What is an appraisal?
When buying and selling a home, there’s no getting around the
home appraisal if the buyer is taking out a mortgage to purchase the home. You
can’t wave a magic wand to raise the fair market value of any property. My
favorite quote is “you are what you are” which means it’s worth what it’s worth.
But this doesn’t mean you shouldn't educate yourself about the appraisal
process. The objective of an appraisal is to provide an independent and
impartial cost analysis of real property according to the National Association
of Realtors®, NAR. The appraiser’s client is the lender. However, the appraisal
protects a buyer against paying more for a home than it’s worth, which could
put their financial future in jeopardy. For example, if the buyer loses their
job a year later after purchasing the property then they are “upside down”.
This means they can’t sell the house for the amount owed on the mortgage, which
leads to foreclosure. However, if they buy it at the right value and something
happens a year or two into it they can get out without losing their skin. They
may not make any profit, but they may not suffer any loss or at least as big a
loss. To come up with an accurate value gauge, the appraiser conducts deep
research of the comparable sales data and uses an on-site visit to verify the
home’s size, features, and condition.
How does the appraisal impact a real estate
transaction?
There are a few primary reasons homes fail to appraise. Let’s
explore a few options:
1. The contract price is over appraisal value. In
rising real estate markets it’s common for buyers to compete for a house and
drive up the price above market value. At that point the biggest mistake
sellers make is assuming that the buyer will bring extra cash to the table as
needed. The reality is traditionally the buyer has saved all the money they
have for closing costs and down payment and usually not much more than that. On
the other hand, there are buyers out there who do have cash on hand and can
cover the difference between the contract price and appraisal value. This is
known as “bridging the gap”.
If the appraisal comes in below the contract price, there are
still options.
1. Seller can lower the price.
2. Buyer can bring the additional cash to bridge the gap
between the contract price and appraisal value.
3. Buyer and Seller can renegotiate the purchase price and
terms of the contract to work in the favor of both parties. This is also why
pricing your house right from the start is so key. Don’t hire the agent who is
going to flatter you with an empty promise to sell your house for more. Find
one who’s done their homework and has the comps to prove it.
2. An appraiser finds an issue with the house that
impacts its value.
In some cases, an
appraiser will identify an issue with the property that must be factored into
the appraisal. This could be a room addition that doesn’t have a permit. In
that case the appraiser may mark the room as a “cost to cure” line item on the
report, which could lower the appraised value for a given amount. Some types of
loans like FHA (Federal Housing Administration) also require specific problems
like broken or cracked windows or peeling and flaking paint to be corrected
before a house can appraise.
3. The appraiser was inexperienced or doesn’t know
the area.
There are a lot of nuanced factors that go into appraising a
property accurately. “Geographic competency” or an appraiser’s knowledge of the
local area can make a big difference in whether an appraisal arrives at the
true market value of a home. Other issues can be as simple as the appraiser
rushing through the data compilation or applies short cuts. Lastly, If the
appraisal value does not come in at contract price, there is one last ditch
effort and usually the very last resort. Appeal the appraisal. This is not a
guarantee and the appraisers are typically not thrilled when their professional
opinion is being questioned. If you plan to appeal the appraisal, here are a
few tips:
1. Contact your lender and find out what the steps are for
their appeal process. Each lender has different processes.
2. Study the appraisal carefully. Review the basic information
used in the appraisal for your home's actual features. Does it have the correct
number of bedrooms, bathrooms, square footage etc.
3. Research the comparables used in the appraisal. Note any
advantages that your house has over the comps used. Do you have a larger
kitchen or perhaps it has upgraded finishes. Whatever advantages you can find,
they should be able to prove that your home has a higher market value than the
comps and that it is properly adjusted in the appraisal. Run the most recent
sales in the last 6 months and sooner to make sure that a sale that supports
your market value didn’t just recently close and perhaps was missed during the
time the appraisal was being completed.
4. Last resort would be to order a new appraisal, but that can
be costly with no guarantee of a different outcome.
You can present this information to your lender who will then
forward to the appraiser for review. Hopefully the new information you bring to
the table will help the appraiser reassess their opinion of value.
What can you do to prepare for the appraisal?
Here’s a short list of things you can do to prepare for an
appraisal:
1. Deep clean the inside of your home. Act like you are
showing the house all over again to buyers. Definitely make sure you’ve dealt
with any issues related to pests and pets. First impressions are so important.
2. Secure your pets. This allows the appraiser to work more
efficiently and can focus on your property without any distractions.
3. Spend an afternoon cleaning up the yard. No need to get too
fancy. Just make sure the front of the house looks nice and tidy. Pull any
weeds, mow the lawn, trim the hedges, edge the grass, brush away cobwebs, and
clear leaves and debris. You can’t necessarily put a price on curb appeal, but
appraisers can take it into account when reconciling that final value.
4. Touch up
your paint on the outside of your home. It may not seem like a big deal, but
appraisers will factor peeling paint into their evaluation, especially if they
are doing an FHA mortgage appraisal. No need to repaint the whole house, just
touch up the few places to make it shine.
Getting through the appraisal process is the last hurdle of
the sale of a home. Working with a local Realtor® who knows the area is
critical to having well-informed choices available to you as a consumer and
ultimately guiding you successfully through the sale. As I have said before,
please call a local Realtor® for all your real estate needs no matter how big
or small. We are trained professionals here to make your life easier. It's best
to surround yourself with the right team of professionals that can continuously
give you the right advice for all your circumstances. <
Lisa DiBiase is a Broker/Owner. She and her company represent buyers and sellers in the Greater Portland area. For all your real estate needs contact lisa@landinghomesmaine.com
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