The Appraisal

The appraisal process can be confusing. On occasion, sellers may feel their properties are worth more than the appraised values. Therefore, it is important to understand a few of the guidelines involved from the lenders’ perspective.

Lender guidelines require appraisers to place a fair market value on a property based on comparable sales in the same area, and the property must be bracketed by properties of the same size and value. It is important to understand that there is no set dollar amount associated with a pool, spa, bathroom or kitchen upgrade, great view, etc. For example, if an owner has had a custom pool installed that cost $45,000 and the current market suggests pool values to be $30,000, then $30,000 will be shown in the appraisal.

In newer properties, upgrades may be considered at full value because the only way to acquire the upgrades was to include them in the building process in the first place. In older properties however, upgrades are rarely given full value. In order for any upgrades to be given a value, they would have to be supported by comparable examples in the same area market.

In regard to time, nearly all comparisons must be taken within the past 180 days. Some lenders will only consider closed sales, while others may allow for both closed and pending sales to be considered. Basic guidelines though, call for appraisers to base their opinion of value on properties that have closed escrow. This is to safeguard the lender by ensuring that an excessively high value is not placed on the property.

When property values are increasing dramatically in a short time span, ‘Real-Time’ value can be established by an appraiser being able to place more weight on comparisons of pending sales and listings. However, the final appraisal can be subject to review.

Though not to be found in writing, a margin of error of around 5% is generally allowed for in a lender review. Should this margin exceed 7-8% then it is likely that a second appraisal will be ordered. This could result in the home being discounted by the full 7-8% or perhaps higher. Therefore, when agreeing a sales price, it is best not to try to push the value higher than what the market will support.

It is also important to remember that the appraiser works for the lender and not the property owner or buyer.

Finally, if you follow lender guidelines and work within the system, all parties will benefit and the transaction will close with fewer hiccups and/or adjustments being required along the way.