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Residential Real Estate Appraisal
By Paul Anderberg
An appraisal is simply an opinion of value. Some appraisals are a professional appraiser's opinion, others are guesses. Still others are based upon the sometimes harsh reality of the marketplace. The most important factors for appraisers are figures of recent real estate sales involving comparable properties. Basically, there are only two opinions that matter.
(1) The list price is a "wishful-thinking" value, merely a hopeful estimate. It is set by the seller. The sale price is the real value. It is determined by you, the buyer. Of course, the price you finally agree to pay is partially determined by the seller through the negotiation process. But you and only you decide how much you are willing to pay.
The lender's is the second opinion that truly matters. The bank usually employs appraisers, although sometimes it uses third party "fee" appraisers. A value of the property is determined, and the lender will then make a mortgage loan based on this figure.
If the lender's appraisal "comes in" lower than your agreed-upon sale price, you may not be able to buy the home. The lender bases its lending decision upon this professional opinion of value. It will only loan a percentage of this figure. Therefore, if you are counting on using the lender's funds in a certain amount to finance the purchase of your home, a low appraisal from the bank can seriously damage your first time home buying efforts.
The lender's opinion of value can be disputed. The appraisal department at a bank will usually welcome previously overlooked comparable sales data ("comps") and other factors which might affect their appraisal. Sometimes there were sales in the area of which the appraiser was unaware. You and/or your real estate agent often know about non-MLS sales of which the bank appraiser has no knowledge.
Perhaps you decided to buy this house because the seller spent thousands on structural and mechanical system upgrades. The lender is not to aware of these value-enhancing improvements. When you bring them to the appraiser's attention, you quite possibly will induce the appraisal department to raise the appraisal figure. The critical point to remember about this is: If the lender produces a low appraisal, you can always contest it.
You might hear complaints when the lender's appraisers express a low opinion of value - "Why don't they just appraise at sales price? After all, THESE buyers are willing to pay that much. Surely others would, too." Ah, but that's NOT necessarily true. Some buyers (hopefully not you) do agree to pay too much. The lender needs to protect itself from these "lovestruck" buyers who must have that home. If the bank eventually has to become the owner, by having to foreclose, it must have reasonable expectations of being able to recover all or most of its investment.
When negotiating the purchase of your home, be sure you are always being prepared to "walk away" from the transaction if the seller is too unreasonable. There are plenty of other homes available. If you do this, the lender's real estate appraisal will almost certainly come in at or above your sales price and thus cause you no problem.
Keep the Golden Rule in mind: "The banks have the gold, so they make the rules."
Paul Anderberg
http://www.first-time-home-buying.net
Mr. Anderberg is the author of many helpful articles about home buying. Visit his website to read more. Several others are also available on this site.
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Who Should Hire the Real Estate Appraiser and Why?
By John H
Everyone involved in the sale of real estate has a vested interest in the results of a real estate appraisal. The outcome affects the seller, the buyer, the lender, and even the realtor.
A too low valuation of the property by the appraiser could mean a seller must lower the asking price. For a lending officer, it could mean a lesser commission or none at all. A too high valuation means the buyer could be paying more than the property is worth. For the realtor, his/her commission could go higher or lower, which is based on the purchase/sell price of the real estate.
An appraiser, who should be licensed by the state, performs the real estate appraisal. It is best to hire someone local with years of full-time experience in order to get a more accurate appraisal. The appraiser and appraisal are governed by the minimum standards, published periodically in the Uniform Standard of Professional Appraisal Practice by the Appraisal Foundation. The Foundation is chartered by Congress.
The recent real estate bubble, unfortunately, brought problems for appraisers and many involved in real estate transactions. According to Realty Times in their April 2006 issue, appraisers have been routinely asked by lenders to inflate real estate values to keep up with the ever-rising real estate market. One real estate appraiser in San Diego quit and turned in his license to the state, after being fired three consecutive times for refusing to inflate his valuations. Now, real estate appraisers across the United States are under a microscope from federal financial regulators and Congress.
The real estate appraiser may be hired by the seller to determine an accurate selling price or by the buyer to ensure the accuracy of the purchase price and mortgage; but generally, the lender does the hiring or uses their own in-house appraiser. Though buyers may assume the lender has their best interest, mortgage lenders have their own best interest at the forefront, especially some not-so-scrupulous lending officers who may be targeting a higher commission.
If I were a seller, I would hire my own real estate appraiser to ensure I was getting the most for my property. As a buyer, I would put the money out upfront to hire an independent and objective appraiser with no connection to anyone within the real estate transaction. This ensures that I do not contract for a mortgage, based on an inflated appraisal valuation, that will give me a new home with a lower or negative equity. The lender still may require a different appraiser.
If five different real estate appraisers evaluated the same property within the same timeframe and under the same conditions, it could result in five different and varying real estate valuations. Why? There is no set checklist or established value for each property feature and amenity. Though appraisals are based on prescribed standards, it is a subjective process.
If there is more than one real estate appraisal and they disagree significantly, you have options. If the value is too low for the seller, renovations may raise the value � or you can decline to sell. If the lender insists on its appraiser�s value, which disagrees with your real estate appraiser�s value, as the buyer you can look for financing elsewhere � or decline to purchase the real estate. There also is the option to bring the appraisers together to come to a common agreement on the value.
Remember, the person looking out for your best interest is yourself. Ensure the appraiser in your real estate transaction is reputable, objective with no connections to anyone in the transaction, local and experienced.
John Harris is an expert researcher and writer on real estate topics such as economics, credit improvement tips, home selling advice and home buying preparations. For more on San Diego Homes for Sale visit http://www.twtrealestate.com
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Why Are There Cheap Houses
By Steven Gillman
There are many reasons why there are cheap houses for sale. Knowing what these reasons are, and what they mean, can help you save thousands buying your next home. Here are six common reasons that a house will be selling for less than others.
1. The home needs work.
What does this mean to you? It may mean you need to pass on by, if you don't want to deal with getting it fixed. On the other hand, these houses are often a way to build equity fast. They scare away most buyers, so there is less competition and often a real opportunity for a low price.
Be aware, however, that a seller may think that if it needs a $10,000 in repairs it is worth just that much less than others. Don't buy it! Dealing with a fixer upper for nothing is no deal. If it needs $10,000 in repairs, it had better be worth $20,000 more when you are done.
2. The neighborhood is questionable.
Cheap houses in bad neighborhoods are common. Are they a good buy? Not if the neighborhood is still declining. That could be the worst investment in town. I caught a story in a real estate forum recently, from an investor who had to sell his Detroit rental house for a loss after twenty years of owning it (who says real estate always goes up in value).
However, if there are clear signs that the neighbor hood is improving, a cheap house there could be a great investment. By the time the improvement is noticeable, things are usually happening fast. You might see a huge jump in the home's value in a few short years.
3. The seller needs to sell fast.
We all have our deadlines. If you learn that the seller needs to move soon, or has to sell quickly for any other reasons, make a low offer. Don't ever assume you are taking advantage of someone in this situation. You might not buy the home otherwise, and the seller can always say no. It may be well worth it to him to sell for a few thousand less to get it sold now. Let him decide.
4. There are hidden problems.
If you see a cheap house, and can't find any other reasons why the price is low, there may be hidden problems. This is especially true if the seller is an investor, or seems knowledgeable about real estate. There could be foundation cracks hidden behind paneled walls, or a highway coming through the front yard in a year.
Identify the problems and, if they can be resolved, estimate the cost to see if the house is still a good deal. Keep in mind though, that if the seller was hiding anything important, there may be more surprises. Have inspection contingencies in the offer if you buy these types of homes, and get those inspections done.
5. The house is unique.
I used to live near a house that was shaped like a flying saucer. Some houses are up insanely steep driveways. Others are built halfway underground. If the unique features are in demand, these homes can sell for a premium. If they aren't they become cheap houses.
A house that is unique in ways that the general public doesn't value will be hard to sell, so it may not be a good investment. On the other hand, what if it fits your needs and you will be living there for a long time? Suppose you pay $300 less per month to buy a "unique" home, and you live there for fifteen years. You'll spend $54,000 less on payments. That might be sufficient compensation for a difficult sale, right?
6. The price is just set too low.
Would you like to find a seller who just doesn't know that his house is worth $220,000, and has priced it at $180,000? It is rare, but it happens. Actually that may be too much to hope for without feeling guilty, but you certainly don't have an obligation to educate a seller or pay more than the asking price. He may actually have reasons you don't know for pricing it that way (a wish to be generous or a need for a quick sale?).
Bottom line? If cheap houses are good houses, don't worry about the reasons too much - just buy one.
Copyright Steve Gillman. To see a photo of the house we bought for $17,500, get a free ebook on how to buy Cheap Houses, and more, visit: http://www.HousesUnderFiftyThousand.com
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