Appraisers and Appraisals - Commonly Asked Questions
I get a lot of questions around some basic principles of the appraiser and the appraisal. For today's blog, I thought I would share these FAQ with you.
How is an inspection different than an appraisal?
Although it seems like they are doing similar tasks (inspecting the home), the purpose behind doing an inspection versus and an apprasial are for two very different reasons. Home inspections assess the physical condition of a home and home appraisals estimate the home's value.
Although the appraiser visually inspects the home, the appraiser usually addresses conditions that are apparent or observable. Unlike a home inspector, an appraiser does not test mechanical systems and major appliances.
A home inspection is to protect the buyer from purchasing a home with structural defects and other major problems.
The home appraisal protects the lender from paying more than the house is worth.
When do I need an appraisal?
When you are purchasing a home with a loan, the lender will order an appraisal of the home. The bank/lender wants to ensure the home's value equates to the loan on the home.
Who pays for the appraisal?
The buyer pays for the appraisal. Sometimes the lender requires the payment up front. Sometimes the buyer will pay at time of closing. It depends on the lender.
So, since I'm (the buyer) paying for your services, you (the appraiser), is working for me, right?
No. It's true you paid for the service, but appraisers are third party to the transaction, hired by the bank to determine a home's market value.
What is the Appraiser looking for?
The Appraiser visually inspects the home for improvements or deficiencies that may lower the value. In addition, the appraiser takes into account the house's location, square footage and the selling prices of similarly sized and located homes. This technique is called the Sales Comparison Approach.
Sales Comparison Approach Versus Cost Approach
The Comparison Approach, as mentioned above, compares similar homes that have sold in the area to the property in question. In real estate, they call it "the subject property."
The appraiser must compare similar properties to the subject property, making adjustments so that their features are in line with the subject property. The result is a figure that shows the price at which each comparable property would have sold for if it had the same components as the subject property.
The Cost Approach is most usually used for new construction properties, where the costs to build are known. The appraiser estimates how much it would cost to replace the structure if it were destroyed.
Do I automatically get an appraisal in a real estate transaction?
No, you typically only get an appraisal done on a property when the home is getting a loan. If you are buying with cash - you don't need someone's permission to pay what you want to pay on the home. That's one of the main reasons sellers like to see cash deals. If the house escalates in price because of multiple offers, the seller doesn't have to worry about bringing the sales price down because an appraiser doesn't value the home at the needed value if the buyer is a cash buyer. Cash buyers are also preferred by some sellers because if you don't need an appraiser, you don't need to worry about prolonging the closing date. Cash closes quickly.
Why did the appraiser tell me that I needed to do repairs, especially when the inspection was waived?
When an appraiser views the home, he will inspect the home. The appraised value of the home may be subject to repairs being completed in the home. Appraisals aren't just about an amount of money, it's about total home value. And if an appraiser sees that the home needs work to bring it to a certain value, s/he will require work to be completed to meet the value. We've been seeing more an more adventurous appraisers going into attics and crawl spaces and asking for work to be completed. So, whether or not the buyer agreed to waive an inspection, if the seller does not complete repairs in an appraisal that is "subject to" completing repairs, the lender will not lend on the home, and the buyer will be unable to purchase the home.
Appraisal "Subject To" versus Appraisal "As Is"
If you get a notice of low appraisal that includes repairs to be completed, the appraiser can list it either as "Subject To" or "As Is." "Subject To" means that seller must complete the repairs in order to reach the appraised value number. "As Is" means the number value of the home will not change or increase if the repairs are completed.
What does it mean to have a low appraisal?
Basically, a low appraisal means the lender will not loan the full amount offered in the purchase and sale contract. It can be quite disconcerting when you get a notice of low appraisal, but ususally, it can be worked through. There's no one way to handle it, but often in real world real estate, both the seller and the buyer pitch in to cover the amount that the lender will not (seller will reduce the price of the home and the buyer will contribute more money at closing).
What's my home's appraisal value?
If you are a home owner seeking to obtain a certain value for your home, renovations and home improvements aren't always dollar for dollar more value. Before you spend thousands of dollars on a renovation, you may want to contact an appraiser directly for their thoughts on the matter.
A few more random facts:
Appraisers must be licensed in the state where they work, and are required to follow various government requirements.
Appraisers are far more removed from the lender than pre-real-estate- crash days. (That's a discussion for a different day.)
When a home gets appraised, real estate agents don't see usually see the appraisal paperwork. We get notified by the lender if the home appraised or not. If it is a low appraisal, that's when the report is typically shared.
A buyer can receive a copy of the appraisal if they put the request in writing. Buyer is not obligated to share the appraisal report with seller. If the report is shared by the buyer, it's most likely a low appraisal scenario when you are trying to re-negotiate price.
Sellers may hire an appraiser prior to putting their home on the market. Seller is not obligated to share appraisal report with a potential buyer. The only time a seller may share an appraisal with a buyer is if the seller hired an appraiser to challenge a low appraisal performed by another appraiser.
Kristin Bushnell is Designated Broker of Bushnell Real Estate Solutions and Co-owner of Bushnell Craft Brewing Company in Redmond, WA. Check out my profile here.
If you are ever interested in chatting about real estate, contact me at firstname.lastname@example.org or call me at 425-559-1355. I'll buy you a beer (or non-alcoholic beverage, if you prefer!), and we can chat about real estate until your heart's content.