The value of a home is determine by an appraisal, or is it?
Federal government guidelines and restrictions have made appraisals less reliable than in years past. Here are ten things you need to know about appraisals.
Fact #1: The Lender, Not the Home Buyer, Is the Client
Every buyer believes that since they pay for the appraisal, it is being completed for them in order to protect them from overpaying for a home.
In reality, the appraisal is more about protecting the lender than the buyer. An appraisal allows the lender to determine risk on the amount of money being borrowed in case the buyer defaults on their promise to pay.
Fact #2: Appraisals Do Not Determine True Home Value
The true home value is determined by what someone is willing to pay, which is determined by comparative shopping and individual need. An appraisal is one person’s opinion of value based on a small sampling of historical data, not real-time market conditions.
This is one of the reasons why when several different appraisers complete an appraisal on the same property you would have several different opinions of value.
Value is determined by real time supply and demand, not by homes sold from a year or more ago.
Fact #3: The Appraiser Knows the Price to Support
When appraisers go to view a home, they can only measure the square footage. They cannot look inside the home. Instead, they use computer data and photos from a private home listing database to draw comparisons between recent homes sold. This can lead to an inaccurate home valuation.
And since appraisals protect the lenders, the goal is for the appraisers to support the price paid, not assign true value to the home. The appraisers know what value to assign the home because they’ve been given a copy of the offer and purchase contract by the lender.
Fact#4: Appraisers Are Government Regulated
As of January 1st 2015, appraisals are actually entered into a computer and values are assigned by the appraiser choosing from a series of codes. Since a computer adjusts value, it also collects and saves this data entered by every appraiser.
Therefore, the computer knows if an appraiser was inconsistent with the code chosen previously. Many appraisers have told me they take a conservative approach to these adjustment codes because they are being watched closely for inconsistencies.
Fact#5: A Computer Applies a Standard to Home Differences
In years past, the appraiser could give their professional opinion on the value to be placed on differences between two homes. Perhaps the home being purchased had $20,000 in upgrades — hardwood floors, new stainless appliances, granite counter tops. The buyer loved the home with all of those upgrades and they saw the value.
Today, the computers uses a standard from homes previously sold, which as we’ve said may not be current with the actual market.
Fact#6: All Mortgage Companies Are Not Equal
If a mortgage company does not have in-house processing, underwriting, and appraisers, then you may face uncertainty and delays if an appraiser is hired from a third party.
There are only a few mortgage companies in the greater Raleigh area that have met the requirements that allow them to say yes to all three of your very important questions. We can refer you to a good mortgage company within our business network.
Fact#7: Appraisal Management Companies Have Created Controversy
Many mortgage lenders have not met the requirement to have approved appraisers, so they must use third party appraisal management companies to place an order for an appraisal.
Many times the appraiser that comes up in the “round robin” assignment rotation may be from outside the area and not know the neighborhood or builders well. When they receive the assignment if they do not know the area, they are supposed to decline the assignment. But since they make a living by completed appraisals, it’s hard to hit the decline button.
This can really cause issues for all parties involved. The truest appraisal will be from someone who really knows the market area and has a lot of experience in that area. Connect with us and we can refer you to a Raleigh area appraiser.
Fact#8 Appraisers Cannot Talk Directly with Loan Originators
However, they are allowed to consult with the Realtors to learn about upgrades or anything else that might affect home value. Realtors have often been inside of the sold and closed properties the appraiser is considering using, and they can provide valuable information about the differences.
Remember, an appraiser can’t view the inside of a closed property, but a Realtor may have viewed it when it was for sale and have added information to share. Really good appraisers will put in the extra effort to learn more about each property to be fair with the value, but some will not and they create a lot of problems for home buyers.
Fact #9: Computers Cannot Accurately Value Unique Properties
Sometimes a property is so unique or highly upgraded that there are no like properties to compare. An appraiser may feel the house is worth the contract price but, the computer has no rational thought processes to draw from. This usually results in appraised value coming in lower than the contract price.
When an appraisal comes in low the borrower can pay the difference, the contract can be terminated, the seller can offer to reduce the price, or negotiation between buyer and seller may occur. When termination occurs the seller has lost time on market and the buyer will lose money paid out for due diligence fee, inspections, title work, and the appraisal cost to name a few.
Fact #10: Your Ideal Home Is Worth More than the Appraisal
The number at the bottom of your appraisal document is for a moment in time, good for today only and highly likely wrong because it was one person’s opinion and a computer. Even an appraiser will tell you that tomorrow the number could change based on the next home that closes in a market place.
Remember, an appraisal is an opinion of value based on a small sampling of past history up to 12 to 24 months prior. A home is worth the value it brings to the buyer now, in this current market. The appraisal is also completed with a computer program with lots of restrictions and for the benefit of the lender.
Buying a Home in Raleigh, NC?
Knowing more about the appraisal process and other aspects of buying a home can help you in the long run. If you would like to know more about aspects of buying a home in Raleigh, from searching for the right home to finding out more about appraisals, contact us at 919-235-0007 or by email at linda@lindacraft.com.