What is an apprasial?
What is market value?
How does an appraiser determine their opinion of market value?
If I pay for the appraisal, do I own it?
Are an appraisal and home inspection the same?
How do I get rid of PMI?
What are the most common FHA repairs?
What effect will home upgrades and renovations have on my homes value?
What is an Appraisal? Back to top
The single function of an appraisal is to develop
an opinion of value. In the case of a mortgage loan, the purpose
of the appraisal is to provide the lender an opinion as to the
market value of the collateral backing the loan. Among a long
list, appraisals can also be used for estate valuation, negotiation
between buyers and sellers, eminent domain, and tax appeals.
What is market value? Back
to top
Market value or fair market value is the most
probable price that a property should bring (will sell for) in
a competitive and open market under all conditions requisite to
a fair sale, the buyer and seller, each acting prudently, knowledgeably
and assuming the price is not affected by undue stimulus. Implicit
in this definition is the consummation of a sale as of a specified
date and the passing of title from seller to buyer under conditions
whereby: (1) buyer and seller are typically motivated; (2) both
parties are well informed or well advised; (3) a reasonable time
is allowed for exposure to the open market; (4) payment is made
in terms of cash in U.S. dollars or in terms of financial arrangements
comparable thereto; and (5) the price represents the normal consideration
for the property sold unaffected by special or creative financing
or sales concessions granted by anyone associated with the sale.
How does an appraiser develop their opinion
of value? Back to top
An appraiser will gather all relevant information
from public & private data, personal files, the inspection
of the subject property & neighborhood, and comparable properties
& sales within the subject’s market. The collected data is then reconciled using the
following three distinct methods of analysis.
1. The Cost Approach: This method typically calculates the reproduction
cost of the improvements minus any depreciation and adds the land
value to arrive at a conclusion.
2. The Sales Comparison Approach: The sales approach relies upon
the most recent, similar, and nearby sales. This is the preferred
approach for single family homes and best reflects the motivations
of buyers and sellers.
3. The Income Approach: This method is most reliable when appraising
properties typically bought by investors. To use this approach,
income derived from the subject property is analyzed based on
a capitalization rate or multiplier to arrive at a value.
If I pay for the appraisal, do I own
it? Back to top
For licensed appraisers, the determining factor
in who owns the appraisal is who places the appraisal order, NOT
who pays. In any federally related mortgage transaction, the law
requires the lender to employ the appraiser’s services.
The homeowner/buyer is entitled to a copy of the report, however
it must be obtained through the lender or with written permission
from the lender.
Are an appraisal and home inspection
the same? Back to top
Appraisals and home inspections are as different
as night and day. An appraiser is not qualified or trained in
building inspection methodology. The evaluation of quality, physical
condition, structural integrity, external influences, and mechanical
condition by an appraiser is done solely to determine market value
and in no way warrants or guarantees function and/or utility.
What is PMI and how do I get rid of it? Back
to top
Private Mortgage Insurance or PMI, is federally
required on homes with less than 20% equity. This insurance protects
the lender against any potential losses on homes. Once a homeowner’s
equity reaches 20%, you can do away with PMI and start saving
immediately. Each state and lender have different rules and regulations
regarding PMI removal. Check with the appropriate persons/organization
for procedural guidelines.
What are the most common FHA repairs?
Back to top
If you’re using FHA backed financing, ensuring
the following list of most commonly needed repairs are complete
will help ensure your loan process is as smooth as possible.
• On homes built before 1978, chipping and/or peeling paint
must be scraped and painted.
• The roof must have 2 years of remaining physical/functional
life and no more than 2 layers of shingles.
• Any broken or cracked windows must be replaced.
• The cause of any wetness in basements must be remedied.
• The electrical system must be designed for 60 amps or
greater. Additional certifications may be required if the electrical
system appears to be overloaded.
• Abandoned wells must be capped and sealed by an appropriately
licensed contractor.
• All open stairwells, stairways, and decks must have safety
rails.
• Any infestation must be remedied. Appropriate certifications
may be required.
• The structure, foundation, plumbing and electrical system
must be in good repair and working order.
• All crawl spaces and attic areas must be easily accessible
for the appraiser to inspect
What effect will home upgrades and renovations
have on my homes value? Back to top
The answer is it depends… The added value
of upgrades and renovations greatly depends on the market which
the property is located. For example, the installation of a $4,000
air conditioning system in Orlando Florida may return significant
value in the market. However, the installation of the same system
in Seattle Washington may have a minimal value impact if any.
The main point is, different markets value upgrades and renovations
differently.
