How do Appraisals Work?
Who wants the appraisal done? - Oakland County real estate
Appraisals are done because the buyer and their lender want to know the house is worth the purchase price. It is really performed for the benefit of the lender. The lender is trying to justify loaning the money for what the house is worth. The loan amount is based on the appraised value of your Oakland County home. Your appraiser will have a copy of the Purchase agreement. (contract). The typical cost of an appraisal is $400 - $500 and is normally paid to the lender upfront by the borrower. Appraisers charge more for rental properties, FHA appraisals, and multi family properties. Commercial appraisals start at $1500 and go up to $5000
When are appraisals ordered?
You probably have completed your loan application, and put in an offer on an Oakland County home. When do you order an appraisal? You order an appraisal after the home inspection. You do not want to order and pay for an appraisal until the house passes inspection. If the house fails inspection you don't order the appraisal until you have worked out a solution to home inspection. You will either get a signed addendum stating the seller will do the repairs, give you a lower price, or that you the buyer accept the house as is. Then you order the appraisal.
Are appraisals a true value of a home?
No, An appraisal is subjective. One appraiser may come up with one value and another Metro Detroit appraiser may come up with a totally different value. An appraisal is not what the house should sell for, it is just a educated opinion or estimate of value of a licensed appraiser using different value approaches.
The most common way an appraisal is done is that the Oakland County home you are buying is considered the subject house is compared to 3-5 homes that are similar in style, size, and location that have sold in the last 6 months. So your appraisal is based on homes that have sold recently that are like yours and near yours! Appraisals are not a guarantee of value. Most lenders will have a disclaimer to that effect. Remember, the appraiser has a copy of your fully negotiated contract BEFORE establishing the appraisal value.
The elements of an appraisal Here are some items that an appraiser considers.
Style When I say style I mean home styles. Appraiser compare colonials with colonials, ranches with ranches, split levels with split levels. They will not compare a ranch to a colonial.
Size and Age When I say size I mean they compare square footage, number of bedrooms, bath rooms, age, garage, amenities. Your home may be 1500 square foot 3 bedroom, 2.5 bath, built in 2000, with a 2 car garage. One of the other Oakland County homes that sold may be 1000 square foot, 2 bedroom, 2 bath, built in 1964, with a 1 car garage. The appraiser has a general industry formula that they use to give value to a 3 bedroom versus a 2 bedroom, A home built in 2000 is worth more than one built in 1964 so more value is given to the 2000 home. The appraiser does adjustments to the value of the home to get an opinion of value. What the appraiser is trying to do is compare apples to apples. What the lender is looking from the appraiser is a solid opinion of value. That the appraiser is not giving some crazy value for the difference in age or difference in bedrooms. Remember very little value is given to updates. Bigger value would be given to an addition or a garage.
Location If it is in the city lenders like to see the comparable sold homes in the same neighborhood first. But the appraiser can use homes within a mile. But the appraiser must use the homes closest to the Oakland County home you are buying. Another rule they have is they should not use homes on the other side of main roads or railroad tracks. This common sense, because if you cross a main road the houses can be totally different. The lender wants the appraiser to use the houses closest to the subject property. So if a similar house sold on the same street the appraiser is supposed to use that home.
That is how many times appraisals may vary Appraisers may be using different comparables (sold houses) and may be using a little different adjustments for the value of a three bedroom home versus a two bedroom home. It gets even more difficult when homes are not selling, or there are very few comparables close by. They sometimes have to go further away and futher back in time. Up to a year ago.
Are appraisals the final say on the value of the home for the bank?
No Most or all Appraisals are reviewed by the lender's underwriters and sometimes by a lenders appraisal review department. Sometimes if the lender does not think the appraisal is correct the will have another appraiser to review the appraisal or have a second appraisal done. So there are checks and balances in the lending system.
What happens if your Oakland County home you want to buy does not appraise for the sales price ? Sometimes homes just do not appraise out.
Either the appraiser gave it a lower value than the sales price or sometimes the bank
rejects the value of the appraisal. Then then have a review appraisal done or a second appraisal done. Then the lender may come back with a lower value of the house. What the means to you the buyer is that the sales price must be reduced or you have to bring more money to the table. For example you bought an Oakland County home for $320,000 and you are borrowing 80%. The bank or the appraiser says it is only worth $300,000. The bank is only going to loan $240,000. You either have to go back to the seller and renegotiate the price or you have to come up with and extra $20,000 to close the sale.
VA Appraisals
When are appraisals ordered?
You probably have completed your loan application, and put in an offer on an Oakland County home. When do you order an appraisal? You order an appraisal after the home inspection. You do not want to order and pay for an appraisal until the house passes inspection. If the house fails inspection you don't order the appraisal until you have worked out a solution to home inspection. You will either get a signed addendum stating the seller will do the repairs, give you a lower price, or that you the buyer accept the house as is. Then you order the appraisal.
Are appraisals a true value of a home?
No, An appraisal is subjective. One appraiser may come up with one value and another Metro Detroit appraiser may come up with a totally different value. An appraisal is not what the house should sell for, it is just a educated opinion or estimate of value of a licensed appraiser using different value approaches.
The most common way an appraisal is done is that the Oakland County home you are buying is considered the subject house is compared to 3-5 homes that are similar in style, size, and location that have sold in the last 6 months. So your appraisal is based on homes that have sold recently that are like yours and near yours! Appraisals are not a guarantee of value. Most lenders will have a disclaimer to that effect. Remember, the appraiser has a copy of your fully negotiated contract BEFORE establishing the appraisal value.
The elements of an appraisal Here are some items that an appraiser considers.
Style When I say style I mean home styles. Appraiser compare colonials with colonials, ranches with ranches, split levels with split levels. They will not compare a ranch to a colonial.
Size and Age When I say size I mean they compare square footage, number of bedrooms, bath rooms, age, garage, amenities. Your home may be 1500 square foot 3 bedroom, 2.5 bath, built in 2000, with a 2 car garage. One of the other Oakland County homes that sold may be 1000 square foot, 2 bedroom, 2 bath, built in 1964, with a 1 car garage. The appraiser has a general industry formula that they use to give value to a 3 bedroom versus a 2 bedroom, A home built in 2000 is worth more than one built in 1964 so more value is given to the 2000 home. The appraiser does adjustments to the value of the home to get an opinion of value. What the appraiser is trying to do is compare apples to apples. What the lender is looking from the appraiser is a solid opinion of value. That the appraiser is not giving some crazy value for the difference in age or difference in bedrooms. Remember very little value is given to updates. Bigger value would be given to an addition or a garage.
Location If it is in the city lenders like to see the comparable sold homes in the same neighborhood first. But the appraiser can use homes within a mile. But the appraiser must use the homes closest to the Oakland County home you are buying. Another rule they have is they should not use homes on the other side of main roads or railroad tracks. This common sense, because if you cross a main road the houses can be totally different. The lender wants the appraiser to use the houses closest to the subject property. So if a similar house sold on the same street the appraiser is supposed to use that home.
That is how many times appraisals may vary Appraisers may be using different comparables (sold houses) and may be using a little different adjustments for the value of a three bedroom home versus a two bedroom home. It gets even more difficult when homes are not selling, or there are very few comparables close by. They sometimes have to go further away and futher back in time. Up to a year ago.
Are appraisals the final say on the value of the home for the bank?
No Most or all Appraisals are reviewed by the lender's underwriters and sometimes by a lenders appraisal review department. Sometimes if the lender does not think the appraisal is correct the will have another appraiser to review the appraisal or have a second appraisal done. So there are checks and balances in the lending system.
What happens if your Oakland County home you want to buy does not appraise for the sales price ? Sometimes homes just do not appraise out.
Either the appraiser gave it a lower value than the sales price or sometimes the bank
rejects the value of the appraisal. Then then have a review appraisal done or a second appraisal done. Then the lender may come back with a lower value of the house. What the means to you the buyer is that the sales price must be reduced or you have to bring more money to the table. For example you bought an Oakland County home for $320,000 and you are borrowing 80%. The bank or the appraiser says it is only worth $300,000. The bank is only going to loan $240,000. You either have to go back to the seller and renegotiate the price or you have to come up with and extra $20,000 to close the sale.
VA Appraisals
If you are getting a VA appraisal, the appraiser will not only look at valuation but will also look at the condition of the Oakland County home. If defects are noted, the lender may require that the issues be fixed prior to closing. Since the borrower has such a low down payment, lenders want to make sure that borrowers are not hit with any up-front maintenance expenses. The seller is not obligated to make the repairs; consequently, they will have to be negotiated. But the loan cannot be closed without the repairs being done
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