Question: Can you explain the basics of the appraisal process?
Answer: I sat down with one of the best local lenders, Jake Ryon at First Home Mortgage (Jryon@firsthome.com), and came up with a list of some of the most common questions we hear about appraisals, which I’ll answer below:
What is an appraisal?
An appraisal is an objective assessment of a property’s value, conducted by an unbiased third party who does not have a stake in the sale of the property.
Below is an example of the core component of a recent appraisal in Arlington, the Comparable Sales Analysis. It compares objective features of the subject property (the home being assessed by the Appraiser) to the same features of similar/comparable homes that have sold nearby to reach a valuation of the subject home based on the Appraiser’s determination of how the difference in features change the value of the homes.
Why are appraisals done?
In most cases, the bank/lender is the primary investor in a home purchase. If you put 20% down, the bank is investing the other 80%. Appraisals are done to ensure that banks are making responsible investments in homes they otherwise know very little about and to make sure they do not lose substantially if you, the borrower, default on the loan and the bank is forced to take over (and sell it).
In short, the bank conducts an appraisal to make sure they agree with the value (aka the agreed upon sale price) you’ve placed on the home.
Who does the appraisal?
Anybody can hire a licensed appraisal to provide an opinion on a property’s value, but most appraisals are done through a bank/lender. Lenders have a pool of independent, licensed appraisers or appraisal companies that receive a notice when an appraisal is needed for a loan and an appraiser from the lender’s pool claims the job.
The selection of the appraiser is designed to be a blind selection process to maintain independence and objectivity so that lenders can’t handpick the appraiser they want and potentially influence the results.
Is an appraisal required? What is an “appraisal wavier”?
Most lenders require an appraisal to approve a loan, but in some cases an “appraisal waiver” is issued if Fannie Mae/Freddie Mac determine that that they do not need the additional assessment of an Appraiser because the sale price falls within an acceptable range based on sales history and reliability of comparable sales.
Waivers may also be given if the borrower has a high enough down payment that enough of the risk of overpaying for a property is being absorbed by the buyer.
How long does an appraisal usually take?
When Appraisers are not overwhelmed with orders and a lender submits a rush order right away, I’ve seen appraisals completed in as little as a few days. However, in most cases, appraisal reports are usually completed within 1-2 weeks of the order being placed by the lender.
What effect does a low or high appraisal have on a property sale?
If the appraisal value comes in at or above the purchase price, the bank is happy and the loan proceeds along the approval process. If the appraisal value is below the sale price, the bank will require the sale price to be reduced to the appraisal value or that the buyer put more money down to satisfy the loan-to-value ratio.
In most cases, the amount of additional money a buyer needs to put down is equal to the percentage the bank is contributing to the purchase (e.g. 80% if you’re making a 20% down payment or 95% if you’re making a 5% down payment) multiplied by the difference between the contract’s sale price and the appraisal value. However, this additional contribution can vary or may not be needed depending on your down payment amount, type of loan, and other details of your loan arrangement.
What happens if we disagree with the value or it comes in low?
The borrower/buyer is the only party who can challenge an appraisal and they must provide other (better) comparable sales, facts, or justifications to support an adjusted valuation.
I have dealt with some frustrating scenarios as a listing/seller’s agent when an appraisal came in low based on factually incorrect information on the appraisal report (incorrect bedroom count, square footage, etc) and there is nothing that can be done unless the borrower/buyer requests a revision.
What is an appraisal contingency?
An appraisal contingency is one of the three “standard” contingencies in the residential real estate contract (inspection, financing, and appraisal are the “big three”). It protects the buyer in the event a property appraises for less than the sale price by giving the buyer the ability to renegotiate the sale price or void the contract without losing their deposit.
Who pays for the appraisal and how much does it cost?
Buyers pay for the appraisal as a pre-closing expense and the cost usually ranges from $500-$1,000 depending on the type of loan and value/complexity of the property.
Does appraisal value equal market value?
I would argue that the answer is no. Market value is the price a buyer and seller are willing to exchange a property for and often incorporates forward-looking expectations (future construction, development pipeline, market trends, etc).
The appraisal value is generally backward-looking given that Appraisers are tasked with determining a home’s value based on similar properties that have sold/closed nearby (generally within 6-12 months). There is subjectivity in which comparable sales an Appraiser chooses for the report and how they value different features, like a pool, view, or extra garage space.
Oftentimes I find that things the market values like beautiful finishes/design, a quiet neighborhood street lined with mature trees, or lot quality (privacy, flat yard, etc) are not valued by Appraisers to the same extend as they are buyers. Appraisers are generally focused on objective, measurable criteria like bedrooms/bathroom count, square footage, parking, lot size, etc.
It is worth noting here that Appraisers do know the contract sale price of the property they’re appraising in real-world appraisals for lenders (as opposed to my hypothetical scenario above).
Does appraisal value impact my property tax assessment?
No, the appraisal value has no impact on anything outside of the loan. The County will not receive the appraisal value to include in their assessment for tax purposes.
Can I switch lenders and use the same appraisal?
For Conventional loans (the majority of loans in Arlington), most lenders will not accept an appraisal done through another lender, but VA and FHA appraisals do have reciprocity on appraisals between lenders.
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.