After the offer on the home is accepted, an appraisal will be conducted by a third-party company. The appraisal gives a second opinion on the fair market value of the home. This assures the lender that they are making a sound decision lending their money to the buyer. As long as the buyer is getting financing for the home, there will be a required appraisal. If the buyer is paying cash, they can choose to order an appraisal for their own peace of mind but are free to make the purchase without one. While appraisals are usually done in person, the virus has caused a rise in drive-by appraisals. This has made some buyers and sellers concerned that their home will not appraise.
What Happens in a Traditional Appraisal?
When the lender begins the loan process, they will order an appraisal from an approved company. The buyer does not have the privilege of choosing the appraiser, but they are required to pay for the appraisal, which can range from $450 to $750. While the primary purpose of the appraisal is to confirm the validity of the loan value, it also makes sure the buyer isn’t overpaying for the home, which could be costly if the buyer loses their job a year or two later and needs to sell.
The role of the appraiser is to provide an independent and impartial analysis of real property. –National Association of REALTORS® (NAR)
When the appraisal is ordered, the appraiser first completes desk-based research of comparable sold homes. This is done using appraisal software and an online database with comparable properties, such as the Multiple Listing Service (MLS). The appraiser will then visit the home to inspect the exterior and interior. This is not as in-depth as a home inspection: the appraiser just wants to verify the reported home features and overall condition of the property. The appraiser will also visit the most comparable properties and take pictures of the outside.
Once this footwork is done, they draft a report showing the market value of the home, including the pictures they took and the comparable properties they used to settle on that amount. The appraisal report is sent to the loan officer, who then notifies the buyers if the home has or has not been appraised at the offer price.
What if the Appraisal is Low?
If the home receives an appraisal lower than the price agreed upon in the contract that isn’t always a deal-breaker. Sometimes the appraisals can be challenged, an action most justified with unique properties or homes in a community without a lot of recently sold listings. In that case, the real estate brokers can provide comparables in which they believe the price is validated. If that doesn’t work or the appraisal is solid, the buyers and sellers can negotiate a lower price or the buyers can pay the difference in cash. While paying cash may mean the buyers are in a deficit, it guarantees the buyer gets the home they really want to live in.
What is a Drive-By Appraisal?
To prevent exposure to COVID-19, some appraisers have switched to drive-by appraisals, which do not include interior photos or an inspection of the subject property. Instead, the appraiser views the property from the road, takes an exterior photo, and relies heavily on MLS information for verification of the other details. A “desktop appraisal” is similar to this but does not include a visit to the property.
Prior to the pandemic, some of the major mortgage organizations did not allow drive-by or desktop appraisals. Many have since temporarily approved them for the safety of the appraisers and homeowners. This does not mean that everyone is now opting to do them. Many appraisers prefer to conduct the appraisals in person and choose to do so despite these options.
It is also important to note that drive-by and desktop appraisals are not necessarily approved for people refinancing. Major mortgage organizations, like Fannie Mae, believe homes for sale are more likely to have updated and accurate information and pictures in appraisal databases than homes that have been off the market for years.
Should Buyers or Sellers be Concerned About Drive-By Appraisals?
Most buyers and sellers should not be concerned with drive-by appraisals hurting any chances of the home appraising at offer price. If the current listing information in the MLS is correct and the interior has been well-documented in pictures, there is sufficient data for the appraiser to use. When information is lacking, appraisers will reach out and request details – not just of the property being analyzed, but comparable properties as well. This is why the NAR has worked diligently to keep high standards for the MLS. The information it contains is not just important for current homes listed but also homes that will be listed days, weeks, months, and years into the future.
Are you considering buying or selling a home in the Wilmington area? We’d love to chat with you about your options. Give us a call at (910) 202-2546 or send us a message through our website.
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