UNDERSTANDING THE HOME APPRAISAL PROCESS

This subject might seen a little dry to you but a little understanding goes a long way to helping you realize how an appraiser does their job. During my years as a loan officer and arranging financing for Long Beach California real estate, I have come to understand how difficult it can be to determine a property’s value.

Consumers are often baffled by the home appraisal process. They feel their nest is worth a certain dollar amount, and they are basing this on what they heard the property down the street was “sold” for. It is for this reason that the professionally 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 operates by 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 into the cost of building the home. On the other hand, the amount spent 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, but 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. Declining property values have made this extremely difficult. 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. Not only closed escrow, but the price has been verified by two public sources.

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. For more information on how appraisals work for Long Beach California real estate CLICK HERE!