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Understanding the Appraisal Process

Shawn Von Talge



02-27-2015

Appraisal

The lending process has many critical components. You have income, assets, credit and a plethora of other items. One of the most misunderstood yet a key piece of the puzzle is the appraisal.

Assigning a specific value to a property is not a science and certainly has a subjective component to it. For example, if you have a colonial style home and the appraiser whom has been assigned the order likes that style they are more adept (and it’s human nature) to potentially give a slightly higher value given their appealing nature to that style. Conversely, let’s say this same appraiser is assigned to value/appraise a “rustic” style home. If they are unfamiliar with this style and/or don’t have a personal appeal to this type of craftsmanship, they may not see the beauty and value in such a style. That’s not to say this happens on every appraisal or even a majority of them. However it would be unrealistic to think that an appraiser’s personal sentiments towards a particular style of home does not have some sort of effect on the value he/she ultimately assigns to it.

Another subjective component of the appraisal process is how the the homeowner and/or seller views the value of their property versus what value the market places on it (which is based on what similar, nearby properties have sold for recently). For example, consider a property in which the seller has recently added a $30k outbuilding. In this situation the seller may logically conclude that the addition of this outbuilding means that the value of the property should automatically increase by $30K or more. While this could hold true in certain scenarios, the majority of the time it does not end up being the case. Is very rare to get a dollar-for-dollar valuation as it relates to outbuildings and most detached structures. In other words, in the aforementioned example, the seller may have spent $30k to construct the outbuilding BUT in the local real estate market–based on the sales prices of similar properties in the local area–the added value may only be $15k.

HOMEOWNER TIP: The following three types of home improvements will generally provide the best added value to your home:

▸ Upgrading the kitchen

▸ Upgrading the master bath

▸ Increasing the finished square footage

Another great hurdle for the general public and in particular seller’s/buyer’s in the open market is being able to look at an appraisal and decipher what is going on. Now let me preface this by saying that they shouldn’t. They don’t look at these every day and it takes an educated, detailed and keen eye to go through an appraisal and understand what the appraiser did, why they did it and how it affects the value and what the market is doing as it relates to residential real estate. Appraisals are written with adjustments, have to follow appraiser independence protocol, follow agency guidelines (Fannie Mae, Freddie Mac and Ginnie Mae) and are held to high standards as it relates to comparables that can be used, how far they can go to find comparables, the age and style of the comparable sales and the list goes on and on.

The biggest point that should be taken away from this is appraisers have a very hard job, with very specific guidelines that must be followed. Most people outside the mortgage industry do not fully understand all of the underlying components that factor into an appraisal. This in and of itself at times can put appraisers in a no win situation. With that said your mortgage professional should be able to answer any and all questions you have as it relates to an appraisal, what to expect and many other items.

As always thanks for reading!

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