What first time home buyers should know about the appraisal process

First time home buyers: Don’t let appraisals confuse you

I get it. Appraisals can be confusing. That is why I wanted to take a minute this week to help explain what first time home buyers should know about the appraisal process. If you are a first time home buyer and have a question that is not answered here feel free to contact me and I will answer any questions you have.

5 things for first time home buyers to consider

1) The appraisal report is owned by the bank- This is one of the most confusing things to explain to first First time home buyerstime home buyers, or anyone for that matter. When a bank contacts an appraiser to do an appraisal for a home that they are lending money on, they become the client of the appraiser because they are engaging them for their services.

It does not matter who pays for the appraisal, the appraiser’s client is the one who hires them to to the appraisal. This also means that the appraiser cannot talk to the buyer about the appraisal unless the lender gives them permission to.

Something that happens frequently is that if the appraisal comes in lower than the contract the buyer will want to call the appraiser to talk to them about it, but the appraiser is not allowed to do this. The home buyer must communicate with the appraiser through the lender.

This may not seem right or fair since the buyer is paying for the appraisal but that is how it works. The lender is required by law to provide a copy of the report to the buyer, so if you do not receive one it could just be an oversite. Of course, this type of arrangement is totally different when an individual hires an appraiser for a private assignment such as a pre-listing appraisal, divorce appraisal, tax appeal appraisal, or an appraisal for estate planning purposes. They are then the client of the appraiser and there are no restrictions on communication with the appraiser.

2) The appraisal report is not meant to “verify” the sale price- An appraisal that is performed as part of the home buying process is not meant to verify the sales price but rather to see if it is supported by market data. When you go into an appraisal assignment with the sale price as the main focus you face the risk of looking for sales by bracketing the contract price rather than the physical characteristics of the property.

By bracketing the features of the home like square footage, bedroom & bath count, and other physical characteristics you are attempting to answer the question “what are the majority of buyers willing to pay for a 10-year-old home with 1,500 square feet, having 3 bedrooms, and two bathrooms in this subdivision or school district. By performing the appraisal using the bracketing method you will get a more reliable estimate of market value.

3) An appraisal is not the same as a home inspection- The differences between an appraisal and a home inspection are numerous but they do get confused with each other. This is especially true for FHA appraisals because the appraiser is asked to perform a more detail observation of the property than for a conventional appraisal.

A home inspection observes and reports on the many systems in the house, such as the electrical, plumbing, mechanical, structural and heating and cooling. The home inspector goes deeper than the appraiser does and reports any potential problems that currently exist or could potentially cause problems in the near future.

An appraisal report is primarily concerned with what the market value of the home is and assumes that everything is in good working order unless there is an obvious sign of a problem or defect. If the appraiser sees a hole in the roof they would obviously report that but they would not do a more detailed inspection if everything looked fine.

4) The appraisal is based on market data- An appraisal is not a casual off the cuff estimate of the value of aRoss Bridge Sales Graphs home. It is a detailed analysis of the local real estate market based on the physical characteristics of the subject property compared to what other similar properties have sold for, taking into consideration any market value differences that exist between the subject and sales.

The opinion of market value has to be supported by recent sales and listings that have been verified by the appraiser. This is different than basing the value of a home on what your neighbor said they sold their home for without verifying it and taking into consideration the physical differences between the two.

And because an appraisal is not based on only one sale the appraisal must include at least three closed sales and should include a couple of listings or pending sales as well. The listings and pending sales help the appraiser determine what other competitive properties are listed at and that may be under contract.

5) A low appraisal does not automatically mean a deal is dead- An appraisal that comes in lower than the contract price does not mean that the appraiser is wrong or that the deal is dead. An appraiser is the only unbiased party to the home buying process and is hired to get a disinterested third party’s opinion of the value of the property for the lender.

An appraisal that comes in lower than the contract can and should be used as a negotiating tool. The buyer should see the low appraisal as a tool that shows them that the investment that they want to make is not in their best interest. The buyer can negotiate with the seller and ask them to lower the sale price to match the appraisal.

If you are a new home buyer I hope the five items I have discussed here help you to understand the appraisal process better.

Question

If you have any appraisal related questions feel free to contact me and I’ll do my best to answer them for you. You can also leave a comment below and we’ll keep the conversation going. As always, thanks for reading.

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Comments

  1. Nice job putting together a list for first time home buyers Tom. I was thinking in my head reading that everyone should know appraisers are hungry to know the details of a home like the age of the furnace, when the septic was last pumped, how old the roof is, etc… Then I remembered that first time home buyers would not know those things or be the owners of the home yet. 🙂

  2. Thanks Tom. I especially liked points #1 and #5. It’s not always easy to understand, but the lender has actually hired the appraiser, which means the lender is the client. Of course the Borrower is an intended user, but there’s a big difference between a user of the report and the client. I think in this day and age we tend to forget that price negotiation can happen throughout the escrow process. Price reductions or increases can take place for so many reasons. When a buyer gets the pest report, more seller disclosures, the appraisal, etc…. These things can all trigger price negotiation with the seller. Let’s not treat the contract price like it is a holy number and unable to be touched.

    • Great points, Ryan. Amen to your comment about that the contract price is not a holy number (no pun intended :-)). At the end of the day the price has to line up with the market or it will not appraise.

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