What Is An Appraisal?
What is An Appraisal?
An Appraisal is an independent 3rd party professional that certifies the value of a property.
An appraiser does this valuation to ensure that the market value and the agreed upon purchase price match.
The lender orders the appraisal; however, they do not do it. It is an independent party that is not tied to the buyer, seller or lender.
The bank will pay for the appraisal up front; however, they will collect this fee from the buyer eventually.
The point of the appraisal is to make sure that the deal is above board and that the buyer is not over paying for the property. These appraisals can create issues; however, they are in the best interest of not only the bank, but the buyer as well.
The appraisal is a way to qualify the real property if you will.
The bank secures the mortgage against the asset (the house). The bank needs to know that should a buyer not be able to pay back the loan, that the asset will be able to cover the loss.
An appraisal will look at comparable houses within a one-to-two-mile radius. They specifically look for recent sales within the last 6 months. There are exceptions that can be made in more rural areas where there are no recent sales.
The appraisal happens once the Purchase & Sale Agreement has been signed.
There can be appraisal delays based on how busy the marketplace is. Generally, this should not be an issue that holds up closing, but can hold up the mortgage commitment.
- What's an appraisal? Hi, I'm Jeff Chubb. I'm here with Jason Bonarrigo of RMS Mortgage, and today we're talking about what is an appraisal? So Jason, tell me what exactly is an appraisal?
- Well it's basically a way that the lenders certify the value. When you send over a purchase and sale agreement to us it's gonna show that value that everyone's agreed upon, but we wanna make sure we can certify that value with having an independent third-party appraiser go out and do a market analysis and basically see what the shape of the property is and what the market value is.
- So it's not you, it's an independent third-party appraisal.
- We order it, but it comes through a third party.
- Okay, and who's paying for it?
- Well, we pay for it up front essentially, but we collect it from the consumer.
- Okay, so why do banks require these appraisals? Why are they so important? Because these seem to be big hiccups in our deal?
- Well, I mean, besides getting the credit approval and the underwriting approval kinda early on and most likely, we like to do that during the pre-approval process. We have that kind of already ready to go. The appraisal is the biggest hurdle overcoming it, because again, it certifies the value. If you come back with a purchase and sale that sits at $500,000 and the appraisal doesn't come in and around that number, then we may have a problem, right? For good, or for bad. So we need to certify that. And of course the bank could be lending upwards of 80%, 90%, 50%, 60% of that market value to the consumer, we want to make sure that the value's there.
- So, layman's terms, pre-approval, cause I'm a layman, right? Layman's terms. preapproval.
- He is not a layman.
- That's qualifying me as the buyer. Right? That's hey we're comfortable
- On the credit side
- And then the actual appraisals, hey we're qualifying the asset.
- And then we put them all together and then
- The collateral as we like to call it right. I mean, that's the house, that's what we're securing the mortgage to. Yes. I'm saying Jeff, you're going to pay that money back. But I'm tying this mortgage to that legal structure that legal entity which is obviously the mortgage and the deed.
- And which the bank needs to know is of value.
- Of course.
- What do appraisers look at?
- Condition one, not so much, I don't want to get crazy on the condition. Cause again, we could talk about for an hour on the home inspection side that's a real deep dive into the condition, overall
- Which by the way you guys don't look at, but anyway,
- True, obviously with the consumer, but, but true. But the banks look at more about true market value. What is it worth? What's it worth today? And most importantly, what is it worth in the surrounding area?
- Right, that's why we look for a one mile to two mile radius and the most recent sales. If I have a three bedroom ranch, I want to look at other three bedroom ranches in the area and see what they sold for. And we put most weight on the sales that have happened in the last six months.
- Okay. I was going to say, so recent sales, so six months
- Of course
- We're looking at something that's 12 months old.
- Very rarely, We do do that, but the appraiser will make a note of that and why they used that. Maybe they couldn't find a particular comp
- Limited comps.
- Right. So, all right, so that's what appraisal looks at. So what's the difference between that appraisal and then the true market value. I should say is there sometimes a difference between them?
- Sure. Of course. I mean, obviously the appraisal, his job is not to take that purchase and sale and bring it right into the number because obviously they wouldn't be doing their job, right. They wanna
- Independent, third party Right, their job is to bring in what they think that market of sales approach is right now. And again, it's based on all the data that we just talked about, the comps and the radius and things like that and obviously condition. But yeah, of course, I mean many, I shouldn't say many times, but at times it can come in and the PNS is 500 and the appraiser brings it at 480. So they're going to bring it at their best of their ability at that market value.
- And I think the answer, to answer my own question here is sometimes, you know, appraisals they're looking at past comps. Comps that have sold. Right?
- True, true
- Versus, especially in hot markets, the market is fast appreciating and a sale comp from three months ago does not dictate of what the current market value is of a property.
- I think that's a lot of times when we have some run in with appraisal, it's not their fault.
- I mean, they may have to go by what is sold.
- Well, we like to say that the comps haven't caught up. Right? I mean someone kind of has to be the first one to pay X amount in that neighborhood. Right, and then that sales closed and now that's a comp and then boom, ba-boom, ba-boom. So, that's the issue. So sometimes it's not a value thing and the clients, so hopefully with a good realtor, obviously like yourself, will understand that they're not actually overpaying because the appraisal came in a little bit low. They're just the first one there.
- Right. Right? I mean
- So, we went under agreement on the property. Okay. When exactly does this appraisal happen?
- We'd like to get it going early and obviously especially if it's a busy market, it takes a little bit. But we once the purchase and sale sign, because obviously many things can change with the home inspection and final negotiation and so on.
- Purchase sales when it's rock solid.
- That's when it's rock solid, ready to go. So we order it then, and it usually takes about 10 days to two weeks to come back.
- Which, by the way, is thank you to the buyer, because otherwise you're spending their money. If it hasn't officially gone through.
- Of course, we want to protect them and make sure that we have it, and someone has to pay for that
- Right, so we ordered the appraisal after the purchase and sale agreement is signed. How long does it take for us to get back?
- Again, depending on the timeframe and how busy the appraisers are, but it usually takes about two weeks. I like to say, sometimes we get it back in seven days but I usually use like a 10 day to 14 day window.
- Okay. Now, will sometimes appraisers be more busy and we can have appraisal delays.
- Of course, of course, depending on the market.
- Should I be worried if there's an appraisal delay?
- No, not necessarily. It doesn't mean it's a bad thing. Sometimes it's just overall volume or sometimes they're trying to find those comps and actually it's a good thing, right? It means the appraiser is spending their time and trying to do the research the right way. They're not just pulling stuff off the internet. They're actually driving around and taking photos pulling the data from the MLS and seeing what those sales close. And they're actually sometimes, as you know, you'll get calls too. They'll call on the realtors in other markets and try to get that data that they need to perform that task.
- You sold a house at 123 Main Street.
- Tell me about.
- Tell me a little bit.
- Yeah, exactly.
- And as professionals, we're always happy to answer that because we know someday that's going to be on the other side.
- Karma's a so-and-so so.
- So, be sure to look out and take a look at what are your options when these appraisals actually come in below the agreed upon value, and then we have another video about what are your options and what happens when an appraisal comes in above that agreed upon value. And don't forget to stick around for what we're going to do with $1000 when we hit 1000 subscribers. But I'm Jeff Chubb with the Chubb Homes Team, Jason.
- Jason Bonarrigo, RMS mortgage in Boston, 413-5038.
- And you can get us at 480-2600 or online at boston2.com. So when we hit 1000 subscribers we're going to give $1000 away to the ASPCA. So make sure that you click that subscribe button below. So that way we can ultimately save some puppies. Look forward to chatting with you soon.