Acquiring a home appraisal is always an important part of buying a home as well as a requirement for getting a mortgage. Major changes have taken place during the last decade regarding the way appraisals are ordered and performed.
Home appraisals determine the value of a specific residential property at a given moment in time. While real estate appraisals are required if there is a mortgage involved, they are optional for cash purchases.
They are needed for a couple of very important reasons.
First, they protect lending institutions and the insuring organization for the mortgage from getting stuck with losses on a property that is worth less than its investment, should it be forced to take possession of the home.
Second, they protect homebuyers from purchasing a home that is worth less money than the asking price.
Appraisals are ordered by the lender through appraisal management companies. Large banks use separate, objective units within a lending institution to do their appraisals. They abide by strict guidelines set forth by the respective mortgage programs.
The buyer almost always pays for the appraisal when purchasing a home, and the homeowner almost always pays for the appraisal when refinancing. Occasionally, when a property is difficult to value because of a lack of recent comparable sales or the uniqueness of the improvement, a buyer and seller may agree to split the cost of an appraisal in hopes of arriving at an agreed-upon price. Appraisal fees typically range from $500 to $700.
The value of the home is largely determined by the values of similar “comps,” or comparable properties, as determined by the appraiser. An appraiser exerts considerable effort to find the best comparable home values when compiling the report. This is extremely important in determining an accurate value of the property being appraised. If a thorough search for “comps” isn’t completed, the appraised value will likely suffer.
The condition of the property must meet the specific guidelines for the mortgage product that is being pursued.
Sellers should be aware of the possibility that the appraisal may not come back as expected. All appraisers operate according to the Uniform Standards of Professional Appraisal Practice code, and they are giving their opinions of value accordingly. These opinions can leave lots of room for interpretation.
Lenders are allowed very little, if any, direct contact with the appraisers. It is advisable to complete a home inspection before ordering an appraisal to determine if any major repairs are needed. Areas in need of repair will affect the appraisal value of the property. They must be addressed before the appraisal.
The risks and repercussions for the buyer can include having the deal fall through and/or being stuck with the appraisal costs.
Kelly Kniffin is a Realtor at Legacy Properties West Sotheby’s International Realty and a past president of the Durango Area Association of Realtors. She can be reached at Kelly@homesdurangoco.com.