much tighter with their values – this can be both a good thing and a bad thing, but much of it results from the housing market crash. We will get into that as well in the upcoming post(s).

image courtesy of Images_of_Money