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Understanding Appraisals

November 11, 2010

If it’s too low, sellers complain. If it’s too high, lenders become concerned that it’s accurate for current market conditions. What it is? The appraisal. An appraisal is a key component when becoming approved for a mortgage; it provides assurance to the lender that if the loan isn’t paid back, the lender could recoup any losses through its sale. Here are the facts on this important piece of the loan approval process.

Appraisals are independent experts

Appraisers are beholden to no one. They are independent third parties hired by lenders to render an opinion on what a home is worth, based on specific data. Recent guidelines put into place by Freddie Mac and Fannie Mae prohibit certain discussions between mortgage brokers and lenders with appraisers to maintain separation and independence. Many lenders use a national appraisal desk, however we have an in-house appraisal desk, meaning local appraisers are assigned.

Appraisers use data and experience

Appraisals are based on opinion, but that opinion is steeped in data that supports the conclusion. A common practice for appraisers is to compare similar properties that are superior and inferior in features, size and condition to the subject property, making adjustments between them to support the final value. This practice, called bracketing, would work like this. A comparable property might have a fireplace when the subject property does not. Or the square footage might be greater in the appraised property than the other comparable properties. Adjustments would be made to the home values up and down, accounting for features, or lack of them, so the properties could be compared as closely as possible.

Adjustments based on market and not cost

Some home remodeling projects will deliver a healthy return on the investment, but others do not. A seller may have paid $30,000 to install a pool, but the current market is only willing to increase the price they’ll pay for that pool by $15,000. Adjustments are based on what the market values the improvements, not the cost or opinion of the seller.

Appraisals are a snapshot.

As market conditions change, so will the appraised value of a home. Appraisals capture the value at a specific point in time, but as we know, the housing market changes and that will change the value over time. That’s why most appraisals are only considered valid for six months.

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