Last updated on November 19th, 2021 at 08:00 pm
You are trying to buy a home and you are told by the loan broker that a home appraisal must be ordered and you will be paying for it. So what is this “home appraisal” that I will be paying for? Most new buyers do not understand the appraisal process and I will include many who have purchased in the past and even some real estate agents. Let’s start with the actual process. First, the lender will usually contact a company that will choose an appraiser. Most lenders will not let their mortgage processors choose an appraiser. The idea is to keep everyone at arm’s length and not influence the process.
The appraiser is contacted either by the third party company or the lender directly and told a few things about your sale including the selling price agreed to in the contract. A bit about the appraiser. There are three levels of the property appraiser, the first level includes those individuals who can appraise only one to four-unit residential properties. Larger properties, properties valued over $1m, and commercial require advanced licenses.
Residential property appraisers must be licensed
To become an appraiser an individual must pass an approved course and study under a licensed appraiser for many hours. State governments issue licenses but standards are national in scope. Does all of this study make a good appraiser? No, but it helps as the individuals gain experience. One good thing is the basic templates used in the process are standard meaning that the portion of the appraisal left to judgment is small based upon the numeric facts.
You may accompany the appraiser during the appraisal process but that’s not usually recommended. I believe that the appraiser should just do their walk around unmolested. Only a portion of the process to produce a report is involved with an actual inspection and measurement of the building. Before arriving at the home the appraiser has done some homework and may drive by some of the homes that are to be used as comparables. After the inspection,, the appraiser returns to the office and puts together all of the data collected to arrive at the appraisal.
In an up trending market appraisers can add to comps
In an upmarket where prices are typically increasing, the appraiser can add to the values of the comps based upon the average trajectory of the market. In a down-trend market, the appraiser may deduct on values. Generally,, the appraiser will use three to four properties in their appraisal of your property. Some formulas are used to try and match all properties based on size, location, etc. For example, a slightly smaller property must be equalized to your larger property and there is a formula for that.
Should your property be a tract home, the appraiser will probably not include comps from recently built custom homes in the area. Typically the appraiser will look for properties that are close in size and type to yours in your neighborhood. If there are few or no comps, they will cast the net further afield until they have enough data points to justify an appraisal.
There are rare occasions when the appraiser will turn in an appraisal that is too low to support the selling price. The seller may ask the appraiser to look at properties X and Y which they may have missed. This happened to a property that I was buying. I agreed to make the purchase based on the contracted price. I was financing the property so the finance company wanted an appraisal the meet or exceed the value of the property I was buying.
The first appraisal came in too low, not far off but enough to cause issues with the lender. We asked for a review of the appraisal and provided some additional sales data for consideration. The appraiser had indeed missed one of the properties because they thought the property was in a different zone. With this new information,, they were able to appraise the property at an amount higher than the buying price. Again, this rarely occurs.
Appraisal reports are returned to the individuals who ordered them and funneled to your agent and down to you. An appraisal has life because prices are constantly changing, a lender may require a new appraisal if the closing is delayed any significant period.
Difference between Appraisal and Selling Price
Real estate agents act in the best interest of their clients. Agents will discuss with you the offer they think you should make on the property. Agents use a process not unlike the process used by appraisers. Agents differ from appraisers since they are trying to arrive at a selling price. Appraisers are arriving at a value. There is a difference not just in semantics. As an example, I recently listed a home for a price that the seller wanted for the property. The selling price was reasonable and permitted some room for negotiation. At the same time two other properties that were nearly identical in the same neighborhood came on the market. One was sold immediately as a VA reposession at a VERY low price. The other was sold just before it could be reposessed again at a very low price.
During planning process to determine what my client should ask for the home these two properties were not on the market and in my opinion the most recent comps supported the asking price. After rejecting several low offers a good offer came in and it was accepted. The appraiser came out and promptly put a halt to the sales process by producing a value which was significantly lower than the price offered by the prospective buyers. Since they were financing, there was no way the lender would approve of the higher selling price.
The appraisal comes in low
What do you do in this circumstance? There are only two choices. The buyer can pay cash and close or the seller can lower the selling price to meet the appraisal and close. There are of course variations on the two options. The could both split the difference where the buyer adds cash to the deal and the buyer agrees to lower the price by 1/2 of the gap. The percentage can change as well. The buyer can for example add $5,000 and the seller can reduce the price by $20,000 to meet the appraisal.
In an other example there was a fairly small difference, about $6,000. I suggested that the buyer and seller split the difference and they both agreed. The deal was closed.
After taking lots of time to find this ideal home, spending money for the appraisal and the home inspection, buyers really want to close. Many sellers get more comfortable with the idea that the deal is done the further the process goes after the contract is signed. Some sellers start to spend money in advance of the closing. Both parties are well invested by the time the appraisal comes out so the parties look for ways to overcome any imblance.
Sellers perspective
Most of the above narrative deals with the buyers perspective regarding selling price and appraised value. If you are a seller, ask your real estate agent to provide you with comps in the area that would likely be used by an appraiser to determine value. Review at least three or four or more recent sales. Go back about 6 months if there are many, longer if there are very few. Look at the size of your property and the bedroom, bathroom configuration. There are other factors as well but size, location and configuration can help sort through recent sales.
If for example the comps would support a selling price of $200,000 then add to that a percent for inflation. Say your market has been accelerating by 6% in the last six months. Your agent will calculate a rough percent of increase and considering that your property may be on the market for a month or more, add even more. You will arrive at a price that it is “hoped” will be “valued” at this amount by the appraiser. If you want to sell your property for $250,000 and the comps even in a stretch may support $210,000 than be prepared for a disappointment from the appraiser if you actually obtain a non-cash offer for the $250,000. Cash offers on the other hand are not usually subject to an appraisal. Remember, cash is actual currency, not dependent upon financing.
The idea that a seller can ask any price and it will be paid is wrong and will waste time. People often ask why a house is on the market so long. Why has that house been on the market so long? It will lead some prospective buyers to conclude something is wrong with house. In the end, it’s not how much you want for your house but how much you can get for your house. Here is my disclaimer: Arriving at the perfect selling price is as much art as science. Anything is possible even the sale of an overpriced home but statically, you are better off pricing your home to sell which means keeping the selling price as close to the market as possible to insure the appraisal will come in at or above the asking price.
William Anderson, the author is a licensed real estate broker along the Mississippi Gulf Coast and a partner in Logan-Anderson LLC, Gulf Coastal Realtors you may want to go to the Logan-Anderson site where more blogs about real estate can be found. Real Estate agents in Mississippi are not permitted to offer legal advice therefore this article and all articles on this blog are not intended to provide legal advice. If you are considering a move from your higher cost state to a lower cost area with great climate and benefits, consider contacting William Anderson or call 228-215-3234
