Today, we're discussing how a property's details end up in the Appraisal Report.

 
Often, a Property Appraisal is ordered and everyone holds his/her breath until the results are returned. This is partially because many sellers and buyers don't fully understand them.
Standard forms, categories, and methods allow appraisals to realistically compare the market values of similar properties. 

 

Even though an individual appraiser's local knowledge and experience contribute to an appraisal,

the entries in it must conform to certain standards in order to beconsistent, dependable, and uniform.
 
The appraiser looks at the home or condo being valued (subject property), gathers info on recent comparable sales, thenevaluates both the differences and similarities between them.
  
All residential lenders require an independent appraisal of value to determine the Loan-To-Value ratio, an integral part of their risk management. It's also a good idea on all-cash deals, especially if the buyer is considering Delayed Financing.
To maintain the accuracy and quality of property appraisals, theUniform Appraisal Dataset (UAD) was developed, which is a set of standards used to bring conformity to the appraisal process.
  
The UAD not only requires the use of specific standardized appraisal forms, it also dictates the definitions, abbreviations, ratings, methods, and entry formats used in the report.

Let's look at the Condition (C) and Quality (Q) general rating scales:
 
   C1 - Recently constructed; not previously occupied; new
           components, fixtures, and mechanical systems

   C2 - No deferred maintenance; minimal physical deterioration;
          recently renovated / upgraded to current standard / style

   C3 - Well maintained; normal wear and tear; some (not all)
           components updated / renovated (first replacement cycle)

   C4 - Minor deferred maintenance; normal wear and tear;
           adequately maintained; minor repairs needed

   C5 - Obvious deferred / lack of maintenance; larger repairs
           needed; livability reduced due to condition

   C6 - Substantial damage; lack of maintenance; condition
           causes safety / structural concerns; major repairs needed
  
  
   Q1 - Architecturally designed / custom-built; extremely high
           quality materials / workmanship / finishes / fixtures

   Q2 - Often custom designed or highly upgraded / modified
           from basic plans, often in upper-level developments;
           high quality materials / workmanship / finishes / fixtures

   Q3 - High quality construction; slight upgrades from standard;
           above-average workmanship / materials; well finished

   Q4 - Standard design from available plans; code-compliant,
           builder grade workmanship / materials / finishes; industry
           standard; few upgrades

   Q5 - Basic design / functionality / floor plans; code compliant;
           below average workmanship / materials / finishes

   Q6 - Basic quality / cost; may not be suitable for full-time
           occupancy; limited electrical, plumbing, mechanical
           systems; "DIY" type workmanship; possible safety issues
 

 

Based on his or her inspection, the appraiser categorizes the subject property as to Condition and Quality using these recognized groups.

Usable comps should be in the same general Condition and Quality categories as the subject property, and must be recentclosed sales. Those sold and settled within the past 3 monthsand located within a mile of the subject are most suitable.

 

An appraisal is NOT a home inspection.

 

It is an opinion of market value, while the home inspection

is a detailed report of property condition.

  

Not many properties are exactly the same, even between the same model in a development, or the same type condo in a building. That's where adjustments to value enter the picture.

Appraisers make value adjustments to account for the differences between properties based on :
 
                       -  age
                       -  lot size or condo floor level
                       -  livable square footage (total and "under air")
                       -  number of rooms
                       -  amenities such as pool and garage
                       -  upgraded kitchens, bathrooms
                       -  fixtures, finishes, and other factors.
 
These adjustments are restricted as to how much they can affect the difference in valuation. This is to ensure that essentially similar properties are being compared, because if too much adjustment has to be made, it isn't a suitable comp.
 

Even after Condition and Quality considerations, then

thinking about Adjustments,

a subject property's value can't be appraised quite yet. Its

contract price is fixed as the baseline for comparison. The comps' values are adjusted in worksheet fashion up or down to determine value relative to the subject.

If the comps' values end up higher than the subject's purchase price, the subject's appraised value may increase to approach the comps' values in the appraiser's final evaluation (known as "reconciliation" on the report).

If the comps' values are lower than the subject's price, the subject's appraised value may be lowered to approach the comps' values in the reconciliation.

Under the Comparable Sales appraisal method, it is impossible for a subject property to appraise higher than the highest valid comp. 

 

  

 

As you remember from previous newsletters - lenders use thelower of contract price or appraised value when calculating Loan-To-Value ratios.

Help your sellers understand the appraisal process a bit better by explaining the basics during the listing appointment. Future appraised value can influence both asking and final contract prices.

 

Help your buyers by discussing appraisals when you ask if they want to pay cash or use financing. Let them know their options if an appraisal comes in lower than contract price.

And have them call me early in the looking stages so we can let them know all their financing options and be ready to submit an offer sellers take seriously.

 

Informed clients who know what to expect lead to smoother transactions and a more relaxed trip to the closing table.

 

  
Let me reinforce the trust
   your buyer has placed in you! sm

All information provided by Chris Carter. Contact Information below.

 

Chris Carter                               Mortgage Advisor / Originator 
239 898-5455 cell                                                                          NMLS 861361
  
  
  
  
Paramount Residential Mortgage Group, Inc
4375 Radio Rd
Naples, FL  34104
239 659-1660 office                                                                 © 2015 Chris Carter