Unless you are paying cash to purchase your home a real estate appraisal is part of bureaucratic red tape and is required by virtually every lender in the country. In this article we will review the value of getting an appraisal and if it is truly necessary or just part of what seems to be the never-ending bureaucracy of purchasing a home.
Don’t Over Pay
Many home buyers believe an appraisal only benefits the lender but this is not true and overlooks how an appraisal protects a purchaser from overpaying for a home.
Most home buyers are not experienced real estate professionals nor do they have access to the MLS or other databases with previous home sales and other relevant market information. They have no reliable method to determine the actual value of a home and generally depend upon the limited data found on the internet or the advice of a real estate agent.
The estimates of a home value found on the Internet are general in nature-based upon an algorithm that calculates the value of a home-based upon only a handful of data points. The algorithm does not take into consideration the actual attributes of the home you are purchasing. For example, it will estimate the value of a home that is adjacent to a landfill for the same amount as a similar home in the same neighborhood that is adjacent to a beautiful park. These systems are useful in gaining general insight into home values but cannot be relied upon to make one of the largest purchasing decisions of your lifetime.
The other source of home values is your local real estate agent. They have access to the MLS database that has detailed information on past sales activity as well as the prices of homes that are currently on the market. Unfortunately, there are many unscrupulous real estate agents that are only interested in the commission and do not care if a purchaser overpays for a home.
The data provided to the purchase by an unscrupulous real estate agent can be manipulated. For example, they can provide you with previous home sales that show a very high price but fail to mention that those homes were totally renovated with new kitchens, baths, roof, and mechanical systems.
For the home buyer, the appraisal is like an insurance policy against grossly overpaying for a home. The estimate of value is provided by a disinterested third party professional who will actually inspect the home and compare it to similar homes in the neighborhood.
The appraiser will then adjust the value of the home you are purchasing based upon the actual attributes versus similar homes recently sold in the same neighborhood. He will not value a home adjacent to a landfill the same as a home next to a beautiful park nor does he earn a commission if you buy the home.
For large banks and financial institutions, an appraisal is one step in the process designed to protect their investment and limit fraud. If you think about it, a large lending institution is lending billions of dollars on properties sight unseen with other people’s money – all being done by loan processors who are not real estate specialists but only trained on how to process loans. An appraiser is a licensed professional who has the experience, knowledge, and access to the data to inspect a home and produce an estimate of value that is reasonable and can generally be relied upon.
An appraisal from an independent disinterested third party provides the lender with pictures of the property, a rudimentary floor plan, a visual inspection report and an estimated value based upon comparable sales. The appraisal also provides a picture of the comparable sales, the source of the sales data, a map pinpointing the location of the home in relation to the comparables homes and a plethora of other information. Finally, the licensed professional appraiser carries errors and omissions insurance that protects the lender from any malfeasance or material mistakes of the appraiser.
This appraisal, coupled with a title report, survey, credit report, tax return verification, bank statements, employment verification amongst other things are all designed to prevent fraud and allow the lender to make the loan that has a high probability of being paid back or if not paid back the collateral can be sold to pay off most if not all of the loan.
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