This is Sam Schneiderman, Broker-owner of Greater Boston Home Team's 150th blog post on BREN. As of this entry, he moves to posting on the first Monday of the month. Today, he discusses the role of the lender’s real estate appraiser in a typical real estate transaction.
The role of an appraiser is to provide the lender with an unbiased estimate of the value of the property being financed by the mortgage. The appraiser will be assigned by the lender or an appraisal management company that the lender uses. As one of the lender's costs in the transaction, the cost of the appraisal is usually passed on to the buyer. Although the buyer is paying for the appraisal, the appraiser is working for the bank.
Lenders use independent appraisers to assure that the property that they are lending on is worth enough to secure the loan if the borrower defaults. If the appraiser's estimate of value is less than the contracted purchase price, the lender will probably not lend on the property at that price because it affects the loan's security and the borrower’s loan to the value ratio, which is used to determine the loan program, interest rate and whether or not the buyer will need private mortgage insurance.
Appraisers that perform appraisals for real estate transactions that involve government money must be licensed by the state. In practice, virtually all lenders use licensed appraisers.
When the buyer applies for the mortgage and submits the Purchase and Sale agreement to the lender, the lender orders the appraisal. A copy of the Purchase and Sale agreement is provided to the appraiser. Most lenders collect appraisal and credit report fees at that time. The appraiser is then contacted and makes an appointment to view the property with the seller's agent or the seller. The appraiser walks through the property noting the property’s details; age, views, room and bathroom count, condition, quality of materials/workmanship, and other amenities like basement rooms, air conditioning, energy efficient items, garages, porches, patios, fenced yard, etc.
After viewing the property, the appraiser drives by and photographs area sales to determine the nearest, most recent and most similar sales that would be the best indicators of market value for the property being appraised. The details of those “comparable sales” (a/k/a “comps”) are placed in columns on a grid next to the details of the property being appraised. Appraisers then make adjustments to the sale prices of comps approximating the dollar value that typical buyers pay for those features or subtract for missing features. For example, let’s say that a home without a garage is being appraised and a comparable home with a two-car garage sold nearby. If area homes with two-car garages typically sell for $20,000 more than homes without them, that amount is subtracted from the sale price of the comp to arrive at the estimated value of the home being appraised. When complete, an appraisal report, including the grid is submitted to the lender with the appraiser’s estimate of market value.(See a sample single family appraisal here.)
Appraisals are often the most time consuming part of the mortgage process. Rush orders typically take about a week. Normal completion can extend to about a month depending on interest rates and demand for financing. Normally, appraisals are completed within a ten day to three week period.
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