When you get a loan on a house, most lenders will require a so called home appraisal. A home appraisal is a report that assigns a value to the home and tells the lender that the house is worth what you’re paying for it. If the appraisal comes in lower than the contract price or the appraiser requires repairs to be made. It can kill a deal and cause a lot of frustration. Appraisals and the guidelines appraisers must follow can also be very confusing to people who are not familiar with them. I hope this article can shed some light on what appraisals are. How they are completed. And how to challenge them.
Why Do Banks Require Appraisals?
Banks and mortgage companies love to lend money on houses. Since houses are a more secure debt than cars or businesses. If the borrower defaults on a house, the bank can foreclose on the home and take possession. However, foreclosures are not cheap to complete for the bank after you factor in paying the attorneys, selling costs, and lost interest. To reduce the amount of money a bank loses from foreclosures, they first want to lend money to qualified buyers. And second, the bank wants to make sure any house they lend on is worth what the borrower is paying.
If banks did not confirm values, the borrower could buy a house for $50,000 more than it is worth. If the home was foreclosed on, the bank would not only lose money on lost interest, Selling costs, and attorneys fees. But they would also have to sell the house for $50,000 less than they thought it was worth (assuming prices did not go down since the loan was made).
An appraisal is done by a licensed appraiser. It is meant to confirm what the buyer is paying is at least as much as the home is worth.
What is a home appraisal?
An appraisal is a valuation of a home or property and is done by a licensed appraiser. I used to complete many broker price opinions (BPOs) as a real estate agent, but a BPO is not an appraisal and not as detailed. BPOs are used to determine market value for banks who may be trying to complete a short sale or for banks who need to know the value of homes that are going into or have been foreclosed. BPOs are usually not used to determine the value of houses for new loans.
To complete an appraisal, the appraiser will view the entire home, take pictures, measure the house, inspect the condition of the house, and complete a report that values the home. The report consists of sold comparables. Which are houses that have sold recently. They are the most similar to the house being appraised (subject home). The appraiser has certain guidelines they should follow regarding the comparables that are used to value a house. Sold comps:
• Must Have sold in the last six months.
• Have above-ground square feet within 20 percent of the subject.
• Must Have similar basements (finished or unfinished if applicable).
• Have been built within a certain time frame of the subject (usually ten years).
• Be in a similar condition as the subject.
• Have a similar bedroom and bath count.
• Be in the same neighborhood or within a certain distance of the subject (usually one mile).
If there are not enough sold comparable properties to meet all these guidelines, the appraiser can expand his criteria and make adjustments. If a house is in a rural area than the appraiser may have to look within ten miles of the subject for comps or look for homes within 20 years of age because there are no other comps. When an appraiser makes adjustments, they will add or subtract value from the comparable properties for different characteristics.