Understanding the Home Appraisal

The Home Appraisal is required by your mortgage lender so that they can determine the value of your home compared to the sales price.  The home appraisal is ordered by the mortgage lender through a independent third party called an appraisal management company or AMC for short.  The AMC will assign a licensed appraiser to take the order.  The mortgage lender and the borrower are not allowed to know who the appraiser is prior to the inspection of the home and the completion of the appraisal report.  This rule is to ensure that the lender and the borrower do not try to influence the appraiser’s opinion of value.  The appraiser’s opinion of value on the home appraisal report is called the “fair market value” of the property.  If you would like to get started on a mortgage loan to purchase or refinance a home, give the John Thomas Team a call at 302-703-0727 or APPLY ONLINE

What is involved in a Home Appraisal?

Having an idea of what is involved in appraising a piece of property can greatly help in maximizing the appraised value and avoiding costly details and re-inspections. The appraisal process consists of several steps. The following are the major steps in the sequence normally followed by appraisers:

1. Research the subject property as to size, bedrooms, baths, year built, lot size and square footage.
2. Gather data of recent sales in the subject’s neighborhood. The appraiser needs to locate at least 3 and preferably more similar-sized homes which have sold and closed in the neighborhood. The homes need to be within one mile of the subject and sold within the past 6 months. These homes are considered the “Comparable Properties” or “Comps” for short.  Appraiser is also to find at least one home that is currently listed for sale.
3. Field inspection consists of two parts: first the inspection of the subject property, and second, the exterior inspection of the comparable properties which have been selected to estimate the value of the subject property.

The subject property inspection consists of taking photos of the street scene, front of the home and rear of the home which may include portions of the yard. The appraiser will make an interior inspection for condition, noting any items that would detract from or add to the value of the home. He will also draw a floor plan of the home while doing the inspection and take the measurements of each room.

The inspection of the comparable properties is limited to an exterior inspection. For features which cannot be seen from the street, the appraiser has reports from the Multiple Listing Services (MLS), county public records, and appraisal files along with other sources to help determine the condition and amenities of the comparable sales. After the field inspection has been completed, the appraiser must determine which comparable properties most resemble the subject property, making slight adjustments in value for any differences between them. After making the required adjustments, the appraiser must go through the reconciliation process with the three comparable properties to determine a final estimated value. This method of estimating value is called the Direct Sales Comparison Approach to Value, and it accounts for nearly all of the considerations in determining value of single family homes.

It is important to consider that the appraiser will be taking photos of the street scene and of the front of the subject. The street scene gives the lenders some kind of ideas as to the type of neighborhood in which the home is located. The photo of the front of the home gives the lender an idea of its condition and its curb appeal. And lastly, a photo of the back of the home and part of the rear yard is taken. Many homeowners don’t take care of the rear portion of their homes and back yards, so for this reason the rear photo is required.

How Does the Appraiser Assign a Fair Market Value on the Home Appraisal Report?

The appraiser will review 3-4 homes that have recently sold that are most similar to the subject property and are within a 1 mile radius to the subject property if at all possible.  The appraiser will look at four main features on the homes and make adjustments to the value accordingly.  The Four Main Features are:

• Square Footage of the Home and Lot
• Appearance
• Amenities
• Condition

The Appraiser will perform the following functions while at the home performing the appraisal inspection:

• Check the condition for all major systems and structures in and around the home such as HVAC and Roofing
• Determine any required repairs to bring the property up to minimum standards for the mortgage loan
• Review the property for any termite damage, water damage or mold damage
• Make sure all the plumbing is working correctly such as toilets, faucets, showers and tubs.
• Check the square footage, number of bedrooms, bathrooms and room count to make sure it matches the county records to ensure accuracy.

The home appraiser will use all this information and compile a home appraisal report and assign a fair market value to the property.

What is in the Final Home Appraisal Report?

The last step in the home appraisal process is preparing a final report of value assigning a fair market value for the property. The appraisal report will provide you and your mortgage lender with a complete property analysis. It will also outline how the appraiser calculated the home’s worth. Typically, the final appraisal report will cover the following items:

• Size and condition of the subject property
• Comments about serious structural problems, like cracked foundations, wet basements, windows that need replacement and roofing that needs repair
• Permanent fixtures, such as lights, ceiling fans and plumbing, including faucets
• Details about any home renovations such as updated kitchens, bathrooms or new flooring
• Comments about the surrounding area, including positive and negative local features
• Maps, photographs and sketches of the property, both inside and out
• A detailed current market analysis, including recent sales of comparable homes

The final home appraisal report will also state which type of mortgage loan is being used to determine if the property meets minimum property standards.  For example an FHA Loan will have different requirements than a Conventional Loan or a VA loan.  A USDA Rural Housing Loan will use the minimum property standards for an FHA Loan.

What is an Appraisal Re-Inspection?

If the appraiser identifies any required repairs to meet the minimum property standards for the mortgage loan then a re-inspection will be required.  The re-inspection requires the appraiser to make a second trip to the subject property to verify that the repairs have been completed.  There will be a fee charged to the home buyer for this re-inspection and is the buyer’s responsibility unless it is negotiated for the seller to pay it with an addendum to the sales contract.  The cost of the re-inspection is anywhere from $150 to $350 depending on the area the subject property is located.  The appraiser will submit submit a report to the AMC which will passed on to the mortgage lender and will certified if all repairs have been completed.  If the appraiser does not sign off on all the repairs being completed, he will note what is still outstanding and a second re-inspection will be required at a cost of $150 to $350 again to the buyer.  This means it is imperative that someone verifies ALL repairs are completed before a re-inspection is ordered.

What Happens if the Home Appraisal Is Low?

If the appraiser issues an appraisal report with a fair market value less than the purchase price then the seller can dispute the appraised value IF the seller or listing agent can provide up to 5 comparable home sales that were not used that may support a higher fair market value.  The comparable sales are submitted to the lender who will then start an appraisal dispute process with the Appraisal Management Company (AMC).

The AMC will review the comps to make sure they meet the guidelines for comparable sales and if they do, send them on to the appraiser and ask him to review the new comps.  The appraiser will review the comps and determined whether they are good comparable sales. If the appraiser accepts the new comps, he will add them to his report and adjust the fair market value.   If he rejects the new comps, he will provide in writing why he will not adjust the fair market value based on the comparable sales submitted and will not include them in the appraisal report.

If the appraised value is not adjusted up to at least the sales price then the buyer and seller have 3 options:

1) Cancel the contract and return the buyer’s deposit

2) Adjust the sales price down to the fair market value on the appraisal

3) Buyer agrees to pay the sales price even though the fair market value is less.

For option 3 the buyer’s loan to value ratio will be determined based on the lower fair market value and not the sales price which means the buyer would be required to make up the difference in a large down payment to keep the loan to value the same.

If you would like to apply for a mortgage loan to purchase or refinance a home, please call the John Thomas Team at 302-703-0727 or GET STARTED ONLINE