The A-B-C’s of Home Appraisal Reports

From on July 20, 2009 in General

forsale.jpgPhoto credit: caswell_tom

If you’re a first time home buyer and you’re not familiar with the buying process, there’s a little report you must have to move forward in the sales process once you make an offer on a home. Actually, it’s not a little report. It’s a big report and a possible deal breaker. It’s called an appraisal.

What is an appraisal?

An appraisal is needed to determine the value of the property. The bank needs this to verify the funds they’re lending equal the value of the home.

How do I order one?

Your lender or mortgage broker will set this up for you. They will call an appraiser, set the appointment, and let you know when the work is done.

Who pays for the appraisal?

The buyer pays for the appraisal. The cost for an average 1,800 square foot home is between $300 and $450. You can pay the appraiser directly or have them bill it through escrow and, if you choose the latter, you’ll pay for the appraisal when you close escrow. If you don’t close escrow because of some unforeseen event such as the pest report revealing that termites have eaten through the floorboards and the house is about to cave in, you still have to pay the appraiser.

What if the appraisal comes in over or under my offer?

Let’s say you find a house with a listing price of $300,000 and you offer $270,000 contingent upon the appraisal. The seller accepts your offer. Your lender orders the appraisal and the appraiser determines the value is $300,000. You just pocketed $30,000 in instant equity. Using the same scenario you decide it’s a hot market, houses are selling fast, and you really want the house. You offer $10,000 over asking price for $310,000. The appraiser values the house at $290,000. The bank will only lend on the $290,000. You have 3 choices with this scenario. You can pay the $20,000 difference out of your pocket, you can offer $290,000, or walk away from the deal.

A note to sellers—on the flip side of this coin is something most sellers don’t think of because it’s not written on the residential purchase contract. The contract has a box for the buyer to check that states the offer is continent upon the appraisal but there’s no box for the seller. You can hand write on the residential purchase contract that if the appraisal comes in over buyer’s offer then seller has the right to cancel the agreement. In other words, if the offer is $300,000 and the appraisal comes in at $320,000 you could renegotiate the price or cancel the deal and then change your listing price to $320,000. Really, if the buyer is protected by checking that little box, shouldn’t you be protected too?

What type of information is in the appraisal?

The appraisal tells the lender what type of neighborhood they’re investing in. What is the condition of the property? Are there any improvements; if so what are they? Are there any physical deficiencies or adverse conditions? Does the property conform to the neighborhood (style, construction, condition?) The appraisal highlights comparable homes (similar quality/size) that have recently sold in the area – otherwise known as comps, to find the value for the subject home.

Fighting for the appraisal to come in where you need it to be

Two and half years ago I wanted to take out a 2nd mortgage with a cash-out feature. When it came in $15,000 short, I had to come up with facts that would justify pumping the value up by that amount. I drove by the homes that were used as comps and found flaws in every one (the appraiser doesn’t drive by his comps – he uses his computer.) One of the homes (that significantly lowered my value) had been an REO and was on the market for over a year. I’d been in that house during an open house - it was in very poor condition.

I listed all the reasons why he should adjust that comparison up or remove it altogether. I also gave him facts and pictures to back up my case on the other comps as well, and guess what? My house appraised exactly where I needed it to be.

So, don’t give up if the appraisal falls short.