Most buyers and sellers are a bit nervous until the appraisal results are known. The “moment of truth” for your real estate deal is after the appraisal is complete. This is when you find out the appraised value of the home. The appraised value will determine how much your lender will lend. This is the point that can crush a deal should the appraisal be significantly lower than the agreed upon price.
Up to this point, you have an agreement with the seller for how much you are willing to pay and the seller has accepted your offer; perhaps subject to some contingencies like the home inspection and mortgage approval.
What Happens If the Appraisal is Too Low?
Should the appraisal be significantly less than the contract price there are some things to do before giving up on the deal.
Review the report for any errors or omissions that may impact the value. If the Appraiser made a mistake in facts regarding the property, then his correction of the facts may bring the appraisal back to the sale price value.
Talk to the appraiser and find out why it was valued so low. If it is due to items that are fixable then the homeowner may be willing to fix the items in order to save the deal. The Appraiser will need to see the fixes to verify the work has been done and adjust the appraisal.
You can also get a second appraisal. An inexperienced Appraiser or one not familiar with the area may undervalue properties where an Appraiser with experience working in the area would not. Make sure the new Appraiser is approved by the lending institution so the results will be recognized. Always use a local Appraiser if at all possible to avoid potential problems.
The seller can also agree to lower the selling price or carry a second mortgage to make up the difference. The buyer can also increase the amount of the down payment to salvage the deal.
If no compromise can salvage the deal, then the buyer can escape from the deal based on the loan contingency clause as part of the contract to purchase.
Protects Lender / Protects Buyer
If there is a large difference between what was agreed and the value determined by the independent non-biased appraiser, both buyer and seller have a problem. The lender will not lend more than the property is worth. This protects the lenders investment because they do not want to get stuck with a property worth less than what they have invested in the loan. It also protects the buyer, who also doesn’t want to over-pay for the property.
While the lender requires an appraisal, typically it is the buyer who pays for it. An appraisal in the Outer Banks costs between $300 and $500. While the lender may share a copy of the report with the buyer, the document belongs to the lender. The cost of the Appraisal is listed as part of the mortgage costs at closing.
Appraisal vs Inspection vs. Assessment
An Appraiser will need access to all the nooks and crannies in the home and access to any buildings on the property to perform the appraisal. However, it is not the same as a home inspection. The appraisal will be looking at systems and conditions of the home to assess value. The home inspection is assessing the working condition of the major systems in the home. The appraiser may make a note of any item that is not functioning as this will impact the value of the home.
In theory, the tax assessment of the home should reflect market value, but rarely does. The tax assessor does not have access to the interior of the home and would not be able to take into consideration the interior condition or any upgrades or improvements. In addition, assessments are conducted less frequently and are not up to date with market forces. In Dare County, NC property assessments are conducted every 8 years.
There are generally 3 approaches Appraisers use for evaluating real estate. The Sales Comparison Approach, The Cost Approach and the income approach.
Sales Comparison Approach
The sales comparison approach is most frequently used for residential property. The appraiser compares the subject property to 3 or 4 comparable properties that have recently sold near the subject property. These comp sales are adjusted to take into consideration differences between the subject property and the comparable property to arrive at a value. The properties are compared by considering lot size, square footage of finished and unfinished space, age of home, and any amenities like fireplaces, garages, pools etc.
The cost approach is used more with new construction. Here the Appraiser estimates the cost to replace the structure and the value of the land.
Rental properties can use the income approach by basing the value of the property on the amount of income earned through rentals.
Other Sources of Information
The Appraiser uses multiple sources of information to arrive at the value and to include in the final report. County court records refer to last sale recordings and MLS provides sales information for comparables. The Assessor may also use outside vendor databases in the assessment.
Appraisal Report Contents
- How value was determined
- Size and condition of property
- Improvements made to property and materials used
- Any serious structural problems or issues affecting value like wet basement, cracked foundation, leaking roof etc.
- Assessment of surrounding neighborhood or area
- Legal description of the property
- Any easements, encroachments or environmental conditions
- Discussion of recent market trends that may impact the value of the home
- Comparative market analysis of similar sold properties
- Maps, photographs, floor plans, surveys and other documentation
Best Practices for Buyer & Seller
The buyer has the right to join the appraiser at the home when he is conducting his assessment. You should take this opportunity to join him especially if there are material facts known by you that the Appraiser may not be aware of. This can prevent problems before they happen.
Sellers can get an Appraisal before they put the home on the market to correct any issues found, list at a reasonable price and make a smoother sale process. The seller can provide the pre-listing appraisal to the buyers Appraiser to add more data and support the sales price.
While an Appraiser does not let dishes in the sink or uncut grass affect his professional judgement of value, people are only human and you want to create a positive first impression. Make sure the home is spotlessly clean, both inside and out. Make sure any small repairs are completed before the appraisal. This should have already been done to get the home ready to go on the market. Depending on how long that has been, there may be additional items to be addressed.
Similar to the home inspection, the Appraiser needs access to all areas of the home and property. Make sure any clutter is removed from the home to make it as easy as possible on these professionals.
NC Appraiser Requirements
The North Carolina Appraisal Board under G.S. 93E-1-5 governs the registration, license and certificates for real estate appraisers and all appraisers must comply with the requirement to legally perform the service. The requirements include formal education, approved appraisal instruction, continuing education requirements as well as background checks before an appraiser can be certified or licensed to work in North Carolina. New appraisers must work as a trainee with oversight from an experienced appraiser before they can work on their own. The Appraiser should be independent, objective and impartial and have no vested interest in the results of the appraisal.
Contact Eillu with any Dare County or Currituck County NC real estate questions or let us know the criteria for your dream home, vacation home, second home and investment property and we will provide you with properties that match.