Home Appraisals – the Good and the Bad

Real estate appraisals are a crucial part of the selling and buying process as they help establish a property’s market value. Whether you’re a first time home buyer in the East Valley or an experienced one, be savvy! There have been many changes in the market in the past few years, especially in the appraisal industry, and all buyers need to stay informed.

In a purchase, the lender requests an appraisal as part of the loan process, so it’s the buyer’s responsibility to pay for it. When you borrow money to buy your home, you are in effect, asking a lender to use your new home as security for your loan. Your lender needs to know it can sell the property for at least as much money as its lending, should you default.  Real estate appraisals are the standard used to assess market value. The cost of the appraisal varies according to the size of the property and its location. Home appraisal fees are usually figured into the buyer’s costs at closing.

What to Look for In Your Appraisal

Appraisers use two common methods to assess the value of homes. The sales comparison approach estimates market value by comparing property to similar properties that sold, usually within a one mile radius, in the past six months. They factor in the location of your new home, its proximity to public facilities, desirable schools, etc. This method confirms to the buyer that their property matches others in the neighborhood according to size, quality, and condition.

The cost approach is not as common and is used mostly on new homes. It estimates how much it would cost to replace the property if it were destroyed.

The GOOD: New Home Appraisal Regulations Protect the Buyer

New Federal regulations closely monitor the relationship between lender and appraiser. In most cases, lenders are no longer allowed to communicate with real estate appraisers directly. They must order all of their appraisals through independent appraisal management companies.

This is a huge shift in the industry. In the past, lenders built up a rapport with real estate appraisers and often put pressure on them to inflate appraised values to match the asking price. This is not to say that every real estate appraiser succumbed to the pressure, but many did. As a result, lenders offered loans for more money than the homes were worth in order to close those deals.
This put buyers in upside down situations from the start. Due to new regulations, buyers are ensured more than ever that their real estate appraisal will closely match market value.

While it’s important to note that real estate appraisers are not home inspectors, a home appraisal will reveal glaring damage to the property such as obvious water damage on the ceiling, missing or broken floor tiles, etc.

The BAD (which could be GOOD) : What if the Appraisal Comes in Low?

In a market like Phoenix that’s dominated by foreclosure and short sale properties, it is not uncommon for appraisals to come in low. In addition, the new appraisal regulations have caused appraisers to be assigned to a particular appraisal from a pool of appraisers. The result is that appraisers don’t develop an expertise in a particular neighborhood or building type. For example, an appraiser might not assign a high enought value to a condo on the sixth floor of the Optima Camelview as compared to one on the first floor, perhaps because there are no recent comparable sales to establish that value.

A low appraisal isn’t necessarily BAD. It could be GOOD. You have options:

• Ask the seller to reduce the sales price to match the appraised value. This is the GOOD scenario for the buyer!
• Negotiate the purchase price with the seller. Typically, buyer and seller meet in the middle and the buyer chips in an additional cash downpayment over the appraised value. This is the second best option in cases where it could be argued that the home was under-appraised by the appraiser.
• Pay the difference in an additional down payment and continue with the sale for the original asking price.
• Cancel the contract. Standard language in the Arizona Association of Realtors contract allows you to cancel your contract and have all earnest monies returned to you if the appraisal doesn’t match the asking price.

We’re here to help you through every step of the buying process and can help advise you on the best course of action if your appraisal does come in low. Contact us if you have any questions about how home appraisals can impact your purchase.

Though not guaranteed, information and statistics in this article have been acquired from sources believed to be reliable.