Note: This is a chapter in my new ebook called The Ultimate Guide to Buying (and then Selling) Your First Home. I will post a chapter a week. If you like what you read, you can pick up a copy here for the price of a candy bar! Buy a candy bar or be a real estate guru! The next chapter is about appraisals. The last chapter to be shared on this blog you can find here.
Three days later, we had heard from the buyer’s agent that the lender was moving forward with the appraisal and it was scheduled for the next week. When I called to let my clients know, Sally answered and wanted a refresher on the appraisal process. I told here. “All banks want to make sure the loan they are giving to your buyers can be recovered in the case they have to foreclose and sell the property. An appraiser is the one that is hired by the bank to give a value of your home. “I told Sally that there was not much for sellers to do with appraisals except make sure to give full access to the property (if required). Sally asked me to go on. I told her about three things you might not know about the appraisals.
1.Appraisals can often disagree with the agreed upon sales price. – I told Sally that appraisals can come back with a different value than your sales price. She asked what happens then. I replied. “If it is higher than the sales price, that does not affect the approval of the mortgage. However, if the home appraises at a value less than the sales price than certain decisions must be made. The bank will only approve a loan matching the value of the home. What do you have to do? There are three likely outcomes. The buyer ponies up the difference between the appraised value and the sales price. This would have to be in the form of cash. The seller can agree to reduce the sales price to the appraised value. Finally, a compromise of some sort can occur where the buyer puts in more cash and the seller lowers the price to meet in the middle.” I told Sally it was always good to strive for the last situation where both parties end giving up something in order to allow the deal to go through to closing.
2.Don’t be afraid to appeal an appraisal. – Sally immediately asked if an appeal can be made on an appraisal. I replied. “All appraisers are certified by the state. In Texas, you must be licensed by the Texas Appraiser Licensing and Certification Board (TALCB) to legally appraise a home. The minimum requirements to be appraiser are Citizen of the United States or a lawfully admitted alien
●18 years of age or older
●Provide 2,000 hours of acceptable and verifiable appraisal experience acquired over a minimum of 12 months
●Meet TALCB’s qualifications for honesty, trustworthiness, and integrity
With the minimum requirements being this stringent (as compared to other real estate professions), you can be rest assured that you appraiser will have the education and experience to determine the value of your home.” I further explained to Sally. “However, there might be at times when you disagree with the appraiser’s opinion on the value of your home. You can reach out to the lender to appeal your case. It is best to approach the buyers to get their support, but even if they do not, it never hurts to request a copy of the appraisal to see if there are any factual mistakes. You can then ask the lender to reconsider the appraisal. Most of the time it will fall on deaf ears, but the effort might be worth it if you can get the appraisal changed.”
3.There are multiple ways to evaluate the value of a home -. Sally didn’t like my response about the appraisal, so she asked if there could a different approach to be taken when appraising the home. Without getting into the specifics of the theory behind appraisals, I replied that it is good to know that your home can be appraised in different ways. I told Sally. “The most important fundamental concept to understand about appraisals is what market value truly means. It is the most probable price a home should bring in a competitive and open market. Price does not equate to value. Price is what is listed in your contract while value is what the market says it is worth. There are three main approaches to determine market value, which the appraiser will use one or many of them to determine value.
●Sales Comparison approach. This one is the most common one used for single family residential. This technique focuses on recent sales to determine value of the property. Comparable properties will be used if possible. If differences exist between your home and the comparable sales, the appraiser will adjust the value
. ●Cost Approach – This technique will take the cost of building the property and determine the depreciation of the home over time. You also look at factors in environmental aspects of the surrounding neighborhood that might detract from the value of a home. Value is reached by deducting the depreciation from the cost of building the property.
●Income Approach – This technique will be used for rental homes. Investors will often know this technique in order to determine if their purchase price is in line with the market value. The appraiser will evaluate surrounding rental rates and the potential future income of the rental to determine value.
Sally said she understood and hoped that none of these situations will happen. She was keeping her fingers crossed that all would go well. And, it did. I left a packet of information for the appraiser on how we came up with the list price for the home, so they could see our thinking on the matter. Most appraisers will welcome such a packet as it saves them time. Others will politely refuse as this can often be a conflict of interest by the appraiser. The week after the appraisal was done, we received the good news that the appraisal matched the sales price, so we could move onto to closing.