Appraisals   CONTENTS: Purpose of an Appraisal and how it benefits ME Definition of Fair Market Value Value ADVISORY How an Appraisal can help you Other things an Appraisal tells you

What is the purpose of an appraisal & how can it help me?

The Appraiser is the eyes and the ears for the Lender. It is the Mortgage Appraiser's duty to see if there are any issues with the house or the neighborhood which would inhibit a sale if the Buyer decided to quit making their house payments and the property had to be foreclosed upon.

Another reason for the appraisal is that Federal statutes state that mortgages must have "adequate collateral". The appraiser must prove the house has a value commensurate with the sales price & loan. Which means you cannot finance a home for just any old price you (or the Seller) want.

The standards established by the Lender & Federal regulations mean the Mortgage Appraiser's job is to determine, as closely as possible, the ACTUAL SALES VALUE for the property in today's market. Mortgage Appraisals have been taken out of the "best guess" category by things like the I-30 Corridor Condo debacle and Whitewater. There now can be Federal penalties if an appraiser is wrong.

There are many different types of appraisals. They are used for different purposes and can come up with very different values. e.g. mortgage appraisal, condemnation appraisal, tax appraisal, drive by appraisal, market position appraisal, etc.

The Mortgage Appraisal is the only appraisal type that is looking for an actual Fair Market Value. It is completed to much higher standards than all other appraisal types and is the only appraisal a Mortgage company can use. Let me quote you the standards for determining the Fair Market Value on a mortgage appraisal. It may appear long winded but it will serve you well if you will read every word. The appraiser is trying to determine:

"the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the Buyer and Seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.

Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from Seller to Buyer under conditions whereby:

(1) Buyer and Seller are typically motivated;

(2) both parties are well informed or well advised, and each acting in what he considers his own best interest;

(3) a reasonable time is allowed for exposure in the open market;

(4) payment is made in terms of cash in U.S. Dollars or in terms of financial arrangements comparable thereto: and

(5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concession granted by anyone associated with the sale."

top

 

Advisory Many times Agents & Sellers will try to use "alternative" value indicators in an attempt to "convince" you of a higher than actual value. Don't be fooled! The MORTGAGE APPRAISAL is the ONLY method where the Appraiser is commanded to get ACTUAL SALES VALUE and is the only figure used to establish the maximum mortgage. Your loan will be limited to a percentage of Sales Price or Appraisal value WHICHEVER IS LOWER! A Tax Assessment is a derived figure based upon theoretical increases or decreases to a very large area's change in value and does not look at specific neighborhoods or properties. It is usually, but not always, in the ballpark, but can be off by $10,000 or more on a popular priced home. An assessment is part of a formula that is used to determine your tax bill, not a home's value. A Real Estate Agent's Market Analysis is designed only to look at marketing positions not value! Implicit in the process is an Offer/Counter Offer strategy and because of this a Market Analysis gives an inflated value. This is just part of a process designed to leave Sellers and Buyers dependent upon the Agents for guidance. But even with the best of intentions an Agent does not have access to the detailed information that an appraiser possesses. An Agent only has access to a "Reader's Digest" version of sales, features, details and comp information which limits them to looking at a "broad brush" view not the fine details. The ONLY WAY to get a mortgage appraisal is thru a Mortgage lender. We encourage all FSBO Registry Sellers to have a Mortgage Appraisal done before they put their homes on the market and to market the home at that price. If a copy of the appraisal is not plainly displayed ask to see a copy - it tells you much more about the house than just value! The FSBO Registry has tried to make the sales process as simple as we can. We have helped to banish that dark and mysterious process known as dickering to the realm of black magic where it belongs so now you can focus on the important things like "Does this home fit our needs?" instead of worrying about "Will the Seller be realistic?" and "How much is this house worth?" Our Lending Partners can help you coordinate all the necessary steps from contract to closing. You can rely upon the Mortgage Appraisal to be a fair and reasonable indication of value. In most cases the appraisal value should also be the sales price.

top

Even though the Appraiser looks at a home with a critical eye and must point out inadequacies such as possible foundation or roof issues, an appraisal isn't a home inspection. We highly recommend that all Buyers also have a Home inspection done by a licensed inspector to ensure they are fully aware of the property's condition and there are no hidden issues.

 

How does an Appraisal help me?

For one thing an appraisal ensures you will not pay too much for a piece of property without your knowledge and consent.

You CAN pay more than appraisal value for a home if you desire, but you need to be aware that your financing will be limited to a percentage of the sales price or appraisal WHICHEVER IS LESS. This means you would have your normal downpayment, closing costs & prepaid items PLUS would have to come out of pocket for ALL the money you paid above the appraisal value. There is no way to finance this additional money.

Federal statutes say a Buyer must be shown and furnished with a copy of the Appraisal so don't worry that you will accidentally pay too much.

Buyers have some protection built right into the contract. Texas State Promulgated contracts are written subject to the property appraising for at least the sales price. If the house doesn't appraise for the sales price you have the option of

• backing out of the contract and receiving all of your earnest money back
• the Seller can, and usually does, reduce the price to the appraised value
• OR you may pay above appraisal price
  

The appraisal gives you much more information than just value. It also gives you a lot of ancillary data about the house and the area. If used properly it can help you make the most informed choice of homes and maximize your chances for increases in value and resale.

top

An appraisal also tells you:

If there are any Home Owner Association dues and how much

Growth patterns and normal marketing times (are you buying into a good area?)

Predominant occupancy (how many rental properties are in the area - rentals negatively influence value)

The price range and predominate price of your area so you can see how the house really fits the neighborhood

Land usage & public services

Lot dimensions, zoning & utilities

Neighborhood improvements + it tells you if the house is above, below or average for the area

A general description of the exterior of the house, foundation, basement, insulation.

Room count and general description of the interior of the house, building materials, heating, kitchen, car storage, etc.

Additional features, condition and adverse environmental conditions.

It also:

Gives you land value, cost to rebuild and other site improvements which tells you how much insurance to buy (insurance agents typically want you to overinsure)

Compares the subject property to other similar homes that have sold (value is determined by homes that actually sold, not what Sellers had been asking)

It even includes pictures of the subject property and others that have recently sold.

The appraiser comments upon:

The improvements - both the quality and features

If there have been recent sales of the subject property

Normal sales terms for the area

There is a floor plan as well as all the square footage calculations.

There are maps that show

Location of the subject property

Location of other sales

Flood Plain

As you can see a Mortgage Appraisal is much more than just a price.

Used wisely it can help eliminate a lot of the fear factor.