REAL ESTATE APPRAISALS

In this competitive and challenging real estate market real estate appraisals can often make or break a deal.  First off I want to explain what a real estate appraisal is.  A real estate appraisal helps to establish a property's fair market value - it is an expert opinion of a certified, state-licensed professional who determines the value of the property.  

How does this professional determine the value of the property?  There are two primary methods for residential real estate: The Sales Comparison approach and the Cost Approach.  The cost approach is primarily used for new construction and is based on reproduction costs.  In this method the appraiser will determine the cost to replace the structure on the property if it were destroyed.  The sales comparison approach compares the subject property with with three or four similar homes that have sold within the area, preferably in the last six months and within a 1 mile radius.  This comparison considers specific elements such as, lot size, square footage, garage, basement - unfinished or finished, age of home and recent upgrades or additions to the home.  

The process begins with an inspection of the property by the appraiser and usually includes a detailed report explaining how the appraiser determined the value of the property.  The appraiser will note the size and condition of the house, improvements made, any serious structural problems, such as cracked foundations or wet basements and comments about the neighborhood and surrounding area.  

The appraisal is a very important piece of the home buying process and as I stated before - it can make or break a sale.  For example: let's say you find your dream home and the purchase price is $450,000.  You've already been pre-approved by your lender and both buyer and seller have agreed upon this price.  You've submitted all your paperwork to your mortgage broker and your are already deciding where your furniture will go and what paint colors you will choose.  However, you get an unexpected call from your lender saying the property did not appraise at $450,000.  Now you discover that your dream home is only valued at $375,000.  Your lender will not loan you more than the value of the home and in this market most buyers wouldn't pay for a home that did not appraise.   So now what happens?  Is the deal over?  Can anything be done?

First, you must look at what may have caused the low appraisal.  It could be a number of factors including the appraiser may have been from out of the area and did not use valid comparable sales, the appraiser used distressed properties and/or foreclosure as comparables, the home was just overpriced to begin with or it may be due to factors that the homeowner could correct, such as repairs or maintenance.  Most banks have a process by which you can dispute an appraisal.  The buyers or sellers real estate agent can supply other comparable sales and explanations as to why they think the appraisers value if off.  This dispute will take some time and if it fails you may still have options.  Other options could include, switching lenders and ordering a new appraisal, reducing the purchase price of the home or the buyer could bring more money to closing.  It is important that all parties work together if this happens so that you can try to find a suitable solution for both the buyers and sellers.  

Unfortunately in this market this scenario is happening more than ever throughout the country.  I am dealing with this factor in more and more of my home sales than ever before.  For this reason, it is very important that the seller price the home correctly.  A seller should make sure their real estate agent provides them with accurate and timely information so that they do not waste time marketing and showing their home at a price it will not appraise at.  

A home appraisal is not just another cost added to the buyers bottom line.  It is a protection for everyone involved in the home buying process and will help you make a more informed decision about purchasing a home.