An important part of a mortgage process is an appraisal. Your lender sends a certified appraiser who will look at comparable sales in the area (comps) to assess whether you are paying fair market value for the home. An appraisal will usually include 3 sold properties and 3 active properties, although it may include a few more. An appraiser will look for similar properties typically within ½ mile of the subject property which have closed in the past 6 months. The homes should have comparable square footage, number of bedrooms, bathrooms, and lot size. With condos, the closest comps will be the ones that closed in the building. Since no two properties are the same, the appraiser will then make adjustments which are often subjective.
An appraisal is ordered early in the loan process. Your lender will ask you to pay for it up front, as a fee separate from the rest of your closing costs. An average appraisal costs in the range of $300-$600 (an appraisal for a commercial property is substantially more).
An appraiser will contact the listing broker directly to gain access to the home. It usually happens within a few days after you finished your loan application. Once the appraiser inspects the property, it takes 5-7 days for her to return the report to the lender at which point you will be notified if the appraisal came in at value and can receive a comp.
A few things to remember:
- An appraisal is the appraiser’s opinion of value. I have yet to see two appraisals of the same property which use the same comps and arrive at the same value.
- As long as the comps you used to make an offer are correct, you can expect the appraisal to come back “at value” which means at the contract price.
- If the appraisal comes back at a price lesser than the contract price, you have a few of options:
- Ask for an appraisal review – those are rarely successful when the difference between the appraisal and the contract is significant.
- Come up with a larger down payment to make up the difference.
- Re-negotiate the price with the seller.
- Switch the lender and start fresh.
- Walk away from the deal (you will get your earnest money back, but you will not get the appraisal fee back).
- When an appraisal comes in over the purchase price – that’s great news. You have instant equity in your home as soon as you close. It does not happen very often, so if you are one of the lucky ones – congratulations!
Here are some of the most common problems with appraisals:
- An appraiser is not familiar with the area – I have had appraisers from Indiana botch appraisals in the city.
- The property is unique and the comps are not easy to find. The appraiser may choose wrong comps.
- Total square footage of the comps as reported by the tax assessor is not correct.
- The adjustment for improvements and condition of the home does not reflect what the market in the area is willing to pay.
If your appraisal comes in below value, stay calm. Call your lender and your realtor to go over the comps to make sure that all the information included in the report is correct and appropriate comps are use. Not all sellers are open to renegotiating a deal, so it is not always shrewd to look at a low appraisal as an opportunity to re-negotiate the deal.
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