There are three types of home valuations: the Appraised Value, the Assessed Value, and the Market Value. Rarely are these three values the same. So it’s easy to confuse them when considering selling a home, obtaining a mortgage, refinancing, or contemplating the ongoing costs of ownership (such as taxes and insurance). Because of these differences, you can appeal an appraisal, tax assessment, and request a different market analysis. But an appraisal can be difficult to change.
It helps to understand a few things about appraisals, why they are ordered, and how they are conducted. Most people only associate a home appraisal as a step in the purchase process. The appraisal is a third party opinion (neither influenced by the seller or the buyer) to determine the fair value of the property. Lenders require these prior to final loan approval or refinancing to assure the property value falls within the guidelines of the loan contract.
Although most people associate appraisals with qualifying for a loan or refinancing, there are other reasons a homeowner might want a current appraisal. Examples include after a major remodel or because of rapid value appreciation to update your financial net worth, when you need an estate valuation, court-mandated, and other life events.
The basic valuation is calculated based on the home's size, location, features, and condition. While there is not an exact expiration date on appraisals, many lenders will not rely on an appraisal report that is more than 60-90 days old. After that, there are probably sufficient changes in the market requiring an adjustment in the report. In a stable or appreciating market, some lenders allow an extension to how long an appraisal is valid up to about six months but additional documentation may be required.
The point is that an appraisal that is several years old is not of much help to you or anyone else. An old appraisal cannot be used to estimate the value of your estate, apply for a second loan, or other financial reasons that come along even if you have no plans to sell your home.
There are a few important things you need to know about appraisals. First, because the appraisal is usually for the benefit of the lender, you may not automatically be given a copy of the report. But you can ask for it. Second, appealing a lender appraisal can be difficult. A lender isn’t likely to grant a second appraisal unless there are reasons to believe the first one grossly misrepresented the actual value. You’ll need to provide documentation for why a second appraisal is needed. Third, loans for FHA backed mortgages can have different appraisal requirements from conventional loans. Most notably, FHA appraisals require a health-and-safety inspection along with a value appraisal. You can learn more about FHA requirements in the HUD Single Family Housing Policy Handbook 4000.1.
The Federal Reserve established the Home Valuation Code of Conduct (HVCC) to ensure against bias and strengthen appraiser independence. The HVCC prohibits anyone with an interest in the value of a house from being involved in the appraisal process. That includes handpicking an appraiser to value a home. None of the parties involved (including the buyer, seller, lender, and real estate agent) have a say in which appraiser will assess a home. Instead, many lenders hire licensed appraisers through appraisal management companies.
Although the lender is generally required to use the appraisal done by the selected appraiser, no laws prohibit hiring your own appraiser if you have a reason to do so. It can serve as a second opinion for you and confirm that the mortgage company's appraiser was accurate in his/her assessment of the house. However, it won't affect the loan value unless it influences the lender’s appraiser to resubmit a revised report.
Many homeowners mistakenly believe they have no ability to influence a home appraisal because it is an independent third party valuation. While it is true that it needs to remain independent, as the homeowner, no one should know more about your house than you. Whether you are the seller, buyer, or have another need for an appraisal, there are ways you can better improve your chances of obtaining an accurate appraisal, including:
Inform the appraiser what you want them to compare your home to by sharing a list of improvements, providing the most favorable comps, and creating a cheat sheet detailing every little thing.
If the appraisal comes in significantly below the agreed selling price, the lender will probably choose not to fund the mortgage and the deal could fall through. Buyers can typically solve this problem by bringing in additional “cash to close,” which is essentially increasing your down payment by the difference between the sales price and the appraised value, renegotiating the sales price, or having the seller make improvements. It can also be a reason for the buyer to walk away from the deal when there is a contingency clause in the contract for the house to appraise at or above the loan requirement.
Please leave your comments and thoughts about the appraisal process. Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].