The appraisal is a central part of the home buying/selling process. Knowing the valuation of your property in relation to comparable homes in your area–whether it is one you’re looking to purchase or one you wish to list–is extremely important, especially when considering the financial steps involved with any type of real estate transaction.
If you don’t know a great deal about how appraisals work or what the process entails, then now is definitely a good time to learn. Landmark Homes is always interested in giving our customers as much information as we possibly can. Here you can find useful insight regarding what an appraisal is, how it works and why it’s so important.
Let’s say you have the largest, most luxurious home on the block. Granite everything, stone façade, the works. At 3500 square feet, your home should easily be worth half a million dollars. However, your particular property tends to be over built for the neighborhood, meaning that on average, properties on your road and nearby streets are selling for around $200,000-250,000. Odds are, you’re not going to be thrilled with how your appraisal comes back.
Based upon a number of factors–one of the more significant being comparable home values—appraisers are going to essentially rate your home in relation to recent sales in your market. If the most expensive home only sold for 295,000, you probably won’t get that 500k number you were hoping for.
What are the determining factors in a property’s value…Square footage, condition, year built, are all central to generating that magic number. But as the professionals at Landmark Homes can tell you, comparables or “comps” generally tend to be a dominating factor. So, whatever value the appraiser assigns to your home (or potential home) is what the lending institution is going to stand by; that is to say, if the appraiser determines that the house is worth 310,000, you will only be able to borrow up to a certain percentage of that amount, as 100% financing is a rarity these days.
Most lending institutions have one or two appraisal management companies with whom they work. Once assigned to the project, the appraiser will come to the home, assess the value and then begin their research. Again, this is largely linked to finding adequate comps and investigating the subsequent market a bit more thoroughly.
The appraiser will then compile a report and send it to the lender for their review. It’s not uncommon for lenders to ask the appraiser to revisit a couple of items in their report, especially if they know the home is appraising much lower than they’d anticipated. As ultimately, your mortgage is going to be based on this report.
A mortgage is a loan granted on the basis of collateral—the collateral being the property itself. The banks need to understand exactly how much this collateral is worth as they have to affirm that should anything unforeseen happen with the mortgage, they could ultimately resell the house at the value for which the defaulted loan now stands. An appraisal ultimately gives them this value.
Rural Areas: Appraisals the Hard Way
Now, as appraisals are largely based on comps in the area, rural appraisals can sometimes take quite a bit longer than those in more urban environments. Fewer houses mean fewer sales, especially recent sales, so coming up with similar properties against which to evaluate a home can be a very difficult task.
Additionally, the rural areas have seen a significant drop off as far as the number of available appraisers. The work just isn’t there, so newly minted appraisers are hesitant to call the country home. Properties are vastly spread out equating to longer drive times and huge territories to cover. And with the lack of homes to compare…let’s just say, not the ideal situation for any appraiser.
One thing you can do if you intend to list your home in a rural area is to check and see if there are going to be other sales in the immediate future. Selling your home the same time another property hits the market can help alleviate the need to “dig up” those elusive comps. Sellers and buyers have found themselves waiting months for a decent appraisal to come through.
At Landmark Homes, we’ve seen issues like this arise. This is why we want you to be prepared, we want you to understand that it’s not necessarily the appraiser’s fault, nor is a low or non-existent appraisal your fault, it’s simply a matter of geographic region and a scarcity of nearby comps.
Is there a shortage of appraisers?
Producing solid and accurate appraisals takes training. Especially since the housing crisis of the 2000’s, lending institutions are getting more and more stringent on their guidelines, to include appraisals.
Requiring a four year degree, certification exam and over 2500 hours of apprenticeship experience, it’s certainly not a career choice for the faint of heart. That said, the number of appraisers in the United States has plummeted by over 20% in just the past few years. So what does this mean for the home buyer and seller? Simply put it means you may have to wait a bit longer than expected throughout your real estate transaction. Start your home search early, be prepared for the challenges you may encounter, and trust your REALTOR and lender when they offer you advice.
At Landmark Homes, we pride ourselves on walking clients through every aspect of the process, beginning to end. And we also strive to keep you updated on all that is going on concerning your home purchase or sale. Yes, there may be some slow going when it comes to the appraisal, you may not get the number you want, but it’s okay, the team at Landmark Homes will help you deal with whatever may come your way. That is what we do best!