The seller of that home you are about to purchase no doubt thought long and hard about how much to ask for it. She consulted with her real estate agent who spent some time poring over statistics and the prices of recently sold homes in the area to come to a rough estimate of the home’s value.
You made your offer based on what you felt the home was worth. The truth is, neither yours nor the seller’s opinion matters. The home is worth what the appraiser says it’s worth, at least as far as your lender is concerned.
Who is the Appraiser?
The real estate appraiser is a specialist in estimating the current market value of real estate. Appraisers typically specialize in commercial property, land, natural resources or residents.
Residential appraisers usually need a bachelor’s degree, although some states will accept an associate degree. State licensing requirements vary, according to the Bureau of Labor Statistics.
Furthermore, loans sold to Fannie Mae and Freddie Mac are required to rely on appraisals performed by individuals who are not only knowledgeable about the area in which the house is located but who have access to local records regarding recent sales in the area.
The Appraisal Process
After you have signed the purchase agreement, but before your lender will agree to give you the money to purchase the home, it will order an appraisal.
The appraiser will visit the home and take measurements of the exterior. Later, she will use these measurements to make an estimate of the square footage of the interior of the home.
The appraiser also checks the home for obvious major concerns – although he does not examine the home as the home inspector does – and makes note of any unique characteristics.
To determine the current market value of the home the appraiser may also:
- Use public records to verify the legal description of the property
- Photograph the home
- Study comparable homes in the area which have recently sold
- Prepare a written report on the value of the home
Appraisers have a variety of resources from which to pull information. These include:
- The local Multiple Listing Service (MLS) database
- Tax assessor records
- Courthouse records
- Local real estate agents
- Appraisal data aggregators
Other factors play into the appraisal process and may be considered by the appraiser. In fact, new laws require that, if an appraiser includes a foreclosed home among the comps, he must consider the home’s condition and make adjustments to the subject property’s value accordingly. Here are a few other factors that may influence the appraisal:
- How the local economy is impacting the market
- The location of the house
- Problems with the house
- How the home’s appearance stacks up to that of comparable homes
- The home’s upgrades
- Foreclosures in the neighborhood
- New developments in the area, such as a landfill, electric company substation or park, and their impact on value
A Low Appraisal Doesn’t Have to be a Deal Breaker
While most experienced real estate agents come close to the appraiser’s figure, there are times when the appraisal is lower than what the buyer has agreed to pay.
At this point, the buyer must choose from one of three options:
- Request that the seller lower the price
- Request that the seller challenge the appraiser’s price determination
- Come up with a larger down payment
- Walk away from the deal
The first step to take when faced with a low appraisal is to check the appraiser’s work for errors or omissions. Make sure that the square footage is correct, that the number of bedrooms and bathrooms is accurate. Ensure credit was given for any improvement that adds significant value.
Then check the comparables the appraiser used. Your agent can supply you with the MLS printouts for these homes so that you can check the appraisal for accuracy of square footage, bedrooms and bathrooms, age and other items.
If both real estate agents agree that the appraiser used faulty or insufficient information to arrive at the value, then the seller should dispute the appraisal by contacting the lender.
If you are selling your home, it’s important to heed your real estate agent’s advice on price. If you overprice the home it may not appraise and you may lose valuable time as well as a good buyer.