Yes. By law, the lender must provide the homeowner with a copy of the appraisal. This may be done at closing or the lender may forget to give you a copy. Since the lender hires the appraiser, all of the appraiser’s results (the appraisal) must go directly to the lender (or the appraiser’s client). Most of the time, the appraiser will not send you a copy of the appraisal report directly to you. It is the job of the lender to provide the borrower with a copy of the report.
Can the appraiser tell the borrower or homeowner what their house is worth or a “ball park” number at the time of the inspection?
The lender hires the appraiser to perform and appraisal on the property. This creates a fiduciary relationship between the lender and the appraiser. As a result, the appraiser can only report any value conclusion directly to the lender and must get permission from the lender to let any other person or party know the results or value conclusion of the appraisal. This means the appraiser cannot disclose any opinion of value (an appraisal) to the homeowner without first giving the client (lender) the appraisal first and getting permission from the client to tell the homeowner the results of the appraisal.
When the appraiser inspects the home or property, he or she inspects the home, lot, floor plan, and measures the house for the amount of living area, basement, garage, etc. This is primarily a data gathering process. There are many factors that comprise the property’s market value such as lot size, location, house condition, room count (number of bedrooms and bathrooms, etc.), finished basement, etc. All these factors need to be adjusted for comparison to other similar sales in the neighborhood or similar neighbor hoods. The appraiser does not have all of the sales data available to him or her at the time of the inspection and cannot make all of the necessary adjustments needed to arrive at an opinion of value at the time of the inspection. Therefore, any number given by the appraiser would probably not be accurate and should not be given.
An appraiser might think that a house should be worth around $100,000 at the time of the inspection, but later finds two sales that just closed in the neighborhood for $94,000 and $95,000 and a very similar house that is listed for $97,000. Though the appraiser was fairly close in thinking the house could be worth around $100,000 at the time of the inspection, current market data shows a value of $95,000 to be more supported by the market and concludes at that number.
Taking the above example a step further, if the appraiser would have told the homeowner that their house was worth $100,000 at the time of the inspection and later concluded the value to be $95,000, the homeowner would be confused as to why there were two values given by the appraiser. The result was that the appraiser legally gave two appraisals ($100,000 and $95,000) since an appraisal is an opinion of value. One is probably more accurate than the other, but two appraisals were performed. In addition, the appraiser may be held liable for the $100,000 value even though it was a guess and the homeowner almost always says (“we won’t hold you to any number, we just want a rough idea”). Any potential value provided by an appraiser is considered an appraisal as the appraiser is considered an expert.
Most lenders accept appraisals that are less than 6 months old. However, with the current market conditions, housing and mortgage lending problems, lenders may accept only more recent appraisals, such as a 1-3 months.
For a purchase or a refinance through a bank or lender, the bank or lender will be responsible for choosing the appraiser. The bank usually has a small list of appraisers that are approved to do appraisals for the bank. Also, lenders have been and will continue to use appraisal management companies to outsource all appraisal responsibilities. For bankruptcies, divorces, estates and other personal reasons, the public can hire an appraiser directly.
An AMC is a “middle-man” that provides appraisal duties for a lender for a fee. The lender outsources the duties such as finding an appraiser in the area, assigning the appraisal to an appraiser, following up on appointment times and expected due dates, receiving the completed appraisal, reviewing the appraisal to make sure it meets the client’s needs and quality standards then forwards the appraisal to the lender. The AMC often charges a flat fee for their service to their client or lender. Often, the AMC tries to reduce the appraiser’s fees and add on an additional $100+ charge for their service so the final appraisal cost on the HUD settlement form may include both the reduced cost of the appraisal and the appraisal management company fee.
Everything about the property including:
- The location of the property such as the neighborhood and what surrounds a house
- The site (lot size, topography, public or private road frontage, public utilities at the site, etc.)
- The overall room count (the number of bedrooms, bathrooms, living room, etc.)
- The condition of the improvements (was the house recently remodeled such as new flooring, kitchen, bathrooms, painting, roof, siding, etc.)
- Garage area
- Basement area (finished or unfinished)
- Quality of the construction (cherry cabinets, granite countertops, hardwood or ceramic flooring, brick siding, geo thermal heat pumps, etc.)
- The current economy
- And other factors such as how many properties are listed for sale in the neighborhood, how many have sold, etc.
Appraisers can value real estate based on one of three different approaches: the Income Approach, Cost Approach and the Sales Comparison Approach.
The Income Approach is designed for income producing or rental properties. The value is based on the potential income and expenses of the property and its ability to provide a return to the owner.
The Cost Approach is used mostly on newer houses and it is based on how much it would cost to rebuild the house and all of the improvements (well, septic, excavating, driveway, etc.). Physical (age, wear and tear) as well as functional and external depreciation are subtracted from the cost of the construction then the land or site value is added to arrive at an opinion of value based on the replacement cost of the entire property.
The Sales Comparison Approach is the most often used approach and is based on using similar properties to the subject that have sold recently and are adjusted for the differences between the subject property and the comparable sales. This approach uses current market sales to show the property’s market value while adjusting the sales for such items as lot size, quality of construction, condition, room count, living area, finished basement area, garage area, etc.
The subject property is a two story house with a 1 car garage and has 2 bedrooms and 1 bathroom. The house next door just sold for $100,000 and has a 2 car garage, 2 bedrooms and 2 bathrooms and is similar to the subject in most other ways. A house a few doors down recently sold for $90,000 and was a similar two story house with no garage and had 2 bedrooms and 1 bathroom and was of similar size and other features. The first sale is superior at $100,000 since it has an additional garage space and bathroom. The second sale was inferior since it did not have a garage. The Appraiser would then conclude that the value of the subject would probably be more than $90,000 and less than $100,000, maybe between $93,000 and $95,000.
Active listings and pending sales can also be used to help reflect current market activity since often similar sales can be 3, 4, 6 and 8+ months old sometimes. This approach is often given the most weight in the appraisal since given the quality and quantity of sales data for most properties. Also, it is important to use similar sales and compare like properties like using two story sales against a two story house and ranch or one story houses against a one story house. Likewise, an appraiser should use industrial plant sales when appraising an industrial plant instead of using shopping plaza or office buildings sales when appraising an industrial or manufacturing plant.
As discussed elsewhere, unique properties sometimes don’t have truly comparable sales or a slow market could severely limit the number of comparable sales. The quality and the quantity of the sales data are extremely important in providing a reasonable or accurate opinion of market value.
An appraisal usually takes a few hours to complete depending on the complexity of the property. However, depending on the workload of the appraiser, the appraisal could take 2, 3, 5 or 7 days to complete and email to the lender. If interest rates are low and there is a lot of refinancing at the time or if there is a lot of sales activity in the summer, the turnaround time could be longer than usual. If the reverse is true, the appraisal could take only a few days to get back to the lender.
The homeowner is going to remodel the house immediately after the appraisal is complete. Will that be taken into account in the appraisal?
Not most of the time. Most of the appraisals are completed “as is”. That means the property is appraised in the condition that is was at the time of the appraiser’s inspection. Construction loans, however, do take into account future remodeled such as plans and specifications so the appraiser will appraise the property based upon the improvements or remodeling being completed.
I just had an appraisal done by another appraiser for a different bank. I decided to switch banks so can the new bank use the other bank’s appraisal?
Yes, a bank or lender can use a recent appraisal from another lender, however, most do not. Most lenders would rather send their own approved appraiser through their own ordering process/company and have the right to reject or refuse to use the previous appraisal by another lender or appraiser. If the lender would decide to use a previous appraisal from another lender, the new lender would probably require the appraisal be sent from the appraiser to the new lender rather than accept the appraisal from the borrower.
Is it possible for two different appraisers to come up with two different market values on the same property?
Yes. An appraisal is an opinion, not scientific fact. The appraiser uses facts (cost data and market sales) to arrive at the appraiser’s opinion of value, but could arrive at different values. The more unique the property and the fewer the comparable sales available to the appraisers, the more subjective the appraisal can be. Also, if a house is located on a busy street, one appraiser may say the best use is residential (though less attractive to the general public) while another might say the best use is for commercial use such as a small office.
The appraisal should be completed under the highest and best use of the property, which means:
- Is the use legally permissible (will zoning allow a commercial use in a residential neighborhood)?
- Is the use financially feasible (will I get enough rent out of the building to make a profit)?
- Is the use physically possible (will a commercial building and adequate parking fit on a small residential lot)?
- What use will be the most productive (a single family home on a busy highway with a large lot may rent for $500/month but if the property was used as an office it would rent for $1,000/month)?
The real estate market is not a perfect market. Buyers and sellers are often motivated by emotion, which result in ranging sales prices. Two similar 3 bedroom ranch homes on the same street sell for $100,000 and the other for $105,000. Both are very similar with minimal differences. Market value is really more a range than an exact value. For instance, the above two houses sold for $100,000 and $105,000 while a third sold for $107,000. The three similar sales would indicate a range of value from $100,000 to $107,000. However, the appraisal forms require a specific value such as $105,000 though the potential value could be somewhat less or more that the reported value of $105,000.
Real estate appraisals are performed for several purposes. Many of the common reasons are listed below:
- Place a value on the real estate for estate or inheritance purposes
- In appealing real estate taxes
- Purchasing a house
- Provide an opinion of value of the real estate in a divorce proceeding for either party or for both
- Eminent Domain
- Value all real estate in a bankruptcy proceeding
- To estimate a market value of a property for the homeowners for the potential listing price of the house.
- To remove monthly PMI (private mortgage insurance) payment (a PMI payment is added on to the mortgage payment if less than 20% down payment is made at the time of purchase. Depending on lender’s requirements, PMI can be removed after a certain amount of time and once the owner gets at least 20% equity in the properties).
- To determine an offering price for the potential buyers of a house listed for sale.
I cannot speak for all other appraisers but this is my personal answer to this question.
The definition of market value is the price paid by a willing buyer and seller, etc. The seller and buyer are the actual market, not the appraiser. (The appraiser should analyze the market for data and trends and apply those to their appraisals.) In many cases, the seller has an experienced realtor who has performed some research (Competitive Market Analysis, etc.) or has in some way helped the homeowner establish a list price (in some cases a real estate agent and the broker can provide the list price of the property providing ample experience). Also, the property owner has seen properties sell in the neighborhood for years and might have a good handle on the sales prices and market values in the neighborhood. The homeowner may even have had an appraisal performed on the property prior to listing the property for sale.
On the other hand, the buyer has often been through numerous properties that were for sale (in this specific example, the homeowner was actually through 50 houses prior to making an offer on the specific property). The buyer has seen many houses in a certain price range and roughly knows the conditions and features of houses in a certain price range and style. Other times, there may be no properties listed in a certain price range and in a desired neighborhood so when a property does come up for sale, it lasts only a few days or a few hours with competing offers. When the buyer does finally make an offer on the house, the buyer should have an informed decision and make a reasonable offer.
Naturally, the seller wants the highest possible price and the buyer wants to pay the least amount for the property so the result is usually market value when they agree on a price. Thus, the final sales price often is the negotiation of a willing buyer and seller. If there is no pressure or reason for a distressed sale (possible foreclosure, short sale, the owner had to move out of state and drastically lowered the price of the house to sell quickly, etc.), then the sale should represent market value.
The appraiser must then examine how the property was listed such as how long it was listed, why was the property listed for sale, what was the motivation of the seller, was it adequately exposed to the market (FSBO sign in yard, word of mouth, realtor listing, etc.) and then provide similar and recent sales in the neighborhood or similar neighborhoods in the area to support the sales price. I try to give much weight to the buyer and seller for the above reasons since they are the ones that represent the market. Sometimes, however, the sales price cannot be supported by sales in the neighborhood. I make sure I have ample evidence if I cannot support the sales price. Sometimes the sales price is inflated so the seller can pay the buyer’s closing costs (so the seller clears or makes the same amount in the end) without regard to the recent sales in the neighborhood resulting in a price that may not be supportable.
Sometimes it is difficult to support the sales price with comparable sales. For example, market activity usually picks up in the spring and summer and slows down in the fall and winter leaving few sales and market activity in the winter months (depending on how cold or mild the winter weather is). When the market picks back up again in the spring the following year, many of the comparable sales we have to use are from late summer or fall from the previous year that do not reflect the slight increase in property values from the previous fall to the new spring market.
Sometimes, a unique property might have only a few or even no comparable sales. A unique contemporary home on 40 or 50 acres may not have any good comparable sales in its neighborhood or surrounding neighborhoods. There may truly be no comparable sale within the last year to 18 months to help the appraiser arrive at a credible opinion of value (and one that often fall in the guides required by FNMA). In this case, the appraiser may have much difficulty proving or disproving the sales price since there is almost little to no current market data. In this case, the sales or contract price might be the best indicator of market value.
It is very important to analyze the factors surrounding the sale to determine if the sale is a market sale or if the property over-sell or under-sell. Moreover, the appraiser has to do adequate research to make sure the sales price is supportable. In the end, the appraiser must consider the sales or contract price, but must use his or her knowledge of the neighborhood, the market, comparable sales and listings to arrive at a conclusion of market value.