By Grant Nelson
Appraisals can be confusing for many going through the mortgage process. Everything is going smoothly, the appraiser has come and gone, and then the number comes in. What exactly is this strange paperwork you’ve been given? How does it explain the value of your house? This assigned value will stick with your home until another appraisal is done, and it can have a large impact on the process of a mortgage. Here are a few appraisal basics to help you understand the appraisal process.
Appraisal Basics: How Does It Work?
The appraisal report is, to the untrained eye, confusing. In fact, most appraisers don’t ever intend for their report to be read by someone with an untrained eye. It’s not that there’s some dark home appraisal secret they want to keep, but appraising is complicated and confusing. There are a few ways to go about valuing a home: the cost approach, the income approach or the more popular sales comparison approach (SCA). The SCA compares the house being appraised to similar homes around it that have sold recently. The appraiser goes out to the home and homes in the area to determine similarity. For the other homes, public data is often used about the interior as the appraiser can’t just go into every home on the block!
On the Grid
A vital part of SCA appraising is the sales comparison grid. Found on the second page of most appraisals, it contains a plethora of comparisons between the subject of the appraisal (the home being appraised) and various comparable sales (recently sold homes in the area). Adjustments are made to the comparable homes based on their inferior or superior qualities, amenities and condition. Superior features create additional value while inferior features bring about a lower value. These factors work together to help formulate the value of the home.
Typically, three different comparable sales are used to determine the value of the subject. Often times, equal weight is placed on all three, but sometimes sales with more in common receive more weight. The key number to look at to see how similar sales really are is the gross adjustment percentage. The smaller it is, the more similar the values of the two homes are in the appraiser’s opinion. If you have very large gross adjustment percentages it might be very hard to find homes with similar features. Sometimes a home is over or under built for an area, other times it’s just because homes are far apart or custom built.
Often there are listings later on in the report. Don’t fret too much about these! Appraisers rarely if ever give any actual value to current listings or pending sales. Focus on the homes that have already sold, especially the ones that are the most similar to your home!
Area of Effect
Depending on where you live, there may be many recent sales that make valuing your home relatively simple. High density urban and suburban areas are easiest, while areas of low population or large areas of land may be more difficult. When you look at an appraisal, be sure to note any large adjustments, especially ones made to all the comparable sales used. They might represent unique factors, important upgrades or deficiencies that make a home difficult to value.
What Can Be Done?
So what do you do if you don’t like your appraisal? Different institutions will have different policies regarding appraisal review. The best thing you can do is get in touch with your lender and see what their approach is. Some commonalities will likely exist, however. To get a lender to consider going above the original appraised value, you will most likely need additional comparable sales, better than the originals. Try to find sales that are more recent, closer and with less of those large adjustments.
Do you have any questions about the appraisal process? Feel free to comment below with your questions!
Link to original article: http://www.quickenloans.com/blog/appraisal-basics