A home appraisal plays an essential role in any purchase or refinance transaction. When a lender evaluates a loan application the lender actually issues two separate approvals- one for the borrower and one for the property. The property is in fact the lender’s ultimate collateral and has the authority to foreclose on a property should the loan go into default. That said, the lender pays a lot of attention to the current market value of the property being financed. The lender’s maximum allowable loan amount is partly dependent upon the appraised value of the property. Even if the borrower has an 850 credit score, a hefty down payment and debt-to-income ratios in the single digits, the property must appraise.
When an appraiser prepares a property appraisal one of the first acts is to research local property tax rolls to see what the county believes the subject property is worth. The appraiser also researches recent sales in the neighborhood of the subject property and compares those recorded sales with the subject property. Generally, the appraiser assigns a price-per-square-foot value of the previous sales, referred to as “comparable” sales, or comps. Then, the value of the subject property is physically inspected and makes any adjustments that could impact the final value.
For example, let’s say a 3,000 square foot house sold for $300,000 last month. The subject property is also 3,000 square feet and three blocks away. Yet the subject property has a valley view and a backyard in ground swimming pool. The view and the pool provide additional value even though the home is located in the same neighborhood and the same size as the one that recently sold for $300,000. After making adjustments, the property is ultimately valued at $325,000.
However, the appraiser doesn’t just research one property to be used as a comparable sale but uses at least three such comps as required by the lender. Each comp used will also be adjusted to account for variances between the different homes. But as any appraiser will tell you- a property appraisal is as much an art as it is a science.
How so? Because if someone ordered two or even three appraisal reports from different appraisers, it’s likely the values will be slightly different. Similar because it’s most likely the different appraisers used the same comps. What this means is the perceived value of a property might very well be influenced. There are some things you can do to prepare your home for an appraisal to get the highest possible value.
Home Appraisal Preparation If You’re a Seller
If you’re the seller and a contract has been signed, one of the more important things you can do is to enlist the services of your listing agent. Your agent has access to the multiple listing service and has intimate knowledge of property listings and recent sales in the neighborhood. The appraiser also has the same access in addition to public records but the appraiser won’t necessarily know the details of a recent closed transaction that an agent would.
For example, if a 3,000 square foot home sold for $290,000 and your sales contract says $300,000 and your property are extremely similar, the appraiser might lean toward adjusting your market value lower than what is on the contract. Remember, lenders use the lower of the sales price or appraised value when establishing a required down payment and loan amount. If the value comes in lower, your buyers would have to come to the closing table with the difference, in this example another $10,000. In most cases, the buyers would most likely withdraw their offer and get their earnest money deposit back. Yet because your real estate agent was familiar with that sale and told the appraiser the previous owners just went through a divorce and demanded a quick sale, thus the lower price. If you have your listing agent compare comps with the ones the appraiser used, you shouldn’t have any issue with final value. Finally, your agent may know of private sales that were not listed in the multiple listing service.
When a contract is signed and the appraiser contacts your agent to make a physical inspection. Note, the prior work researching previous sales and listings has already been completed. When the appraiser pulls up in front of the house, first impressions are important. You want what is called a positive “curb appeal.” Curb appeal means what your home looks like when someone looks at it from the street. Is the lawn free of debris, mowed and edged? Are the sidewalks and driveway clean and cleared from stains? What about the exterior, is it freshly painted? Tree limbs and leaves cleared from the roof? For a first impression, curb appeal is important.
Your real estate agent will tell you what should be done to the interior to increase perceived value. Does the carpet need to be replaced? How about a fresh coat of interior paint? New hardware on the cabinets? No cracked windows of peeling paint? When the appraiser arrives, your home should be free of clutter and absolutely shine.
Home Appraisal Preparation If You’re Refinancing
When you’re refinancing an existing mortgage, you want to take the same steps a seller would. With a refinance, there is no sales contract and the final value is based upon recent sales and listings. You need to prepare for a positive curb appeal as well. Make sure everything works. If a light switch doesn’t turn on the lights or there’s leaky faucet upstairs the appraiser might think the home hasn’t been well maintained, dampening the final value. Don’t forget this is a combination of art and science.
Pay close attention to the kitchen and baths because the appraiser will. Did you recently upgrade your kitchen? If the comp down the street had an older kitchen or master bath, you’ll get upgraded with a positive adjustment. Fresh paint is also a good suggestion and relatively inexpensive. Are there any other recent improvements you’ve made the appraiser may not know about? You need to let the appraiser know of everything you’ve done to the home.
Remember, you need to be your own cheerleader and let the appraiser know everything good about your home especially any improvements you’ve made the appraiser wouldn’t otherwise know about. And finally, if you know of any details of recent home sales in the area that could positively impact your final value, by all means don’t let them be a secret.