If you're refinancing a home, you know that getting the best mortgage depends largely on a solid appraisal, a reality that raises the question: What steps can you take, legally and ethically, to make an appraiser happy and get the home value opinion you want, need and deserve?
If you bought a home several years ago, you'll find that the appraisal process has evolved. The appraiser is still there to give an independent opinion of value on your home and will take into account overall market values and past sales of comparable homes in the area. But a few things have changed.
First, legislative reforms have created new safeguards to assure that appraisers can value a home without pressure or intimidation from lenders, brokers or borrowers. Appraisers must also now use a standardized format.
Second, the days of drive-by appraisals are over. Today's lender instructions require appraisers to perform a complete visual inspection of the interior and exterior areas of the subject property. You can expect an appraiser to be at your home from 20 minutes to two hours, depending on the size and complexity of the property, and they must take photos of all living areas to document and confirm the condition of the home.
Keep in mind that there is a big distinction between appraisals use in home sales and those used to refinance a property: When a home is changing owners, the purchase agreement (sale contract) is part of the appraiser’s scope of data and is considered a powerful indicator of value.
In a refinance, there is no sale agreement and thus no counter-balance in the transaction to offset an appraiser's valuation. As a practical matter, the appraiser’s word is final.
9 WAYS TO ENCOURAGE A HIGH APPRAISAL
- You will get a call from the appraiser to set up an appointment. Start-off on the right foot by asking the appraiser what time and date are convenient for them and then agree to work with the appraiser's schedule. And make sure you are at the property when the appraiser arrives.
- The outside of the house should be landscaped with mowed lawns and trimmed bushes. If you can arrange to have blooming flowers when the appraiser arrives, so much the better because curb appeal really does count. Appraisers need to measure the exterior, and overgrowth makes that difficult.
- The inside and outside of your house should be in perfect working condition, the way it would be if you were selling it.
- The house should be clean inside. Beyond that, if you can get rid of any items before the appraiser comes – perhaps donate them – that's helpful because less clutter can create a sense of greater space.
- Be aware of the $500 rule, the idea that appraisers value property in $500 increments – like $307,000, $307,500, $308,000, etc. Because appraisals with $500 increments are common, there's the idea the small repairs are unnecessary. Nope. Make small repairs because they contribute to the overall sense of the property's condition.
- If you have pets, they need to be out of the house, because some people – including, perhaps, the appraiser coming to your home – are discomforted by dogs or are allergic to cats.
- Create a “brag file” for the appraiser. In the file, have a sheet with a list of major repairs and improvements, including appliances and landscaping, as well as the dates when something was improved, installed or replaced. Example: “New roof, September 2013. New refrigerator, January 2010,” etc. Next, have copies of the bills to prove when the work was done and how much was paid. Appraisers have to report upgrades and conditions of materials.
- Break out some basic documents and give copies to the appraiser, including the most-recent tax bill, the survey, and HOA papers.
- When a home looks good and all systems, elements and appliances are up-to date, the appraiser will note what he or she considers its effective age. It may well be that a home was built in 1960, but with improvements and care the appraiser might see it as far younger and give it an effective age of 20 years. Additionally, the effective age and condition of the house are considered by the appraiser in estimating the home’s remaining economic life (REL), which relates to the number of years the home will hold its market value.
- In the end, the important point is that you have the ability to influence appraisal results, within the rules, of course. The keys are to prepare, provide documentation, and be pleasant – a formula which works in most financial situations.
DEALING WITH A 'LOW' APPRAISAL
The scourge of every real estate sale is the possibility of a low appraisal. With a home sale, low appraisals can be deal killers. As a seller, if you think your home is worth $300,000 and the appraiser says $290,000, both you and your buyer could have a problem. The loan is going to fall $10,000 short of what you need to do the deal. You will have to lower your price or the buyer will have to bring additional cash to closing.
In a refinance, however, a low appraisal may not be a deal breaker. Let’s say your lender is willing to loan you as much as 80 percent of your home’s value. If the property is appraised for $300,000, you can get as much as $240,000 in financing. If the appraisal comes in at $290,000, the maximum loan amount is $232,000. There’s an $8,000 difference between the desired appraisal and the actual valuation. Would you decline the lender's offer? If you need $240,000 and not a dime less, then perhaps. But for many borrowers, the $232,000 would be adequate. As always, you have to think about your needs and preferences.
Should the appraisal come in below what you think is accurate and below where you need it to be, you don’t need to just give up. Carefully review the report and bring any errors or misperceptions to your lender’s attention. Back up your concerns with facts and make your arguments succinctly. The rules say the owner can provide “appropriate property information, including the consideration of additional comparable properties, to make or support an appraisal” when appealing a value. That means you can prepare and submit printouts of nearby homes of the same size that are for sale or have recently sold to support the value you think is correct. In other words, produce your own set of “comps,” or comparable properties. If you need to, consider consulting a real estate agent.
6 steps to a smooth closing on a refinance
7 ways to sink your home loan application
Refinancing an investment property
How U.S. mortgage rates are established
Frequently asked refinance questions