Home sales lives and die by the price, which is why the appraiser is vital to the transaction They’re called “risk mitigators.” Or the “value man”/ “value woman.” Some know them as “invisible protectors” because they remain unknown to the buyer. Whatever the moniker, a property appraiser provides an important part of the homebuying process: an unbiased opinion of a property’s true market worth. And that’s worth a lot more than people give it credit.
Appraisals provide a third-party perspective on a home’s value that gives buyers, sellers and lenders peace of mind that the transaction makes sense to all parties involved. The appraisal safeguards buyers from purchasing a residence that’s worth less than they’re offering to pay, and it protects the lender from getting stuck with losses on a property that’s worth less than its investment, should the lender be forced to take possession of the home.
“Home appraisals exist and are needed to ensure that there is appropriate collateral for the bank to lend on,” says Matthew Talacko, an appraiser with Value Services in Mt. Clemens, Michigan. “Appraisals, when properly used, are a risk-mitigation tool that is used to determine loan-to-value ratios and risk, which affects interest rates.”
An appraisal is ordered by the lender if financing is involved or can be ordered by the purchaser if it’s a cash purchase. If ordered by the lender, it goes through an appraisal management company to ensure an unbiased process. The value of an appraisal generally is valid for a six-month period.
Appraisal prices can cost from $300 to $700 or more. The seller may choose to reimburse the buyer for the appraisal cost through a concession at closing.
Since new “code of conduct” industry regulations were adopted following the financial crisis a few years ago, lenders and loan originators are not allowed to pick the appraiser or contact them directly when certain non-FHA/VA loans, such as those backed by Freddie Mac or Fannie Mae, are involved. These rules were put in place to protect borrowers from appraisal fraud and protect appraisers from pressure to inflate home values.
“Once the buyer pays [for the appraisal], the lender submits the order to the appraisal management company, who randomly chooses the appraiser and contacts them with the order,” says Spencer Llewellyn, founder of Loans101, a Houston-based mortgage information site. “Once ordered, the turn time can take anywhere from five to 10 business days. Once the appraisal report is complete, it is then delivered to the lender.”
The appraisal process itself takes several hours to complete. To determine value, appraisers generally use three different approaches — cost, sales comparison and income.
“The appraisal process is all about understanding the comparable homes in the area as compared to the subject property,” says Brian Brunhofer, president of Meritus Homes in Deerfield, Ill. “Things they consider include location in a community, lot size, lot features, age and square footage of the home, room count, basement and garage type, and age and quality of the interior and exterior features of the home.”
To better ensure that the appraisal process goes smoothly, first-time buyers are recommended to have the home professionally inspected to determine if any major repairs are needed before ordering an appraisal.
“The appraiser should be provided with a list of improvements that were recently completed on the property,” Talacko says. If there are unique features to the property, that should also be described to the appraiser.”
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