Appraisers play an important role in the sale of your home. They are licensed or certified real estate professionals whose job is to provide an independent opinion of value of your home. The opinion of value created by appraisers is the byproduct of an onsite inspection plus a market analysis that includes research of other recent and nearby sales, listings and trends. The result is a detailed report, sometimes 25 pages or more.
Appraisers are compensated for the service of appraising, not for the value they give a property. They get the same fee whether a valuation is “high” or “low.” However, their unbiased opinion is important because it helps lenders justify loan approvals and the risk a lender takes when it provides you money to buy or refinance. Without an appraised property value that matches or exceeds the purchase price, a loan application can quickly halt. Here’s how it works:
Imagine you want to sell a home for $300,000 and you receive an offer at the full asking price. The buyer has been pre-qualified for a loan at 95 percent ($285,000) of the value with a 5 percent ($15,000) down payment.
If the appraiser comes back with a value of $300,000 or more, you’re good to go. The property’s purchase price is confirmed and you have what your buyer will regard as a “good” appraisal. But what if the appraised value comes in at $290,000?
A low appraisal is a huge problem because lenders make loans based on the sale price, or the appraised value, whichever is less. If the appraised value is $290,000 and the lender will provide 95 percent financing, then the maximum loan amount is $275,500. That leaves a gap of $24,500 – nearly $10,000 more than the $15,000 down payment the buyer planned.
Four things may happen with that “low appraisal:”
- The buyer can put up the additional $9,500 in cash to purchase the property for $300,000.
- You can decide to reduce the price to make up the difference, perhaps selling for less than what you could have to another buyer.
- You and the buyer might compromise if each is willing to give a little to assure completion of the transaction.
- If neither party will compromise, the deal is likely to fall through.
Do home sales really blow up because of appraisal problems? You bet. The National Association of Realtors estimates that about 4 percent of all transactions fail because of “appraisal issues.” Given roughly 5 million annual home sales, we are talking about 200,000 home sales a year.
How to Get Better Appraisals
Many appraisal worries can disappear if you take a few steps to help in the process. Here are several ways to assure that you get the best possible appraised value.
- First and foremost, have the property in “show” condition for appraisers. Make sure that all repairs are complete and clean the home from top to bottom. If there’s junk to be thrown out, be certain that it is gone before the appraiser arrives. Remember that appraisers must consider needed repairs.
- Make appointments to show the property at the appraiser’s convenience and be on time. Someone should be present during the appraisal.
- The rules provide that you can ask the appraiser to consider additional information. For instance, if the property has had major repairs such as a new heating system, gutters or a roof, it’s fine to give the appraiser copies of the repair invoices to show when the work was completed. The purchase agreement is part of the appraiser’s scope of work and is a required document due to it being a powerful indicator of value.
- Appraisers are professional individuals with extensive training and experience. They deserve to be treated with respect. Be aware that federal law guarantees appraiser independence. Any effort to bribe, extort or intimidate an appraiser is a serious offense.
- Lenders must inform mortgage applicants that they can receive a free copy of appraisals, reviews, computer valuations and other data used in the transaction. A buyer isentitled to see this material “promptly” after the appraisal report is completed, or three days before the loan closes, whichever is earlier. The buyer should receive the full appraisal report with all of the relevant information that was integral to the valuation of the property, including exhibits and attachments. Recent reforms require appraisals to include an analysis of inventory as well as trends in median sale price, list price, days on market (DOM), sale-to-list price ratio, and impact of foreclosures and REOs.
Lastly, even if your buyer makes an all-cash offer, you should consult your real estate agent, who can help assure that a property has a given fair market price.
Call today for more information.