You probably have an opinion of the value of your home. Your opinion and a professional appraiser's opinion may be the same. But appraisers are required to be objective and impartial in their analyses and opinions. A professional appraiser has been trained in appraisal methodology and looks at how your home compares with sales and listings of homes similar to yours, considers many factors such as price trends and proximity to a freeway, complies with professional standards, and usually completes a written report.
A fee is paid to an appraiser, who is qualified by education, training, and experience to estimate the value of real and personal property. Appraisers usually charge one fee for a single-family home and slightly higher fees for a two-family, three-family, or four-family home.
Appraisals are much more likely to come in under the expected value in a re-finance transaction than in a purchase transaction. Simply because homeowners often unrealistically over estimate the value of their homes.
Eventhough the borrower pays for the cost of the appraisal report, it is in the name of the lender bank or mortgage broker. By law, borrowers have the right to receive a copy of the Appraisal Report. In fact, lending institutions are required to disclose to the borrowers that they have this right.
The fair market value that is determined by the appraisal is not just what an evaluation of what your house is worth, but what a potential buyer in that market would be willing to pay for the property.
Although appraisals rarely come in under the purchase price, it happens. What are the implications of a low appraised value? For one, the buyer overpaid, at least in the eyes of the appraiser. An appraisal is nothing more than just the appraiser's professional opinion on the "fair market value" of the subject home. The "fair market value" of a home is subjective. What it's worth to one buyer is often not worth as much to another (otherwise the first buyer would have been overbid). In a purchase transaction, the buyer often use the low appraisal value as leverage to negotiate a lower purchase price. Unless being in an overheated real estate market where the seller is certain he will find another buyer, the seller would often agree to a lower price for fear of not finding another buyer in a short time, and the recurrence of a lower appraisal value with any subsequent buyers.
Another possibility the appraised value may come under the purchase price is that the appraiser may not be familiar with the neighborhood. This happens most often when the bulk of the appraiser's work is not in the same vicinity of the subject home, or that the subject property is located in a rural area when there are no usable comparable sales. If a home buyer believes this is the case, he should request a copy of the appraisal report from the lender, check the comparable properties chosen and determine whether they are valid comparables.
There are several kinds of appraisals including an Automated Valuation Model, a Full Interior and Exterior Appraisal, and a Limited Exterior Appraisal. Some loans such as home equity loans under $100,000 don't require a full appraisal, while home loans over $2 million will require two full appraisals.
Costs for appraisals can vary depending on which company is used. Sometimes the cost can be inclusive in the loan fees and other times it will need to be paid when the appraiser comes out to the home. In any event, the appraisal evaluation is one of the key components in what loan amount each individual borrower will qualify for.
The appraisal in not to be confused with the home inspection. While an appraisal is completed for the value of the home alone, the inspection is performed to uncover potential problems that may be present in the home. It's very important to have both done on the property.
In most cases, lenders require a professional, independent appraisal of the property you want to buy or refinance to ensure that it is worth at least as much as they are being asked to lend on it. If you are making a smaller down payment and have a lower credit score, the lender is going to be even more interested in making sure the property that will be collateral for the loan is worth lending the amount requested.
Comparable sales of similar properties is an approach to evaluate most single family residence. Other approaches, such as the Cost Approach and Income Approach are also used for different types of properties. The Cost Approach is an estimate of the cost to rebuild the property of similar characteristics as the subject property. Income Approach is often used when the subject home generates rental income, such as duplex, triplex and quadplex.
An appraisal is simply an OPINION of value, from someone who is licensed to give such an opinion. Opinions vary from individual to indivdual. Likewise, the appraised value of the home will vary from appraiser to appraiser. However, appraisers base their opinions on comparable sales (what similar houses have sold for in the area recently), as well as other factors. Since the factors used to determine value are the same for every appraiser, most apraisers will give similar opinions about the value of the house.
Though an appraised value might be one thing, a lender reserves the right to "cut" that appraisal as they see fit. A lot of lenders have their own appraisal review department; these departments will look at comps themselves, look at the appraisal, and decide weather to honor that value.