When you’re a realtor, you know that appraisals can make or break a purchase deal -- whether the market is flourishing or not.
As a realtor, you don’t have to be an expert on appraisals, but you should know enough to be able to properly guide your client through one and help them decide what to do when there’s an unfavorable outcome.
Having a deeper knowledge of appraisals also helps you understand the factors that go into valuing a property and gives you more insight on home sale prices and trends in your area.
Read on to learn 4 things realtors should know about home appraisals.
In an appraisal, a licensed or certified home appraiser will evaluate a property and prepare what’s called a Uniform Residential Appraisal Report (here’s an example). The appraiser will evaluate:
Through this evaluation, the appraiser will determine the fair market value of the home. This dollar amount can either match a purchase price, be higher than a purchase price, or come in under a purchase price. The outcome of this phase in your client’s loan process will determine if you make it to the closing table.
It’s important to keep in mind that a home is only worth what someone is willing to pay for it.
Sometimes buyers really want a home and will pay thousands of dollars and even hundreds of thousands of dollars more just to get the home. Typically, that is their prerogative if they plan to pay out of pocket. If a borrower is attempting to finance the full amount (including an amount OVER fair market value), lenders have some say in the process - especially when it comes to the loan-to-value ratio.
Borrowers can only borrow based on the sales price of a home or the appraised value, whichever is lower. For a buyer, it’s important to discuss what offering OVER list price means to them and what it means in the context of getting loan approval with their mortgage broker.
Appraisals generally protect the borrower, ensuring he or she doesn’t pay any more than the home is actually worth at fair market value. They also protect the lender by reducing their risk of underwriting a loan for more than a property is worth.
Read the National Association of Realtor’s Guide to Residential Appraisals for more in-depth info on how they work. This is also excellent info to share with your client.
You may have heard that VA and FHA appraisals are more stringent than those for conventional loans, but the truth is, they’re mostly the same in their requirements.
All appraisals must meet sound health and safety requirements. A lender does not want to lend on a home that cannot be occupied. Homes need to have an operational bathroom, a safe kitchen, safe drinking water, be sanitary, and be secure. Unless you’re applying for a rehab loan, the home you’re seeking out a loan for must be livable. These factors are in the forefront of every appraiser’s mind during evaluation.
Appraisal values that come in on the money or slightly over are ideal outcomes for your client. In these cases, lenders see lower risk in approving the loan amount and the purchase can continue on smoothly to closing.
When there’s a low appraisal, however, it creates a roadblock in loan approval. It’s important to keep in mind that your client has options in how to respond to a low appraisal.
Bias in appraisals still happens even in this day and age, so it’s important to know what to do in the event that you or your client suspect racial bias or discrimination in an appraisal. If you or your client do suspect that racial bias may have influenced the results of an appraisal, you can take steps to report the incident using the Appraisal Complaint National Hotline. In addition, your client should inform his or her lender and request a reconsideration of value and/or appraisal review.
Like realtors with required periodic ethics courses every 3 years, licensed appraisers are required to undergo updated training every 2 years on the standards of professional appraisals. The Fair Housing Act and best practices in preventing discrimination and racial bias influence on appraisals are key topics in current appraiser training and will continue to be for the near future.
I’m a licensed mortgage broker serving Arizona, California, Colorado, and Florida and I’m happy to help guide your client through the pre-approval and loan process, including answering both of your questions about appraisals. Reach out to me anytime at 480-313-7103 or firstname.lastname@example.org!