Monday, January 30, 2012

How to Prepare for an Appraisal

1.


At some point in the life of a home owner, they get their house and or property appraised. For most homeowners the role of an appraiser is shrouded in mystery, and they don’t know how to prepare for the day of inspection or the remainder of the process. My job in this article is to shed some light on understanding the role of appraisers and preparation for the inspection.


Just another Day

I arrived at the property about 10 minutes early for a conventional appraisal. As I walked up the sidewalk and onto the porch, I was taking notice to the upkeep of the property, exterior features of the home, and looking for any environmental issues. I knocked on the door and was greeted by the homeowner, which appeared very nervous. After introducing myself, I gave her a brief explanation of what I was going to be doing today, and asked if we could sit down and talk for a few minutes. At this point the homeowner was already apologizing for the “wreck” that her home was in, and said she didn’t know I was going to be coming in the home.

As we were sitting at the kitchen table I made some small talk and asked if she had ever been through an appraisal before, which she had not. At this point, I usually explain in detail what I will be doing for the next couple days, because I realize that the homeowner has not been briefed or doesn’t know what to expect from the appraisal process. After the chit-chat, I usually ask several questions about the features of the home such as age, amount of land, where the septic tank and or well is located (if applicable), and any recent updates. By now she had calmed down a little bit, and we proceeded to go through the house for sketching and photographic purposes. I could tell she had a lot of questions, but she didn’t want to be pushy. So I talked her through the appraisal process as we went through the house. We talked about gathering the data, analyzing it, and then reporting the results. I told her how we methodically chose comps, and why I was taking pictures of her dirty laundry and all of her rooms.

Once I was done on the inside of the home we went outside, where I took a few more pictures and measured the home. She was following me around the whole time and when it was time to go, I could tell she was still on edge a bit. This example of a typical inspection for an appraisal happens all the time with both men and women. For some reason the role of an appraiser is one of the least know pieces of the mortgage puzzle.

Understanding the role of the appraiser

It would be easier to understand the role of the appraiser if homeowners would realize that the appraiser doesn’t work for them or the mortgage company, they are employed by the lender/client. The appraiser’s job is to inform the lender of the value of the property so the lender can make a decision on whether or not they will make the loan. The appraiser is the “safe-guard”, because the lender doesn’t want to lend any money if there is not sufficient collateral in the property. Many people do not understand this fundamental fact about the appraiser/client relationship, especially when the appraisal comes back low and the homeowner still has to pay for the appraisal.

Appraisers are contracted on a per fee basis. That means they do not get a percentage of the loan value if the loan is approved. They are paid a flat fee whether or not the loan closes. This system of payment was put in place to protect the independent, un-bias, and impartial stance the appraiser must take. Appraisers cannot be tempted to inflate the value of the property in order to get paid, they must “call it like it is” on the behalf of the lender.

Appraisers will use data from several different sources in order to prepare an appraisal. They examine the general features of the subject (house or property), site, contract, neighborhood, and market before they start using an approach to value. Analyzing all this data will determine if multiple approaches are needed and which ones apply. Appraisers have three main approaches to value: sales, cost, and income. The sales approach is the most common, and this approach uses similar properties that have sold which are then compared to the subject. The next is the cost approach. This approach uses the cost of replacing the structure on the property plus the value of the land minus any depreciation in order to arrive at an opinion of value. This approach is most effective on new constructions, but less on older homes that have been remodeled. The income approach is rarely used on residential properties because an income has to be associated with the property.

5 Steps to prepare for the inspection

1. Prepare your documents- Appraisers love it when all the documents they will need are accessible and current. If you have had changes to the deed, and or property lines moved, make sure the deed is updated. Having the following documents on hand would be even better: deed, plat, past real estate taxes, assessor data, and a list of updates.

2. Prepare your property- A property that sees regular maintenance, periodic updates, and has been cleaned will have a positive effect on the effective age of the property. Effective age is the age of homes yours competes with on the open market. For example, if you have a ten year old home and have done regular maintenance to it and some updates, it may compete with a five year old home. The opposite is also true. If you have the same home that has been abused and not taken care of, it may compete with a 15 year old home. Make sure that if you’re in the middle of a remodel job to get to a natural stopping point when the appraiser comes out. The appraiser will be looking at the finish of the rooms. If he or she sees a room that has the floor ripped up, walls knocked out, or key components missing such as tubs and countertops, it will delay and possibly cause the mortgage to not be approved. In regards to remodeling, keep in mind that the cost of the remodel job doesn’t guarantee a direct return on investment. The appraiser will take into consideration what the market is willing to pay for the feature, not what it cost to put on your property. Consult with several professionals before spending large amounts of your hard-earned money on remodeling (i.e.- planning and zoning, Realtors, and appraisers). Also, make sure the water and electricity is turned on.

3. Prepare your family- Let family members know when the appraiser is coming over. He or she will need access to the rooms (and will be taking pictures), so make sure no one is sleeping or taking a shower when they arrive. Also, try and pen up Fido so the appraiser doesn’t end up with paw prints all over them.

4. Have all areas open for access- Depending on the type of appraisal, the appraiser may need to get into the attic and crawlspace. If this is the case, have the access panels for both of these areas free of obstructions. Also, don’t have any of your rooms locked (this could cause an additional trip fee).

5. Get ready for the next step- Depending on the type of financial transaction, the appraisal could take from a few days, up to two weeks to get back to your mortgage broker. The appraiser may have to make an additional trip to your property if something did not meet the underwriter’s guidelines. Your broker should be able to provide you a copy of the appraisal before closing, and if you have any specific questions about the report, please direct them to your lender; however, feel free to give the appraiser a call if you have any general appraisal principle questions. Just keep in mind, appraisers work for the lender, and they can only share specific information when written authorization has been provided.



Conclusion

Well, this wraps up this article. I hope that this will shed some light on the appraiser’s role in the mortgage process, and what homeowners can do to prepare for the inspection. Feel free to check out our website bvs-ky.com and our facebook page (Bluegrass Valuation Services) for more interesting articles and information on the Real Estate industry. If you need appraisal services as a homeowner, lender, or a Realtor, we have something for everyone. Be sure to click the like button and leave a review before you leave. Thanks for reading, and I’ll see you around the Hardin, Meade, Jefferson, Bullitt, Grayson, and Breckinridge County areas.





Lance Shore is a certified residential appraiser in the Central Kentucky area. He has been in and around the Real Estate industry since 2001 where he started working in the management program at 84 Lumber. He started Bluegrass Valuation Services in 2009, and is also a licensed Realtor in the state of Kentucky. Lance performs a variety of valuation services for homeowners, lenders, and Realtors.
1. woodlandsappraiser.com

2 comments:

  1. Weigh in the options first. An appraisal should be used only when necessary.

    ReplyDelete
  2. Dear apartment for rent,

    Thanks for chiming in! In most refinancing and purchase transactions, especially those over $250,000 an appraisal is required and there is no option. Other options such as BPO's and AVM's tend to be inaccurate due to the lack analysis and expertise of whoever is compiling the report. A BPO and AVM can be filled out by anyone who is not professionally trained in valuing property. They can also be performed by someone who has a vested interest in the closing of the property.

    ReplyDelete