Thursday, August 20, 2009

Appraisals: How do They Work?

If you are paying cash, you do not need an appraisal…however if you are financing the property, an appraisal will be required before the lender will approve money for your purchase.

Appraisals are not a science; they are an opinion of value, which can vary depending upon the person doing the appraisal. If you hire 3 appraisers to appraise the same property, typically you will get 3 different answers.

This is how an appraisal works: the appraiser evaluates the property and then reviews the recent sales in the neighborhood to make comparisons. They will compare the number of square feet, bedrooms, parking garages, pool etc. in addition to the location. A lot that backs up to a shopping center will not be valued as high as one on a lake or backing up to a conservation lot. They do not give much consideration if the property is upgraded and in top condition, however they will lower the value if it needs work. If the property is unusual with limited or no recent comparables, you are at the mercy of whatever the appraiser thinks.

If your instinct tells you that you are getting a real steal on the property with a price way below market value, do not expect the property appraiser to raise the numbers to a higher value. All appraisers know how much you paid and they will justify only the purchase price. If they bring the property value much higher than the contract price, the lender would then question the sale and probably request another appraisal to review the first one.

If the property appraiser’s report comes in with a value less than expected, these are your options:

1. Ask the seller to reduce the price to appraised value,
2. Request another appraisal.
3. Modify the terms of the loan for a different loan-to-value.
4. Pay the shortage in cash.
5. Choose not to buy the property.