Appraisals, in my experience, are the most misunderstood real estate instrument in the business including by professionals. Appraisals do NOT determine the value of a property. (This post will not address appraisals acquired by cash buyers, refinances or sellers. Those too are often misunderstood and hold no validity when a new bank calls for their own appraisal.) This entry is written specifically to help sellers and buyers understand the purpose of an appraisal when a buyer's banker orders one.
What does determine the value of a property? Three components. First, what a Seller is willing to sell for. Next, what a Buyer is willing and able to pay. The appraisal comes into play in regards to the buyer's ability to pay.
If a buyer must borrow the money to buy a home then a banker calls for an appraisal. The banker will not rely on what he deems as a biased opinion of value from from the point of view of the seller and buyer. Often times bank ordered appraisals will come in at purchase price even though there might be comparable sales that very well could push the value higher. Why? Because, even appraisers know what ultimately determines the value of a property; seller and buyer. They just need to prove there are comps to validate the seller and buyer's agreed upon purchase price.
Next, what an appraisal is (unofficial definition): An appraisal is the opinion of the person giving it and that is that. Typically the appraiser will use the most recent comparable properties nearest in proximity to the subject property. Be clear, in the mass majority of cases the appraiser works for the bank and is protecting the bank's interests. The appraiser's job is to ensure the bank's collateral is secure in the event the buyer defaults. If the buyer defaults and the property wasn't appraised accurately by the strictest federal guidelines the bank can go back on the appraiser. Appraisals bust more real estate deals up today next to inspections leaving everyone very disgruntled.
So, what can buyers and sellers do in regards to appraisals? An experienced agent, familiar with federal guidelines, can look at the comps and comfortably ensure the home is priced well within the appraisal guidelines. For sellers who push value, beware if you accept a buyer with a loan contingency. Most buyers can't and/or won't bring more money to the table if the appraised value is less than the agreed upon purchase price. Sellers, buyers and agents can challenge an appraisal but it very rarely changes. And, even if an appraiser admits, 'my bad' (which they don't) now the bank knows what the first appraisal said thus without overwhelming proven negligence on behalf of the first appraiser the underwriter is scared and chooses the lowest value.
Few things to consider:
1. Currently, FHA appraisals are stuck to a property for 6 months. If another FHA buyer comes along the bank must use the first FHA appraisal per federal guidelines.
2. Most upgrades (carpet/fixtures/marble windowsills/ etc..) on a property hold no direct value on an appraisal, although there is intrinsic value in terms of using superior comps.
3. Landscaping cannot be given value. Why? Because, landscaping dies and the bank won't give value to a potential buyer's green thumb.
4. Pools bring very little in value. Typically, on average $6000-$8500 if that. I've seen $80,000 pool and landscape packages on luxury homes only pull $12,000-$15,000 on an appraisal.
5. Sellers, ask your agent before making any major upgrades and assuming it will bring dollar for dollar improved value of your home. And, 'no' you don't get a copy of the appraisal or do you get to choose the appraiser. Remember, it's not you risking the money to loan.
6. Buyers, ask your agent for the comps because if the home doesn't appraise your inspection/appraisal monies will not be refunded to you. Best to go in eyes wide open.
Next, what an appraisal is (unofficial definition): An appraisal is the opinion of the person giving it and that is that. Typically the appraiser will use the most recent comparable properties nearest in proximity to the subject property. Be clear, in the mass majority of cases the appraiser works for the bank and is protecting the bank's interests. The appraiser's job is to ensure the bank's collateral is secure in the event the buyer defaults. If the buyer defaults and the property wasn't appraised accurately by the strictest federal guidelines the bank can go back on the appraiser. Appraisals bust more real estate deals up today next to inspections leaving everyone very disgruntled.
So, what can buyers and sellers do in regards to appraisals? An experienced agent, familiar with federal guidelines, can look at the comps and comfortably ensure the home is priced well within the appraisal guidelines. For sellers who push value, beware if you accept a buyer with a loan contingency. Most buyers can't and/or won't bring more money to the table if the appraised value is less than the agreed upon purchase price. Sellers, buyers and agents can challenge an appraisal but it very rarely changes. And, even if an appraiser admits, 'my bad' (which they don't) now the bank knows what the first appraisal said thus without overwhelming proven negligence on behalf of the first appraiser the underwriter is scared and chooses the lowest value.
Few things to consider:
1. Currently, FHA appraisals are stuck to a property for 6 months. If another FHA buyer comes along the bank must use the first FHA appraisal per federal guidelines.
2. Most upgrades (carpet/fixtures/marble windowsills/ etc..) on a property hold no direct value on an appraisal, although there is intrinsic value in terms of using superior comps.
3. Landscaping cannot be given value. Why? Because, landscaping dies and the bank won't give value to a potential buyer's green thumb.
4. Pools bring very little in value. Typically, on average $6000-$8500 if that. I've seen $80,000 pool and landscape packages on luxury homes only pull $12,000-$15,000 on an appraisal.
5. Sellers, ask your agent before making any major upgrades and assuming it will bring dollar for dollar improved value of your home. And, 'no' you don't get a copy of the appraisal or do you get to choose the appraiser. Remember, it's not you risking the money to loan.
6. Buyers, ask your agent for the comps because if the home doesn't appraise your inspection/appraisal monies will not be refunded to you. Best to go in eyes wide open.
