- How Homes are valued
Homes are valued a lot like everything else: They are worth what people will pay for them. The Maybach Exelero, the most expensive car in the world, sells for $8 million because that’s what people will pay for it. By the same token, you can ask for $8 million for your Hyundai, Ford or Chrysler, but don’t count on getting it – you’ll get what the market says it’s worth.
So, how do we know what a willing buyer will spend for a house? Although we may never be certain, by looking at the recent past, we can come up with a pretty good idea. This is why the market value of a house is based on sold homes that are comparable in various ways.
In other words, it doesn’t matter what amount Tom, the next-door neighbor, lists his house for. The only thing that matters is what Jessica, the former neighbor, got for her house. List prices are fantasies while sold prices are reality.
- The Appraiser
Licensed appraisers aren’t house experts or property inspectors, but they are analysts, able to pull together myriad facts and statistics to arrive at a home’s value.
To avoid a conflict of interest, most lenders adhere to the “Home Valuation Code of Conduct” (HVCC) and use the services of an appraisal management company. The lender or the loan officer are not allowed to directly communicate with the appraiser. All communication is done through the appraisal management company.
- The First Step in the Appraisal Process
Shortly after your refinance or purchase transaction begins, your lender will order an appraisal through a management appraisal company which will in turn randomly select an licensed appraiser in the same area as the subject property. The appraiser will then contact the homeowner or their agent to set up an appointment to see the home. The time he or she spends inspecting the home varies, depending on the appraiser, but plan on it taking at least 30 minutes.
The appraiser makes note of the floor plan and any improvements, and takes measurements of the exterior of the home to determine the square footage.
- The Second Step in the Appraisal Process
The appraiser uses statistics from the multiple listing service, public records, or a combination of both to find recently closed sales that are similar in age, size, location and features to your home. Typically, the appraiser relies on sales within the last 90 days, but may go back as far as six months. She will also use homes within a 1-mile radius of yours.
- The Final Step in the Appraisal Process
The final steps of the appraisal involve comparing your house, which the appraiser calls the “subject,” to the comparable homes. She’ll use a list of criteria that includes the age of the homes, size, number of bedrooms and bathrooms, location and any improvements made to the homes.
She’ll add or subtract value from your home depending on how it stacks up to the comparable houses until she arrives at the market value of your home.
- What to Do if you Disagree With the Appraisal
An appraisal obtained by the lender is paid for by you and therefore belongs to you. So the lender is required to provide you with a copy of the full appraisal report. If you disagree with the appraisal you can request a formal dispute by asking your loan officer to complete an appraisal appeal form with the management company. However, if you decide to appeal the appraisal be prepared to provide valid reasons for your dispute and provide additional recent comparable sales in your neighborhood (with similar size, bedroom count, age, and condition) that can support your claim.
- What to Do if the dispute is not successful
If the appraised value is determined to be lower than what the buyer has agreed to pay, the lender will typically not lend on the property and the buyer and seller have some decisions to make.
The buyer can come up with a larger down payment (which lowers the amount of money he needs to borrow). Most buyers think long and hard about this option – nobody wants to overpay for a house.
The seller and the buyer can agree to split the amount that is over the appraised value, with the buyer bringing half the cash to the deal and the seller lowering the price of the home to meet his half of the deal.
Another option, and the one most commonly used, is that the seller lowers the price of the house to meet the appraiser’s evaluation.
Finally, the seller and the buyer can simply walk away from the deal.
Before any of these steps are taken, however, the buyer and the seller should review the appraisal to ensure that the appraiser used accurate information in his determination. Appraisers are human and do make mistakes. If errors are found, the buyer can notify the lender and ask for another appraisal.
If the appraised value is lower than what was estimated upfront, the loan officer will inform the borrower about any possible changes to the loan amount or interest rate. Typically, if the loan to value ratio is at or below 80% the loan can still be funded with little or no effect on pricing. However, if the loan to value ratio goes over 80% the loan will be subject to mortgage insurance, higher interest rate or both. Finally, if the loan to value ratio goes over 90% the loan may be declined unless the borrower is willing to bring down the loan amount.