Don't confuse a comparative
market analysis, or CMA, with an appraisal. Real estate agents
use CMAs to help home sellers determine a realistic asking
price. Experienced agents often come very close to an appraisal
price with their CMAS, but an appraiser's report is much more
detailed--and is the only valuation report a bank will consider
when deciding whether or not to lend the money.
About Appraisers and Appraisals
What type of area the home is in (a development, stand
alone acreage, etc.).
Residential Appraisal Methods
There are two common appraisal methods used for residential
properties:
Sales Comparison Approach
The appraiser estimates a subject property's market value
by comparing it to similar properties that have sold in
the area. The properties used are called comparables, or
comps.
No two properties are exactly alike, so the appraiser must
compare the comps to the subject property, making paperwork
adjustments to the comps in order to make their features
more in-line with the subject property's. The result is
a figure that shows what each comp would have sold for if
it had the same components as the subject.
Cost Approach
The cost approach is most useful for new properties, where
the costs to build are known. The appraiser estimates how
much it would cost to replace the structure if it were destroyed.
So What Does the Appraisal Mean to You?
Your personal approval is accomplished early in the loan
process, but final loan commitment usually hinges on a satisfactory
appraisal. The bank wants to be sure its investment is covered
in case you default on the loan.
If the property appraises lower than the sales price, the
loan might be declined, but that isn't the only hurdle it
must pass. Other facts on the appraisal can be a problem,
too:
The bank probably won't like it if the estimated time to
sell the property is longer than the area average.
If the appraiser notes that entry to the property is from
a private, shared road the bank might want to see a road
maintenance agreement signed by everyone who uses the road,
verifying that maintenance is shared by all parties.
Those are just a few examples of negatives that could stall
your purchase. The lender will study the appraisal carefully
before determining whether or not the property qualifies
to serve as security for your loan.
An Appraisal Isn't a Home Inspection!
Appraisers make notations about obvious problems they see,
but they are not home inspectors. They do not test appliances,
look at the roof, check the chimney or do any other typical
home inspection tasks. Never count on an appraisal to help
you determine if the home is in good condition.
If the Appraisal Comes in Low
Don't panic if the appraisal comes in low, because there
are often steps you can take to make the deal work.
If the appraisal uncovers other problems, remember that
most problems are correctable. Try to keep your cool and
work through issues one step at a time.
