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Appraisals benefit lender,
but you pay for it
Dear Steve:
When should a real estate appraisal be ordered? Who orders it? How
do they work?
-- Annie Up
Dear Annie:
The home appraisal is generally ordered by a lender as part of the
final approval process of a mortgage loan application, although
appraisals can be used for such things as estate planning, tax assessments
and dispute resolutions.
But we'll play the odds here and assume that you are
trying to purchase a house.
Your lender wants to make sure its investment is secured
in the event you default on the home loan, so it needs an accurate
estimate of the property's value to clearly establish collateral.
The lender hires an appraiser to give the house, property and neighborhood
the once over and to present a value finding that is independent
and unbiased, presumably.
Generally the loan applicant pays for this appraisal,
indirectly, as part of closing costs, although the bank basically
"owns" it. However, if you're a loan applicant, you can
make a written request for a copy of the report and get it under
the Equal Credit Opportunity Act.
Note than while a home appraisal and a home inspection
sound alike, they aren't the same. A home inspector establishes
the condition of a house, on behalf of a prospective buyer or seller.
The appraiser merely produces an opinion of value.
Also understand that appraisers put a value on a home
property, not the personal property inside or around it.
Appraisers will measure the home and consider its
condition, features, curb appeal, functionality, neighborhood, proximity
to amenities and in many cases, comparative local sale trends, before
returning a finding.
The site-visit portion of an appraisal can take from
20 minutes to about an hour. The high range comes in if the property
is unusually large, has separate living quarters on it or other
unique features. After a walk-through, the appraiser will tour the
neighborhood to complete the determination. (Whether you're a buyer
or seller, don't ask the inspectors how much the place is worth
before they drive off. They honestly don't know yet.)
Two number-crunching methods are typically used for
residential appraisals:
Sale comparison: The appraiser will compare values
of like homes in the area and the overall real estate market.
Cost approach: This method computes what it would
cost to replace the property. Land cost is determined and added
to the cost of replacing the property's improvements -- such as
the house, patios, and pool. Depreciation and any possible functional
obsolescence or neighborhood deterioration is also factored in to
come up with a final figure.
If the appraisal exceeds the sales price in either
form, that's good for you. But if it's lower, you might have to
increase your down payment to make up the difference.
I hope this helps. Good luck, Annie.
-- Posted: March 6, 2004
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