Property appraisals have changed over the last few years. Federal regulations on banks have affected appraisals and the appraisal process. Most affected are the sales transactions that require appraisals for an FHA or VA loan. Also affected are property appraisals required for conventional loan sales transactions and refinancing.
Lenders send their own appraisers to the property to determine the property value. These appraisers are hired by the lenders. They typically don't speak to either the buyer, any licensed agents that may be involved in the transaction. They will know the contract price, but won't know what comparables or other information these buyer/seller parties may have used to come up with the contract amount.
What if their appraised value comes in lower than the contract price??? This happens frequently, depending on the location of the property, number of foreclosures/distressed homes in the neighborhood etc. Doesn't always seem fair, considering the buyer and the seller agreed to that contract price. But unless the property appraisal says the value is the same as (or more than) the sales contract price, the bank won't agree to lend the money.
What happens in the event issues with property appraisals happens? What are the basics of Property Appraisals? And is it worth it to pay for an Independent Appraisal first? (hint: appraisals are an art, not a science... two appraisers will almost always come up with a different appraised value).
A buyer and seller enter into a sales contract. They agree on a purchase price. The buyer plans to seek financing with a conventional loan. Property appraisals are the next step. That bank hires a property appraiser to go out to the property and measure, look at upgrades and condition, and analyze neighborhood comparables and similar properties recently sold.
They adhere to strict industry standards, applying certain amounts and percentages to adjust for square footage, pools, high floors, upgrades, improvements etc.
They consider recent sales, neighborhood foreclosures, etc. They come up with the value they believe the property is worth, and submit that to the bank. The bank then lets the buyer know. The buyer hopes that number matches (or exceeds) the Purchase Price on the sales contract.
If the property appraisals value comes back too high, the buyer and the buyer's bank and agent have no reason to let the seller/seller's agent know. It makes the buyer and their lender to know the property is worth more than what they will be paying. And the buyer is the one that is paying for that appraisal. So there is normally no need to share the results with the seller.
However, if that number comes in too low, the contract price either needs to be negotiated, the contract will die, or the buyer will need to pay additional cash on top of the amount they are financing to make up the difference.
What if the buyer is getting financing through FHA or the VA? Do property appraisals play an important role in this process also? YES! FHA-backed financing programs send their own property appraisers. And that process is even more strict than conventional. These FHA-financed property appraisals sometimes result in even more disappointing results. They ALSO have been known to appraise HIGHER THAN expected. Why is that?
These programs are under a certain amount of pressure to produce results. They WANT to help people buy their own homes! Many real estate agents will say that appraisals from the FHA or VA programs notoriously come in too low, often causing the contract to die. BUT... other real estate agents will tell you that this also seems to depend on other factors like the location of the property, qualifications of the buyers, etc. These factors aren't supposed to influence the final appraised value... but they definitely seem to. There are plenty of real estate agents who LOVE working with FHA-financed sales transactions because, in their experience, property appraisals almost always come back at the sales contract price.
So bottom line? If a buyer qualifies for FHA, and decides that's the type of mortgage that works best for them and their situation, don't be afraid to enter into a contract out of fear of a low property appraisal.
Not in a contract but want the valuable tool of having a professional, independent property appraisal in hand? It's often a great idea, depending on the circumstance. It can be used to help determine your asking price if selling, or as a great negotiation tool in the event another appraisal comes in too low (or high).
In Miami, most real estate agents agree that values are near or at the levels we had before the 2008 bubble burst. Which is a great thing. However, the areas that the busted bubble hit hardest (like Homestead) are still struggling to recover from. What does that mean? Appraisals are still coming in low, even though there are buyers willing to pay the asking price.
MAKE SURE TO HAVE A GREAT IDEA OF WHAT THE PROPERTY IS WORTH BEFORE SUBMITTING THE WRITTEN OFFER, NO MATTER WHAT AMOUNT THAT IS.
ONCE THE APPRAISAL COMES BACK, IT'S BETTER TO HAVE A REALISTIC EXPECTATION OF THAT AMOUNT - AND A PLAN FOR IF IT COMES BACK TO LOW.
Whether buying or selling, it's HUGELY important to have a very good idea of what the property is currently worth before listing or submitting a written offer. Because IF the appraisal comes in low, or too low - the contract could break apart and lots of time could be lost.
It is often a good idea for prospective sellers to have a formal appraisal done at their own expense (costs several hundred dollars depending on the company, size of the home, etc). This can be an invaluable tool when setting an asking price, and especially if lowball offers come in (and they will!!). Real estate agents will be able to narrow down a range of what your property is worth, but they are not allowed to perform an actual formal appraisal unless they have an Appraiser's license as well.
For buyers? It's important to know the value of the home you want to purchase. If you want it no matter what, you may need to agree to a "not contingent on appraisal" element of the contract. If you are trying to purchase a property with instant equity, it will be important to narrow down that value - and the most reliable way is through the professional service of a licensed appraiser. If financing the purchase, the bank will require an appraisal to be done. If a cash purchase, no appraisal will be required.
Appraisals are done only by licensed appraisers. They must adhere to a set of nationally accepted valuation methods. They are local and have a good understanding of the local market. They will charge anywhere from approximately $275+ depending on factors including size of property. They will/should tell you first, before starting the appraisal, how much the charge will be in total. *Buyers are generally in control of who they hire to do the appraisal. (However, some circumstances (FHA, VA)... they will most likely send their own approved appraisers.
An appraiser will first look to the tax rolls (county information listing the property, square footage, number of bedrooms/bathrooms, garage, pool, etc. Then, when visit the property they will take photos and include condition and upgrades. Did you add marble floors and granite countertops? Did you have a new roof and AC installed recently? Did you add a jacuzzi/waterfall feature to the pool? Make sure to point out anything you feel adds to the value of the property.
Once back at the office, the appraiser will sit down and research the real estate activity within your subdivision and/or surrounding area. They look for the most recent 3-4 properties most comparable in size to yours first... preference is for "solds" within the last six months. Once the comparables are found, the appraiser will adjust the properties so that they compare laterally... and an amount will be added or subtracted according to size/number of rooms/upgrades/condition etc. That final appraisal will be in report form and given to whoever paid for the appraiser. *If a buyer is financing a property, they are required to pay for an appraisal. They will receive the results of that appraisal, and the financing bank/mortgage company will also need/receive a copy. However, in this case the buyer does NOT have to or normally share this information with the seller. Oftentimes the final appraised value is used as a bargaining tool depending on the type of Purchase Contract used for the transaction.
A free alternative to Miami appraisals are the reports provided by licensed Real Estate agents, called Comparable Market
Analysis (CMA) reports. The reports are most similar to that of an appraiser, but will be shorter with less detail and specific pricing adjustments between comparable properties (appraisers assign specific values to upgrades, condition variances, etc).
When a buyer is looking to purchase property and has a question about the asking price... their agent can provide a CMA which will put into black & white all the factors they would need to determine a fair offer amount.
As well, sellers often don't know what to set as their asking price. Just because the neighbor down the street sold his home for $350k... yours could be worth quite a bit more. Don't lose money out of ignorance, get an experienced real estate agent to provide you with a free CMA!
Why do sellers pay for formal Miami appraisals?
What about the assessed value found on the Miami-Dade Property Appraiser's website?
They may factor in area auctions and foreclosures, will factor in many available exemptions which keep the assessed value low like the Homestead Exemption, Widow's Exemption, Deployed Military, etc. As well, if the owner of the property bought and lived there over many years... any increase in value year over year can't legally increase more than 3%.