APPRAISALS . . . SOME BASICS
In the past, we often relied upon the "willing buyer, willing
seller" concept to establish value. Given today's circumstances, lenders
rely upon appraisals to know that there is sufficient value to support their
loan amount. This is particularly critical on high LTV loans where there is
little equity for protection. Thus, even when a buyer is
willing to "pay a seller's price", the appraisal may not justify the
requested loan amount. The loan amount a borrower can acquire is
determined by the purchase price or the appraised value whichever is lower . Sellers, thus, need to know that they are placing
their property on the market at a reasonable and saleable price, and buyers
want reassurance that they are purchasing at market value .
(Lenders are required to provide a copy of the appraisal to the borrower .)
There are times when the appraised value is lower than the purchase price but
because of a low LTV, the lender will still make the loan. In a higher LTV
transaction, even if a buyer, in spite of the low appraisal, wishes to proceed
with the purchase, there may be insufficient cash to do so. [i.e., Sales Price
= $200,000; Appraised Value =$190,000; Original anticipated loan = $180,000
(90% LTV); Lower loan amount based on appraised value now = $171,000;
Therefore, the Buyer is required to make up the $9,000 difference in cash to
continue the purchase.]
When preparing to sell a property, it is a good idea to secure a Comparative
Market Analysis (CMA) to assist in determining the appropriate sales price. A
comparative market analysis, by identifying recent "similar" sales
(known as "comps"), assists in setting the probable value at which
the property can be expected to sell. Comps can also be helpful when
encouraging a buyer to "make their best offer" when contemplating a
purchase.
An appraiser uses "comparable sales" ("comps") to
support his/her opinion of value for a specific property. Here is what a good
comp represents: A comparison of a recent (not more than 6 months ago)
"closed sale" of a similar type home in the same neighborhood (not
adjoining developments or across town). "Similar" means in style,
construction, size and age (typically not more than 3 years older or newer than
the subject). Any comp that does not meet the above criteria must be
"adjusted" for any differences.
Pending sales in escrow, while noted, are given little weight. Instead,
"closed" home sales are more important in determining the anticipated
value. Appraisers must now also note the "list price" for any homes
for sale in the same neighborhood. This could have an impact upon your sale if
there is a present listing at a much reduced price from recent sales. The
appraiser will be required to comment on whether values are declining (which
has recently become a major issue for many lenders) or whether the particular
low priced offering is unique due to poor condition, a distress sale, etc. It
is imperative that good comps are acquired to support today's listing and/or
sales price from the very beginning of the transaction. It must be recognized
that a recent sale of a 1 or 2 year old home will not support a sale of a 10
year old home without a value adjustment being made.
Sellers, eager to acquire top dollar, can be disappointed if the appraised
value is less than desired. When an appraisal comes in lower than the sales
price, the first instinct is often to blame the appraiser. Appraisers are
sometimes asked to "push up the numbers" or "meet the sales
price". While an appraiser wants to accommodate all persons in the
transaction, if s/he succumbs to the temptation to "make it work",
there is the risk of an appraisal review being done by the lender. While
appraisal reviews used to be infrequent, lenders now perform reviews on a more
routine basis. This means that after the loan file is submitted to the lender
with the accompanying appraisal, there is often an "in house"
appraiser who reviews the adjustments made and the final reconciliation
figures. If any "red flags" appear, a more complete review might be
required. Obviously, this suggests that it is nearly impossible for the
appraiser today to "push the value up" very far. S/he must be
accurate the first time to avoid a possible reduction in value by the lender
prior to funding a loan. You can help by knowing your market and not expecting
the appraiser to "reach the purchase price" without adequate
comparables available.
Appraising today can be difficult. But, by understanding the restraints
placed upon the appraiser (by lenders) in determining value, hopefully, we will
not be so quick to blame the appraiser for a low appraisal. A Realtor can
assist a seller in determining the anticipated selling price of any property.
By acquiring sufficient information ahead of time, a seller can avoid
confusion, controversy and disappointment when setting the selling price for
their home or other property.
Webpage/appraisal basics