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Consumers are often baffled by the home appraisal process. They feel their nest is worth a certain amount; and are often disappointed when the value comes up short of that figure. It's important to know appraisal guidelines are dictated by lenders. Appraised values are not necessarily accurate indicators of what price a home would sell.....
In essence, lender guidelines force appraisers to put a fair market value on a home based upon comparable sales in the area where the home is located, as the home must be bracketed according to size and value. For example, there is no set amount associated with a great view, pool, spa, bathroom upgrades, etc. If a homeowner installs a custom pool that cost them $30,000, and the local marketplace supports the value of a pool at $15,000, that item will be given a value of $15,000 on the appraisal.
Upgrades can usually be expressed at full value in newer homes since they required investing additional money into the cost of building the home. On the other hand, the amount spent upgrading or remodeling an older home is usually not fully reflected in the final appraisal. The reason is the home had value in its original condition, so upgrading kitchen countertops only marginally increases the value by the amount of the improvement. Also remember the value of the upgrades must be supported by comparable examples within the same marketplace.
These comparisons must be drawn from current market activity within the last three to six months. Some lenders may want to look at both closed and pending sales to see if there is any room for negotiation. This is a safeguard to prevent appraisers from over-valuing the home in question. It is further stated in the guidelines that appraisers can only place a value on homes that have closed escrow. However, when property values rapidly increase within a marketplace, appraisers are generally permitted to make concessions and put more weight on the evidence provided by comparisons to pending sales and listings. This allows for a "real time" appraisal.
Although there is no formal standard to speak of, most lenders give the appraiser a 5% margin of error. If the file is reviewed and the appraiser is off by 8%, there is a good chance the value will be cut by the full 8%. It is in the best interest of both the appraiser and the homeowner not to push the value up higher than the market will support, otherwise the property evaluation may be exposed to a strict appraisal review.
Ultimately, an appraiser is strictly giving his/her opinion of value, which is subjective.
We make it a point to follow lender guidelines at all times and work within the systems they provide. This promotes a good relationship with the lender, and smooth closure for our clients. As always, you are welcome to contact us if you have any questions.