Know the Red Flags That Can Hurt an Appraisal

Appraisal is a critical step of the home buying process. Why? Because it determines how much you can leverage the house to borrow the mortgage. This is the value lenders will use, not the value of your purchase price. Let’s make sure you know the appraisal process inside out and more importantly how to work with the seller to improve it.

Key Questions We Cover

• Why Home Appraisal is Super Important?

• What's the Difference Between Appraisal and Inspection?

• What's The Home Appraisal Process?

• How Is The Appraisal Done?

• Caution to Home Buyers: What Appraisers Consider and Red Flags to Watch Out For?

Why Home Appraisal is Super Important?

A home appraisal is a process of determining the fair market value of a home by a neutral, licensed appraisal contractor. The appraiser is hired by the prospective lender to determine the home’s value based on recent sales of comparable homes in the area, as well as the appraiser’s judgement after an analysis of the property. It’s important to note that the appraised value and market value of a property are not always the same. While the appraised value can be seen as what a home is actually worth, the market value can be seen as the price that the property ultimately sells for, on the open market, based on supply and demand.

For instance, imagine a house with lots of expensive updates and excellent curb appeal goes up for sale in a very desirable neighborhood and a seller’s market. After just two days on the market, the seller receives multiple offers well above the asking price and eventually accepts the highest bid. This is the market value of the house. However, when an appraiser looks at the house, they may see its value as considerably less. What’s happened is that a demand bubble has driven the price artificially high. The appraisal puts a check on the market value, a warning to the lender to be wary of lending too much for the property. Ultimately, it is important to note that appraised value is more important in whether the lender will agree to the loan and whether or not the deal can go forward.

What's the Difference Between Appraisal and Inspection?

Home appraisals and home inspections are often confused, but they serve different purposes. Here are the key distinctions:

1. Purpose:

• Home appraisals determine the fair market value of a property for the lender. They are required by lenders and affect your loan amount.

• Home inspections identify potential issues with the property and help buyers understand maintenance or repair costs. They are optional and ordered by the buyer.

2. Initiation:

• Lenders order home appraisals on your behalf.

• Buyers independently arrange home inspections.

3. Involvement:

• Buyers are encouraged to accompany home inspectors during the inspection to ask questions.

• It is not recommended for buyers to be present during a home appraisal, as it's conducted by a neutral appraiser hired by the lender.

4. Expertise:

• Home appraisers determine property value based on sales of comparable homes and their analysis.

• Home inspectors identify structural and maintenance issues in the property and assess its overall condition.

• Understanding these differences is crucial when buying a house to make informed decisions throughout the process.

What's The Home Appraisal Process?

The duration of an in-person home appraisal visit varies mainly based on the home's size. Smaller properties may only require a half-hour for a complete appraisal, while larger residences could necessitate several hours. Additional factors influencing the appraisal timeline include timing, location, and the availability and workload of local appraisers. During busy market conditions, appraisal companies may experience delays.

Once the physical inspection of the home is conducted, the appraiser proceeds to collect data on comparable properties (comps) - recently sold homes in the vicinity that resemble the property being appraised. Using the gathered information, the appraiser generates a comprehensive report outlining the home's estimated market value. This entire process can take several days or even weeks, depending on the appraisal firm's backlog at the time.

Here are the steps involved in the appraisal process:

1. Property Inspection:

The appraiser thoroughly examines every aspect of the house, both inside and outside. They make detailed notes and capture photographs during the inspection. The appraiser verifies the square footage, takes note of any additions, assesses the condition of mechanical and structural components, and estimates the age of items that may require replacement, such as the roof or air conditioning unit. The appraiser also evaluates the property's cosmetic aspects, including landscaping, curb appeal, paint, flooring, windows, and overall cleanliness. Cleanliness is considered because it reflects care, while a dirty house may suggest a lack of attention to detail and potential issues with pests.

2. Comparable Property Research:

Following the property inspection, the appraiser conducts research on the sale prices of comparable homes (comps) in the same area, typically within the last six months. This step is crucial because comps represent properties that are appealing to potential buyers with similar preferences, such as neighborhood, school district, and budget.

3. Appraisal Report Writing:

After a thorough assessment of the physical property and an analysis of the current market conditions, the appraiser leverages their expertise to provide an opinion on the home's value. It's important to note that this value is not necessarily the same as the sale price; instead, it serves as guidance for the lender in determining how much they should lend to the borrower.

In summary, the home appraisal process involves a comprehensive property inspection, research on comparable sales, and the creation of an appraisal report to help lenders make informed lending decisions.

How Is The Appraisal Done?

1. Drive-by Appraisal:

A drive-by appraisal, an uncommon practice in typical home sales requiring a mortgage, involves assessing only the exterior of a property. Lenders usually mandate a comprehensive evaluation of both the interior and exterior. However, during the COVID pandemic, it gained popularity as a safety measure. For smaller transactions like home equity loans, lines of credit, or certain refinances, lenders may still opt for a drive-by appraisal to expedite the process.

2. Hybrid Appraisal:

In a hybrid appraisal, two different professionals handle the property assessment and comparable research. Typically, the lender engages an Appraisal Management Company (AMC) to oversee the process. The AMC assigns both an appraiser and a data collector to the property. The data collection phase precedes the appraisal, with the collected information provided to the appraiser. Subsequently, the appraiser combines this data with their own research to complete the final appraisal.

3. Desktop Appraisal:

As the name suggests, a desktop appraisal relies solely on online research of the neighborhood and local real estate comparables to determine a home's appraised value. It does not involve an in-person property inspection. It's important to note that many lenders do not consider a desktop appraisal as a credible evaluation method.

Red Flag Checklist: What Appraisers Consider?

When you're in the process of purchasing a home, it's essential to be aware of what appraisers look for and potential issues that could negatively impact the appraisal value. Appraisals play a critical role in determining the value of the property you're considering, so here are some key factors appraisers consider and cautionary red flags:

Factors Appraisers Consider:

1. Lot and Home Size: Appraisers assess the square footage and the number of bedrooms and bathrooms to determine the property's size and layout.

2. Age, Design, and Floor Plan: The age, architectural design, and floor plan of the home are evaluated to gauge their influence on value.

3. Mechanical Systems: The age and condition of essential systems like plumbing, electrical service, furnace, and AC units are inspected.

4. Renovations: Appraisers consider the age and quality of any renovations made to the property.

5. Health and Safety: Health and safety considerations within the home are critical for appraisal assessments.

6. Curb Appeal: The property's exterior appearance and curb appeal factor into the appraisal.

7. Appliances: The age and condition of appliances in the home are noted.

8. Windows: Appraisers assess the condition and insulation value of windows.

9. Permanent Upgrades: Upgrades like basements, pools, decks, and garages are taken into account.

10. Overall Quality and Condition: The general quality and condition of the home are vital considerations.

11. Roof: The age and condition of the roof are evaluated.

12. Neighborhood Conformity: Appraisers check if the property aligns with neighborhood standards, which is important for resale purposes.

13. Comparable Sales: Recent sales of similar homes in the area are reviewed to determine market value.

14. Community Quality of Life: Factors like schools, crime rates, tranquility, and access to amenities like shopping and restaurants are considered.

Red Flags That Can Hurt an Appraisal:

1. Declining Community Values: If the neighborhood has declining property values due to poor schools, rising crime, or a general decline in quality, it can negatively impact your home's appraisal value.

2. Poor Curb Appeal: A lackluster or neglected exterior presentation of the house, along with uninspired landscaping, can result in a lower appraisal.

3. Outdated Mechanicals: Electrical service, plumbing, or major appliances in need of updates can lead to a decreased appraisal value.

4. Poor Outdoor Living Spaces: If outdoor living spaces like wood decks or brick patios are in poor condition, it can be a red flag.

5. Lack of Outdoor Living Space: The absence of outdoor living spaces may affect the appraisal value.

6. Renovation Needs: Homes requiring bathroom or kitchen renovations, refinishing of wood floors, or carpet replacement can receive lower appraisals.

7. Window and Roof Issues: Windows or roofs in poor condition that need replacement can negatively impact the appraisal.

Understanding these appraisal considerations and red flags can help you make informed decisions when purchasing a home and negotiating with sellers.

How Restate Can Help:

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