When I look back at how the real estate market has changed over the past few years, it’s amazing that any of us can tell up from down anymore. But, one of the most dramatic changes has been in the appraisal process.
In the past, if we got past the initial negotiation and then made it through the inspection, we were smooth sailing for closing. No so anymore. Due to rampant mortgage fraud, foreclosures and predatorty lending practices that got us into this housing market mess, appraisal guidelines have gotten super strict. And, they are constantly changing.
I can’t even begin to talk about all the nuances of the appraisal process that affect buyers and sellers in a short blog. But, one issue that I think is important to be aware of is the many appraisal guidelines that can affect a buyer’s ability to obtain a loan. So, we’re not necessarily even talking about the market value of the property, but instead factors about the property that the lender may not approve. Let me give an example:
I found out recently that if a house has a driveway that has more than a 12% grade, then the property should not appraise within the FHA guidelines. Ouch! That really hurts anyone who has a steep driveway because many buyers in this market are getting FHA loans. But, let me clarify: Some appraisers will let this slide if it’s close. Some will always measure the grade of the driveway and report it’s exact grade. So, to a certain extent, it’s up to the appraiser and how strongly they feel about the particular guideline.
To further complicate matters, these guidelines are constantly changing — who can keep up? What’s a homeowner to do?
My advice (and what I have been strongly recommending to all of my seller clients recently) is to get an appraisal before listing a home for sale. There are several good reasons for this:
1) It will help determine market value from an appraiser’s perspective. Pricing in this market can sometimes be difficult to determine. And, appraisers look at properties very differently than a REALTOR. It’s good to have both perspectives on a property’s value to make an informed decision on pricing. Because the value of a home is no longer just what a buyer is willing to pay — it’s also how much it will appraise for.
2) A knowledgeable appraiser can help educate a homeowner (and their REALTOR) on any guidelines that might be an issue on the appraisal. Particularly with FHA loans, the guidelines can be very strict. If it is determined that a property has several factors that might come up on an FHA appraisal, a homeowner and their REALTOR may approach negotiations differently, taking into account whether the buyer is doing an FHA or Conventional financing.
3) Many appraisers are now doing listing appraisals, and will guarantee their value will hold up. This gives several perks. First, having a recent independent appraisal available for a buyer and their agent puts everyone’s mind at ease. Second, the appraisal is available to give to the appraiser working for the lender — it helps them do their job and explains how the property’s market value was reached. Third, if, for some reason a lender’s appraisal comes in lower, the first appraiser will help develop the “appeal” and will use appropriate terminology and arguments that may have a greater success of winning an appeal. They will use “appraiser-speak”.
The takeaway here is to be aware of the appraisal process as a big and cumbersome part of getting a buyer and seller to the closing table. While it’s not a REALTOR’s job to know all of the appraisal guidelines and provide a valuation of the home, they should be very knowledgeable about the process. Whether you’re a buyer or seller, be sure your REALTOR can proactively guide you through the process to avoid appraisal problems. That’s much easier (and a lot less heartbreak) than trying to renegotiate a deal after an appraisal gone bad.