Appraisals are a common part of most real estate transactions. Anytime a person applies for a loan an appraisal is ordered to help the bank determine whether or not making the loan will be a good risk. There are many other reasons to order an appraisal but in this case (seeking a loan) the appraiser is working for the bank.
Appraisals are not an exact science, but there is a very detailed process that appraisers must go through to determine value. Their intended audience is the underwriter at the bank who will be approving the loan. The appraiser’s job is to be the eyes and ears for the bank and they are required to stick to the facts. However, since no two homes are exactly alike there are many subjective “facts”
A bit about the process
First step is to gather data by researching the tax records and MLS. Appraisers must also study the subject property’s sales history for the past three years, determine the zoning for and around the subject property, acquire the tax information, study the site and select appropriate comps.
Selecting comparable properties is one of the most important factors that helps appraisers determine value.
- A comp must be similar in design: a ranch home must be compared with a ranch home.
- A comp must be within 1 mile radius (for the city this radius is even smaller)
- A good comp must have sold within the last 6 months
- A comp must be similar in site and size
Again, since no two homes are ever the same, adjustments must be made for amenities like fireplaces, spa-bathrooms and hardwood floors. The adjustments are made to the comparable properties and if the net of all the adjustments made alter the value by more than 15% either way, the comp is discarded.
Another part of the appraiser’s job is to study the terms of the contract. The appraiser is required to review all the terms of the contract, including all offers, counter offers and addendums including any kind of concession in terms of closing costs and prepaids to determine how these conditions will affect value.
The appraisal is performed at the expense of the buyer and the cost of the appraisal will be billed to the buyer at closing in the form of closing costs. While the appraisal is technically done for the benefit of the lender it is still an important safe guard for the purchaser. According to the SLAR Appraisal Rider, the buyer has three choices if their appraisal does not meet the agreed upon purchase price stated in the contract.
- The buyer can terminate the contract with earnest money returned to the buyer.
- The contract can be renegotiated to reflect the value stated in the appraisal.
- The buyer can continue with the agreed upon purchase price if the buyer can bridge the gap between appraisal and purchase price with the buyer’s own funds.