Friday, July 9, 2021

Real Estate: Waiting on Bated Breath, The Appraisal

Submitted by Lisa DiBiase 

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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