Monthly Archives: May 2014

Appraisals – Part II

Appraisal Report

After a few rounds of counter offers and negotiations, buyer and seller agree on a price and the home goes into escrow. Time to celebrate? No, not just yet unfortunately. Within the escrow process, there are several hurdles to overcome, one of which is the appraisal. As we mentioned in last week’s post, appraisals are a critical component of the lending process. A low appraisal can derail the agreement reached by the buyer and seller.

Low appraisals can arise in a declining housing market due to the lack of recent comparable homes sales, making it difficult for appraisers to determine the current market value of a property. When home sales slow, good comps “age” fast. Comps of homes that sold over six months earlier generally become obsolete data and aren’t factored in the valuation. Add foreclosures and short sales to the equation and appraisal values can vary greatly depending on the appraiser’s methodology. But, low appraisals can also occur when the market is rising rapidly as appraisers may have a hard time adjusting their valuations to account for escalating market value.

The reality is that appraisals are conducted by independent 3rd parties hired by the buyer’s lender. Legislation requires lenders to use an intermediary entity who then in turn selects the appraiser, ensuring that the lender and the appraiser have no conflict of interests. The regulatory intent is to have the appraisal be as impartial as possible. So it’s not at all possible for the buyer or the seller to choose who performs the appraisal. However, if you have a knowledgeable and seasoned real estate agent representing you, he or she can be instrumental to the process. Here’s how:

  • Your real estate agent would never want his/her client to overpay for a house so chances are, during the negotiations process, he/she will be facilitating the negotiations towards fair market value, already mitigating the chances of a low appraisal report.
  • Your real estate agent presumably is an area specialist so he/she should be well-studied in the specific neighborhood of the home so that he/she might drawn upon nuanced knowledge of schools, community and other neighborhood desirability details that can be shared with the appraiser.
  • All reputable real estate agents will attend the appraisal at the home and provide a package of most relevant comps to the appraiser.
  • In addition, the agent could have knowledge of off-market home sales in the area that can impact the appraisal or conversely have knowledge of recent foreclosures and short sales that should be exempt from the valuation.

Good agents are keen to the fact that appraisers tend to draw their comps straight from the MLS but that data collected may not represent the clearest picture of market activity and value.

And should the appraisal return a lower value than the negotiated sales price despite the diligent efforts of your agent, here are the buyer’s options:

  • Negotiate a new price – sellers may entertain a lower sales price as a low appraisal is a blemish on their home should they have to put the house back on the market, or there could be other circumstances at play like the purchase of the next home contingent of the close of the current home that might increase seller flexibility.
  • Put more money down – if feasible, buyers can always bridge the difference between the loanable amount with cash.
  • Hire a new lender – a new lending entity will restart the process potentially with a new appraiser.
  • Cancel contract – contracts are typically written with an appraisal contingency to protect the buyers from having to follow through on the heels of a low appraisal.

Under any of the circumstances above, the thing to avoid while navigating the pitfalls of a low appraisal is letting the appraisal contingency period expire or else the buyer is locked into the transaction.  Again, your real estate agent should be well aware of the contingency period and would never allow the period to expire.  A seller benefits from a mutual resolution so typically they will grant an extension while the buyer vets all options.

Whether you are the buyer or the seller in a low appraisal situation, your seasoned real estate agent should be guiding you through the entire process and see you through its resolution.

Appraisals Explained

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Appraisals are a critical component of the lending process.  In any home sale/purchase transaction that requires financing, the lender will mandate an appraisal on the property.  So what exactly is an appraisal?

Often confused, a home appraisal is a separate analytical report from the home inspection.  An inspection identifies potential physical issues with the house to prevent costly repairs down the road.  An appraisal is a third party expert opinion on the current value of a piece of property.  Lenders rely on the appraisal report to ensure that they are not over-loaning on a property.  In the event a borrower defaults on the mortgage and the property goes into foreclosure, the lender recoups the money it lent by selling the home.  If the bank loaned above the value of the property, then the lender is unlikely to recoup their investment.

An appraiser is an independent and objective third party who does not have any financial stake in the transaction apart from his fee for performing the appraisal. Appraisers are state-licensed and work in regions and neighborhoods they are familiar with so they have an expert knowledge of any environmental or other concerns that may affect the value of a property.  Typically, the homebuyer pays for the property appraisal when applying for a home loan and the cost varies greatly depending on the size of the home and the experience of the appraiser.

There are two basic methods of appraisal used for residential properties. First, there is the sales comparison approach whereby the market value of the subject property is determined via “comparable” analysis.  The appraiser typically visits the home in question and obtains specific home information and statistics and then compares the data with “comps,” properties of similar kind in the same geographical area that have recently sold.  The second method is the cost approach, which evaluates value by determining how much money it would require to replace the property if it were to be destroyed.  This approach is more commonly used in evaluating new construction.

The appraiser gathers information for the appraisal report from a number of sources, but the process always begins with a physical inspection of the property inside and out.  Additionally, the appraiser may look at county courthouse records and recent sales reports from the multiple listing service. The appraisal report typically includes:

  • An explanation of how the appraiser determined the value of the property.
  • The size and condition of the house and other permanent fixtures, along with description of any improvements that have been made and the materials used.
  • Statements regarding serious structural problems, such as water damage and cracked foundations.
  • Notes about the surrounding area, i.e. proximity to schools, new or established development, lot size, relevant aspects affecting desirability and resale, and so on.
  • An evaluation of recent market trends of the area that may affect the value.
  • A comparative market analysis that supports the appraisal including maps, photographs and sketches.

Next week we will discuss how to prepare for an appraisal and what happens if the appraiser returns a value lower than your contract price.

DIY Staging Tips

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In last week’s blog post, we covered a few tips on how to prep your house prior to listing it for sale.  We discussed improving curb appeal and light remodeling to make the home more universally appealing.  To that effort, we also mentioned the importance of de-cluttering, de-personalizing and cleanliness.  So now that the house is neutral and clean, how does one dress each space to additionally enhance a buyer’s impression of the house?  This is where the art of staging comes into play.  Should you want to take a crack at staging your house, here are some few helpful tips to consider.

Furniture Grouping

Roll up your sleeves and start moving furniture. There’s a common belief that rooms feel larger if the furniture is pushed up against the walls, but it actually isn’t true.  Reconfigure your sitting areas by floating furniture away from the walls.  Reposition sofas and chairs into groupings that look conducive to conversations. Not only will this make the room feel more inviting, but it will open up the space and the area will appear larger.  Give yourself permission to remove furniture items entirely if the room requires more breathing room for better traffic flow.

Accessorize

Style your dining room table as if you’re expecting a dinner party.  Bring some greenery indoors as flowers and plants instantly add vibrancy and life into any room.  Place pleasant, non-controversial artwork or photography that befit the style of your home on walls that seem too bare.  Dress each bed with complementary linens and pillows for a comfortable, lived-in look.  For the master bedroom, remember to tow a gender neutral line when selecting bedding and accessories.

Home Lighting

Do not forget to consider lighting.  The first thing a real estate agent does when showing a home is to turn on all the lights, regardless of the time of day.  So at some point, mimic a showing and turn on all the lights in the house to give yourself the buyer’s perspective.  What you want is to make sure that your home looks warm, inviting and well-lit.  As it turns out, most homes are improperly lighted. To remedy the problem, increase the wattage in your lamps and fixtures. Aim for a total of 100 watts for each 50 square feet.  Make sure you have all three types of lighting in the house: ambient (general or overhead), task (pendant, under-cabinet or reading) and accent (table, floor or wall lamps).

Make Awkward Spaces Functional

One way to really add value to a house via staging is by creating a purpose for an otherwise awkward space.  The area under the staircase can sometimes fit a small desk for a quaint office nook.  Transforming a blank space into a practical area gives the house a feature that is memorable to the buyer.  It also gives the impression that the house is bigger and thoughtfully functional.  If you have an awkward space, check out interior design websites like Houzz for inspiration on how to give it a quick transformation.

Make Every Room Count

Most of us have a room in the house that is a “hobby room” which is a euphemism for “dumping ground.”  As part of the decluttering process, make sure the room is thoroughly cleansed and all unnecessary items are removed.  Then, give the room a purpose.  Would potential buyers want to see a guest bedroom?  Or an additional kid’s room?  Making a real room out of what was your junk room will have a big payoff on buyer impression.

The goal of staging is to breathe new life into the house, giving it universal appeal.  Chances are, while living in the house, you’ve made it work very specifically for yourself over the years.  Staging removes some of the specificity and quirkiness.  When well done, it gives buyers an idea of how to use every space well and maximizes the home’s potential for positive impressions.  Staging is immensely valuable tool in selling a house.