- Lenders hire appraisers through a third party to assure a neutral opinion.
- Appraisers follow one of three methods to determine a property's value.
- You can appeal an appraisal if the value is too low.
How Appraisers Set Market Values & What to do if Your Appraisal is Wrong
Home loan lenders require appraisals as an impartial estimate of the property’s fair market value. Lenders will deny a loan application if the loan amount is more than the property’s value. Waiting for an appraisal can be a stressful time for home buyers because an unexpectedly low appraisal can scuttle a loan approval, and if the property has multiple offers sellers often turn to the next buyer in line. Because so much rides on an appraisal, it pays to understand the appraisal process, what appraisers look for when setting a property’s value, and what buyers can do if they think the appraised value is too low.
What Is An Appraisal?
An appraisal is required when someone needs to know the value of a property. Appraisals are common for:
- Loans
- Estate planning
- Financial planning
- Determining a sales price
For loans, the lender contracts with a state-licensed or state-certified appraiser or orders the appraisal through an Appraisal Management Company (AMC). There is no standard appraisal report form. However, Fannie Mae and Freddie Mac use their own appraisal report forms. Regardless of the intent of the appraisal or the eventual buyer of the loan, all appraisal reports must contain enough information to understand a description of the property and its present market value.
An assessment is not an appraisal. The municipality’s assessor’s office sets a property value to determine the property tax due. The assessed value has a relationship to, but is not the same as an appraised value. An assessed value should never take the place of an appraisal.
Some appraisals require an inspection of the property’s interior. Other inspections are exterior only. An appraiser uses the following information when setting a property’s market value:
- Multiple Listing Service (MLS) records
- County and municipal records
- Cost of land, materials, and labor to reconstruct house
- Sales and listings of comparable properties, and review:
- Square footage
- Number of bedrooms and bathrooms
- Lot size
- Garage size and style
- Quality
- Age
- Amenities
- Value of neighboring properties
The appraiser may use one of three approaches to develop a price:
- Sales comparison: This approach reviews recent transactions of nearby comparable properties.
- Cost approach: Estimates the current replacement cost of constructing a reproduction of the existing structure.
- Income approach: Used with rental properties, and compares rental rates of similar nearby properties.
The appraiser should indicate which approach he or she used when reaching an appraised value.
Some lenders use an automated valuation model (AVM) appraisal to replace or augment a human appraisal. AVM appraisals are based on comps, recent sales of that particular property, and other public data. The two advantages of an AVM appraisals are speed and cost. The disadvantages are the technology has no awareness of the property's condition and added options, or intangibles such as its view.
The appraisal will cost $250 to $350. Talk to your lender if it costs more, and ask the reason why. If the lender offers no good reason for the discrepancy, then explain you want to negotiate a lower price.
Appraiser Independence
Appraiser must follow USPAP professional responsibility standards and in most states, must be licensed for his or her appraisals to be used as the basis for a federal mortgage. An appraiser must be independent, impartial, and objective. The lender ordering an appraisal through an Appraisal Management Company (AMC) is supposed to provide a buffer between the loan originator and the appraiser. This step and buffer was added because unscrupulous lenders conspired with appraisers and developers to over-inflate the prices of properties. This was one factor in the collapse of market prices, foreclosures, and loan loses in some areas of the US.
What To Do If Your Appraisal Is ‘Wrong’
Some loan originators offer an appraisal dispute process where the buyer submits recent comparable sales, and reasons why the borrower thinks the appraiser’s value is too low. A lender’s appraisal review takes time and there is no guarantee the appraiser’s opinion will be overruled. Generally, the wider the discrepancy and the more documentation a buyer can provide that supports the offered and accepted sales price, the greater the chances the appraisal will be tossed out. If the appeal process fails to change the lender’s mind, buyers and sellers have three options:
- The seller extends the date of closing and the buyer starts over with a different lender
- The seller agrees to a lower sale price
- The buyer increases the amount of the down payment
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Keep in mind an appraisal is not a home or pest inspection. A home inspection is designed to identify items requiring repairs, or structural problems with the building. A pest inspection will alert the buyer and seller of any problems with termites or other unwanted residents of the property. The appraiser will note the overall condition of the house, its upgrades and improvements, and any obvious problems with the home in setting the value. However, the appraisal process is not designed to spot, for example, hidden termites or damage caused by neglected maintenance. Therefore, don’t expect an appraisal to replace these other inspections.