Appraisals – What Buyers and Sellers Need to Know

An appraisal is an opinion of value. An appraiser does not establish value but provides judgment, based on experience, of the estimated ’value’ or ‘worth’ placed on a property. Although value is created by people in the marketplace, an appraiser must estimate it. Financial Institutions Reform Recovery Enforcement Act of 1989 created appraisal standards and requires all appraisers to be licensed.  Appraisers in Arizona are licensed by the Arizona Department of Financial Institutions (AZDFI). In general, an Appraiser uses properties that are most similar in design and appeal to buyers to assess value.

Factors taken into consideration during the appraisal process include but are not limited to:

• Location of property and identical comparable homes, preferably in the immediate neighborhood, and, or in a one-mile radius.
• Preferably 5-6 homes that closed in the last 6 months, or up to a year, if recent sales are not available.
• Active and pending listings in the selected geographical area.
• Homes with similar specifications such as the number of beds, bathrooms, square footage, age, and builder.

Appraisers may use market data, cost approach or/and the income approach to estimate value depending on property-type and age. The appraiser’s opinion of value also takes into consideration the safety, soundness and structural integrity of a property.

This is required for government-sponsored enterprise (GSE) funding such as Veteran Administration (VA) guaranteed and Federal Housing Administration (FHA) loans.  The VA issues a ‘certificate of reasonable value’ that states the present market value base on a VA approval, setting a ceiling on the amount that can be financed. A VA appraisal is good for 6 months for resale homes and 12 months for new/proposed homes while an FHA appraisal is valid for 120 days.

An Appraiser’s estimate of value typically trumps the listing and sales price in a real estate transaction financed by a lender if it comes lower than the contract/sale price.  This is because it is assumed that given all property and market information, an appraiser’s opinion of market value is the closest to the market price. This value is used by a lender to estimate the financial worth of a property used as collateral for lending purposes.

Did you know?

Both VA and FHA loans have ‘an escape clause’ that permits the buyer to void the contract if the property does not appraise at or below the sale price. Buyers in both situations get their escrow monies back.

Conventional loans do not have the escape clause, however, buyer and seller can negotiate and come up with a solution as per the purchase contract. It is there very important that your listing and buyers’ agents understand the appraisal process to ensure their comparative market analysis (CMA) provides a recommended listing price that does not differ ‘significantly’ from the final appraisal value. A range of the recommended listing price is advisable.

Real estate agents need to incorporate in a CMA:

• Five to eight like-homes in the immediate neighborhood (location),
• Homes sold in the last 6 months,
• Homes with similar builder, square footage, number of bedrooms and bathrooms,
• Homes with similar special features, and
• Active and pending listings,
• Selected geographical area.

Most importantly, real estate agents should note where there are unique features in a home such as:

• Over-improvements,
• Basements,
• Changes in zoning, and
• Additions, among others.

Additional and separate comparisons must be made to provide and include the estimate of the additional value placed on these unique home features in the listing price and inform the seller of these additional features that could result in differing valuations by buyers and appraisers.  Realtors should ensure that Appraisers have access to all and any information provided by sellers on improvements done in the last 15-years. In situations where there are no comparable homes sold in the last 6-12 months in the neighborhood, a mile radius can be used to find similar-type homes. Additionally, appraisers will make market movement adjustments to ensure appreciation is included in lieu of recent sales of similar homes in the neighborhood. Professional realtors who do their due diligence when performing a CMA for listing purposes will look for and note when additional comparable market analyses are necessary to capture the value of unique features. A private appraisal is always recommended in situations when a seller’s expectation of their home value differs significantly from what the market is valuing comparable homes in the immediate neighborhood. Today, Freddie Mae and Fannie Mae require the lender to provide an appraiser with the sales contract for their review and response to ensure the Appraiser has all relevant information on the transaction, including any concessions made.

By adding notes in the purchase contract, a Realtor can provide information that can advise an appraiser of a potential need for adjustments.

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