Consumers are often baffled by the home appraisal process. They may feel their home is worth a certain dollar amount, and therefore, the appraised value doesn't make sense to them. It is important to know that appraisal guidelines are dictated by the lenders. In many states, the lenders must disclose the purpose of the appraisal, as each situation carries its own set of rules.
In essence, lender guidelines force appraisers to put a fair market value on a home based upon comparable sales in the area where the home is located, as the home must be bracketed according to size and value. For example, there is no set amount associated with a great view, pool, spa, bathroom upgrades, etc. If a homeowner installs a custom pool that cost them $30,000, and the local marketplace supports the value of a pool at $15,000, that item will be bracketed as [$15,000] on the appraisal.
Upgrades can usually be expressed at full value in newer homes since they required investing additional money onto the cost of building the home. On the other hand, the amount invested in upgrading or remodeling an older home is rarely reflected in full in the final appraisal. The reason is the home had value in its original condition, and again, the value of the upgrades must be supported by comparable examples within the same marketplace.
These comparisons must be drawn from current market activity within the last six months. Some lenders may want to look at both closed and pending sales to see if there is any room for negotiation. This is a safeguard to prevent appraisers from over-valuing the home in question. It is further stated in the guidelines that appraisers can only place a value on homes that have closed escrow. However, when property values rapidly increase within a marketplace, appraisers are generally permitted to make concessions and put more weight on the evidence provided by comparisons to pending sales and listings. This allows for a "real time" appraisal.
Although there is no formal standard to speak of, most lenders give the appraiser a 5% margin of error. If the file is reviewed and the appraiser is off by 8%, there is a good chance the value will be cut by the full 8%. It is in the best interest of both the appraiser and the homeowner not to push the value up higher than the market will support, otherwise the property evaluation may be exposed to a strict appraisal review.
As a loan executive, I make it a point to follow lender guidelines at all times, and work within the systems they provide. This promotes a good relationship with the lender, and smooth closure for my borrowers. As always, you are welcome to contact me if you have any questions.
Hayden Gerson is the Branch Manager of America One Mortgage and Realty located in Sherman Oaks California. If you have any questions or would like to speak with Hayden please feel free to call. Hayden can be contacted at (800) 505-7554 or go to his website,Los Angeles Real Estate and Mortgage.
Hi Hayden,
Enjoyed your blog you made some really good points. I wanted to comment about a few things you mentioned in your blog to expand a little on what you shared.
You mentioned "In essence, lender guidelines force appraisers to put a fair market value on a home based upon comparable sales in the area where the home is located, as the home must be bracketed according to size and value".
Appraiser's are not forced to determine fair market value. That is there job to estimate and determine market value based on the most recent data as you stated. Listings and pending sales provide the most current data to support the value estimate in both an appreciating market and depreciating market. The guidelines are just that, guidelines. When the appraiser does not adequately explain within their report why he/she is outside of those "guidelines" then the report is questionable and scrutinized.
You also stated that "Upgrades can usually be expressed at full value in newer homes since they required investing additional money onto the cost of building the home. On the other hand, the amount invested in upgrading or remodeling an older home is rarely reflected in full in the final appraisal. The reason is the home had value in its original condition, and again, the value of the upgrades must be supported by comparable examples within the same marketplace."
In today's California market New home builders are adding various "incentives" to try and maintain their asking prices they are including expensive upgrades throughout the home such as upgraded carpeting, moulding, granite countertops to attract buyers. In some cases they are still having to lower prices despite this.
The confusion for most homebuyers especially in New homes is that when buying a new home any upgrades made to the home are added to the price when they are purchasing. The builder dictates what everything costs, not the market. This regularly occurs in an appreciating market. In a depreciating market all of those upgrades are not added to the price they are added to maintain the current asking prices.
The trouble begins when the homeowner sells in the re-sale market. They begin to add up all of the improvements made pools, balconies, landscaping, etc... and as you pointed out the re-sale market does not give full value dollar for dollar for upgrades.
The best indicator of market value is not a builder, an appraiser, but an "informed educated buyer, and an informed educated seller' neither in duress.
Pablo's comments are spot on. I would also argue that it is not lender's guidelines but USPAP (the Uniform Standards of Professional Appraisal Practice) that all appraisers must follow that dictate appraisal methodology.
Carolyn, certain lenders require a specialized appraisal and certain appraisers if they have not followed these guidelines can get blacklisted. The broker orders a specific type of appraisal based on the lenders needs, the appraiser completes that type of appraisal.
our appraisers, here in Greater Hartford, have been kind so far. I had one transaction in June, my listing, the bank stopped the buyer from receiving as much, for his closing costs, from the sale price. The buyer ended up borrowing the monies from his grandparents.