Previously, Part 1 of this post, “How Appraisals Can Affect Your Real EstateTransaction“ offered information regarding facts and details addressed and documented within an Appraisal report.
In this post, Part 2, I will attempt to explain what “logic” is used to support the value reported by the Appraiser in their report.
In today’s challenging mortgage underwriting, that logic has to hold up to fairly intense scrutiny. In truth, it is the underwriter that is the last word regarding any Appraisal.
Due to the issues within the housing market the last few years … those being declining values, Lenders’ losses, foreclosures, short sales, prior fraudulent appraisals, Lenders having applied pressure and trying to influence Appraisers to “make the deal work” … there has never been a time where the Appraisal has been examined more closely than the present.
The Appraiser is supposed to be a fair and disinterested third party to the transaction as a whole. The “logic” applied to the writing of the Appraisal should reflect that, as should their opinion of the value and condition of the property they viewed. The “logic” of the report should also serve as a guide or compass to those reading it. Ultimately, the report reveals if the buyer is paying a “fair” price for the property.
Today’s Appraisal “logic” is sometimes harder to discover and verify. Vast fluctuations in property prices have made finding “comparables” an increasingly hard task for the Appraiser. Many times, “comparables” are fewer in sheer number and usefulness. With most housing markets showing much-declined values … “adjustments” utilizing “logic” typically must be made.
This can place Appraisers in a very difficult situation. They often find themselves:
- Trying to find 3 … 4 … or 5 recently closed sales, completed successfully within the prior six months of the sales date of the Subject Property (the property that the client is purchasing).
- Trying to find these “comparables” within 1 mile of the Subject Property.
- Seeking properties of similar age, living area, condition, amenities, and features.
- Lot size must be similar, as well.
In order for the Appraiser to proceed with his report, they must also compile important information on each of these “comparables”. Some of their information needed and considered during the Appraising process is:
- The sales prices on the closed/completed transaction properties
- The Listing Prices of the current similar properties
- Information on the “adjustments” made. Do those “adjustments” made by the Appraiser exceed 25% of the Sales Price?
- Do those “adjusted values” surround or bracket the eventual Appraised Value?
- The number or probability of foreclosure sales (REO sales) in the market are also noted/weighed.
An Appraisal is not only figures, measurements, tax, or governmental numbers. It is also explanations … what is called the “narrative” portion of the Appraisal.
Narratives reveal and showcase opinions, trends, analysis. Some of the most important information contained within an Appraisal is found within these “narratives”. They are the extras, or “guts” of the Appraisal report. The thoughts behind the Appraiser’s “adjustments” are explained here. Narratives can be accompanied by a photo, map, diagram, etc.
Some mortgage programs (HUD/FHA for instance) demand that properties meet specific property standards. Appraisers must know these differing standards, requirements, and guidelines and make sure to note and address them within their reports.
Ultimately the Market Value of the Subject Property is developed, documented, then submitted by the Appraiser. The report then faces the scrutiny of underwriters. Those underwriters then communicate any concerns they have regarding the Subject Property and/or Appraisal report.
A pro-active, experienced mortgage banker will have studied the completed report prior to submission to the underwriter. They’ll have familiarized themselves with what is contained within that Appraisal report. They will know if what they are viewing is a quality, well-written, well-supported Appraisal.
This pro-active lender will also already have noted what issues might be of concern to their underwriters and already implemented action to address those issues. This helps speed the mortgage processing along and keeps the loan on track for its’ proposed closing date.
With all the information needed, steps needing to be taken, and issues that can arise with today’s property Appraisals, it’s easy to see why many clients do not know or understand an Appraisal report. Why the report and the process may be confusing to them and possibly some agents/brokers as well.
Today’s challenging housing market and mortgage regulations amplify the importance of having a mortgage lender at your side that understands Appraisals and the Appraisal process, and the demands and requirements of underwriters. It is absolutely crucial in obtaining a successful closing for a home buyer.
Do not try to navigate the waters of a challenging housing market and mortgage processing with a lender that is uneducated and inexperienced regarding these issues.
Originally posted at: http://www.genemundt.com/blog/2011/06/26/Understanding-Real-Estate-Appraisals-How-Appraisals-Can-Affect-the-Outcome-of-Your-Transaction-Part-2-.aspx