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What Is Reviewed In A Home Appraisal

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When you go to buy a house, unless you’re throwing down all cash on the deal, you’ll need to get a home appraisal. The lender requires this because they want to know that you’re not borrowing a million bucks for a $50 home because in the event their own due diligence on you is faulty (and you default), they can at least take the home and sell it for the value of the loan. If the appraisal comes back lower than the selling price, then the lender is a little wary of extending you credit because now you have no collateral to back it up. (This explanation only applies to the appraisal of an existing home, I don’t have experience with a new home)

One thing to remember is that the Home Appraisal is entirely separate from the Home Inspection. The inspection is designed to find the faults in the home that need to be addressed whereas the appraisal is merely designed to reach a value for the home. An inspection is far more rigorous in terms of going over the house with a microscope (if you get a good and capable inspector).

What You Get
Considering you usually don’t get to pick the appraiser (the lender will), you’re probably more interested in what you get for the money you’re about to spend (it’s part of the ubiquitous “closing costs”). You’ll get a report that lists out the following:

  • The characteristics of your house and the land it sits on.
  • Three comparable (“comps”) properties that are similar enough to your own property.
  • Information about the real estate market in your general geographic area.
  • Any positive or negative factors – these are the unique characteristics that differentiate you from your neighbors, your comps, etc. An example of this would be if you had a back deck but none of the comparables do, if you have significant structure issues, stuff like that.
  • Miscellaneous data – The appraisal has a lot of information that you otherwise didn’t think mattered or were quantifiable.
  • Photos – The appraiser may append photos of the front, read, and street view of your home as well as photos of the comparable properties.

For example, this is what my home appraiser said under “Factors that affect the marketability of the properties in the neighborhood”: The area is in good proximity of employment, shopping, schools, churches & recreation facilities. Public transportation, police & fire protection are readily available. Utilities are readily available and deemed adequate. Employment stability appears good. Properties in the neighborhood are generally well maintained; appearance & appeal to marketability are deemed as good. No detrimental conditions affect marketability were observed. So you see, there is a bit of subjectivity.

How Do They Determine Value?
Here’s is where they get to play a little with numbers. They come up with a value by either taking the average price of three comparables sold in the last few months and then adjusting for the positive or negative factors. So you see, since many of the factors a bit subjective (how valuable is that deck?) so the appraiser usually can get you an appraisal that is at least the purchase price of the home.

{ 3 comments, please add your thoughts now! }

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3 Responses to “What Is Reviewed In A Home Appraisal”

  1. Debbie says:

    I read your appraisal posting with some trepidation, being a Licensed Real Estate Appraiser. While I appreciate your pointing out the appraisal is not an inspection, I bristle at your closing line. There is little subjectivity in the appraisal process and the purpose of the appraisal is not to “…get an appraisal at least the purchase price of the home.” The adjustments applied to the comparables are derived from market data. An over-simplified explanation of the Sales Comparison Analysis (the “grid” page) would be to consider 2 houses exactly the same with House #1 selling for $300,000 and House #2 selling for $310,000. The only difference between the 2 houses is that House #2 has the deck you refer to, indicating the deck has a value of $10,000. That data tells the Appraiser the market value of a deck that size is $10,000; giving a basis for the adjustment. What is key to remember is that the Appraiser is looking at what the market (the typical buyer) values the features. Actual costs, the value to the homeowner, etc. do not translate to the actual contribution as we’re always looking at what the market indicates.

    As to “getting the value,” I cannot stress enough that is not the purpose of the process. The ethical and compliant lender wants to know what the most probable price they could get for your house should you default on the loan. Appraisers are subject to huge amounts of pressure to “get the value” in various direct and indirect forms. Whether or not the appraisal “works” for the lender or the borrower is irrelevant to the validity of the appraisal. The comparables are adjusted in “the grid” and result in a post-adjustment range of value. Your statement that we develop a value from that range is accurate. One sale may be only a month old, one may be a block away, one may require few adjustments, etc. and we weigh those differences. In the case of a sale, oftentimes a property is listed for an above-market price whether existing or new construction. In a refinance, the borrower wants an amount that will allow them to pay off their existing mortgage and take out enough money to pay off the credit cards and take a vacation. Those are very valid issues for the property owner but are not within the appraiser’s consideration.

    Comparables can be selected that will support a certain, targeted value but, to many within the process, that is fraud. To have adequate comparable sales within a 1/4 mile of the Subject property but to use sales a greater distance (because they sold at a higher value) is one example. Another ploy is to omit certain factors of a property, such as not mention (or adjust for) an in-ground swimming pool offered by a sale. I have completed numerous review appraisals for fraud investigation departments where the lender is pursuing legal action against the appraiser in order to recover their lost money.

    One last item is that we are dealing with historical data, comps that closed prior to the inspection of the house (but no longer than a year ago.) Concessions in the form of closing costs, furniture, big screen tv’s, vacation vouchers, outbuildings, etc. are deducted in the grid and reduce the net price of the house. So in the current housing market where some areas are seeing the builder offering a whole house furniture package or a detached garage in order to entice buyers, the value of that feature is a reduction in the overall value of the property. $500,000 purchase price – $40,000 outbuilding=$460,000 house value. If you paid $500,000 2 years ago for your house and the brand new house down the street just sold for $500,000 with a “free” $30,000 swimming pool…well, your house is probably worth about $470,000.

  2. Karen says:

    What determines the cost appraisers use in making the adjustments in comparing comparables?

  3. jim says:

    Gut. 🙂

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