real estate appraisal

Top 10 Things You Need To Know About A Real Estate Appraisal Inspection

Did you know that real estate appraisals are required on a property whenever it’s financed – whether you’re buying a home or refinancing a mortgage?

The sad truth is few people really know how appraisals fit into the home buying process. That’s not a good thing. People need to understand what appraisals are, who does them, and why they’re required. And most importantly, a real estate appraisal inspection is NOT the same thing as a home inspection (when buying a home). A home inspection is much more in-depth and designed to find things wrong with a home, such as problems with the foundation, furnace or roof improperly installed, etc. An appraisal will take obvious defects into account, but not nearly as much as a home inspection.

First Things First – What’s a Real Estate Appraisal?

A real estate appraisal is the practice of developing an opinion of the value of property, or what is commonly called “market value.”
Appraisals can vary by state, but there are three main parts to a home appraisal:

1. The inspection – a licensed appraiser comes to the property and inspects it to determine fair market value
2. Comparables – after the inspection, the appraiser researches similar homes in your area and compares recent sales to determine market value.
3. Final appraisal report – using the data gathered from the inspection and comparables research, your appraiser issues a final appraisal report

The Real Estate Appraisal Inspection

The Top 10 Things You Need To Know About A Real Estate Appraisal Inspection are:

1. The appraiser confirms that the property exists and is in livable condition.
2. The appraiser confirms reported square footage.
3. The appraiser checks all rooms for obvious damage that could affect value.
4. The appraiser will verify reported upgrades (you’ll provide that information prior to the inspection).
5. The appraiser will note all permanent features to a home that could affect value. Like the built-in appliances in the kitchen. Removable items are not included in appraised value.
6. The appraiser will check the basement for updates and finishing, but NEVER include it in sq. footage. Updated basements can increase a property’s value, but they can’t be included in sq. footage.
7. The appraiser verifies there is a working furnace and air. But remember, they don’t test a furnace the way a home inspector would. They just confirm it exists and appears to work.
8. The appraisal verifies the number of bedrooms. To be counted as a bedroom, the room must have closets and windows. Keep in mind: DON’T start a room project you don’t plan on finishing before the inspection. It may hurt your value.
9. The appraiser checks the front and back of the house and measures all land area on the property
10. Finally, remember: What you spend on updates may or may not raise the value of your home a by the same amount. Don’t expect that $25,000 kitchen to raise the value of your home $25,000. It may or may not.

One last tidbit – don’t worry about how clean your house is. Appraisers don’t take that into consideration. But do cover over cracks in walls or finish any minor retouching you may have started. Make your home look as finished and as nice as possible; don’t leave any unfinished painting or renovation jobs in limbo. Get those done and you’ll do your appraisal a favor.

Understanding Real Estate Appraisals

Real estate appraisals are one of the most misunderstood parts of the home buying or refinancing processes. By understanding appraisals and being prepared for the real estate appraisal inspection, you’ll know how to maximize your home’s appraised value. In today’s real estate market, that’s good information to know. And may be the difference between qualifying for a mortgage and not qualifying.

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real estate appraisal

Taming inflated home appraisals

NEW YORK (CNNMoney.com) — Washington policy makers have taken aim at one of the main contributing causes to the housing crisis: inflated appraisals.

When home prices were soaring, one of the driving factors was that appraisers, pressured by loan officers and mortgage brokers, kept hyping home values. Not only did homebuyers wind up paying more, but the exotic mortgage products they needed to finance their purchases later exploded, setting off the financial and economic turmoil the nation is facing today.

Now, the Federal Housing Finance Agency (FHFA), the government agency created to oversee Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), has announced a plan to curb the influence that loan originators exert on appraisers to overvalue homes. A new Home Valuation Code of Conduct, which will take effect this May, is an attempt to improve the reliability of appraisals for mortgages sold to the two companies. The guidelines prohibit lenders from coercing, extorting, colluding with, intimidating or bribing appraisers into making inaccurate appraisals.

“It’s a step in the right direction,” said Tom Inserra, president of Pinnacle Peak Appraisers in Arizona, who has testified before Congress on appraisal issues. “Separating the lending function from the selling function had to be done.”

Fannie and Freddie have a strong interest in ensuring the soundness of appraisal reports because they’re the basis for the mortgage loans that they buy from lenders, according to James Lockhart, FHFA’s director.

Most mortgages in the United States are now bought by Fannie and Freddie, who then securtitize them and resell them to investors.

Appraisals get inflated because the incomes of mortgage brokers and loan officers depend on how many mortgage loans are approved. A high appraisal ensures that the house – the collateral backing the loan – is worth more than the amount of the loan, which reduce the bank’s risk.

Inserra knows how intense the pressure to inflate values can get. Three years ago, he found himself battling one of his largest clients. The bank’s senior vice president in charge of mortgage lending tried to get Inserra to “hit a number,” industry parlance for inflating the appraisal. He wouldn’t do it.

“The discussion got so heated,” recalled Inserra, “that he threatened to do harm to my family if I didn’t co-operate. I really thought he might do it. I got a restraining order from a judge.”

In the end, the banker didn’t hurt his family, but he did punish Inserra by depriving him of the $200,000 in annual business he had been getting from the bank.

That may be an extreme case, but it was not isolated. A 2007 survey by October Research found that 90% of appraisers said that they felt pressured to fudge figures.

Not everyone is convinced that the new guidelines will help.

“I’m very skeptical,” said Elizabeth Kern, a past president of the National Association of Independent Fee Appraisers (NAIFA). “I think the only thing that will change is that we’ll see the better appraisers, the more experienced ones, not getting the work.”

Inserra wonders about enforcement of the rules.

“The concern is that, unless there’s an enforcement mechanism that works better than what we have today, it won’t do much good,” he said.

Under the new rules, complaints from appraisers, consumers, or anyone else will be fielded by the “Independent Valuation Protection Institute,” which FHFA will set up.

If a lender logs too many complaints, it may be prohibited from selling its loans to Fannie and Freddie. That should be enough to make lenders police their appraisals more carefully, since the government entities are virtually the only buyers left standing.

The National Association of Mortgage Brokers is not happy with the plan. According to its president Mark Savitt, mortgage brokers often work closely with appraisers to make sure applications are error free and accurate. That kind of co-operation may be construed as crossing over the line into trying to influence appraisals, even when it’s not.

Savitt said increased enforcement of existing regulations is all that’s needed to make the appraisal inflation problem disappear. “Beef up the penalties for the laws that we already have and enforce those laws.”

Right now, few loan originators are held to account for pressuring appraisers. Bill Garber, director of government and external relations at the Appraisal Institute, reports that only about 15 states have any laws targeting loan officers and mortgage brokers, and these are not often enforced.

Appraisers themselves are more likely to get hit; more than 250 lost their licenses last year for hyping values, he said.

But if the new regulations help prevent some of the abuses, it could have a healthy impact on the housing market.

Lenders will have much more confidence that the home values are justified and that could make them more willing to lend.