There is a proverb that says a wise person has many counselors. So it is when you are purchasing real estate. When you get a mortgage loan, most of the time a lender will require an appraisal of the property to show that it supports value of the price you are purchasing it for. An appraisal does more than this though. It informs the lender of the particulars about the home and property and oftentimes is an independent set of eyeballs to review the property and note any anomalies the lender should know about. While condition plays a part in the evaluation process, it isn’t what appraisers do. They are licensed professionals to determine value based on market conditions, location, historical data and cost to construct in the local area.
Appraisers take an analytical dive into value. While there are several types of appraisals that they may produce, the basic goal is to determine value based on an objective criteria which includes size of home and lot, amenities, features, style, overall condition, quality of construction and any upgrades. There is a subjective part to this too, based on the appraiser’s assimilation of the data, since most properties are unique in some way. In an appraisal you have grid pages that provide all of the objective information that allow the property to be compared to others in the same manner. Then there is a narrative section where the appraiser can elaborate further on the finer (or not so fine) features of the home. This is where they will comment about the proximity to the lake or the exceptional view of the nuclear power plant. The report is a window into that property so that the underwriter and all of the investors on down the line can see what this property is and how it compares in the area.
Different loans require different types of appraisals and forms. A full appraisal is the most extensive. It involves the appraiser walking through the home, snapping photos of main rooms, measuring, peeking in attics and crawlspaces, noting other structures included. They move down from there from being just a drive-by where just the front of the property is pictured to a desk review and sometimes less than that depending on lender requirements. Forms can be added as well, such as a comparable rents schedule to show what marketable rents are for the property.
As-is or with conditions? Values are noted based on one or the other. Appraisers are not home inspectors. If they see a sag or a ripple in a roof or that the home hasn’t been lived in for awhile and plants are growing in the gutters, there are going to be some conditions. They might include requiring a clear pest and dry rot inspection, repair to a leaking pipe they saw in the basement, or fixing that hole in the front porch they nearly stepped in upon entering. If you are getting a government backed loan, FHA, VA, USDA, they have a set of safety standards that they require and that will need to be met for the appraisal to be acceptable. These agencies are insuring that loan in the event the borrower defaults. They want to be sure that at least at the onset of the loan, things were not a health and safety issue.
Are home inspections required? Not really. As stated above, if there is a question, an appraiser may require a specific type of inspection. However, if you aren’t a contractor who knows what to look for and you don’t have a kind relative or friend who is, that can go through the home and look at these things, it’s a good idea to have a home inspection. They will make sure appliances work, that pests aren’t hiding in the walls, look for things that are amiss like chimney flashing, bad vents, wrongly connected plumbing and GFI issues. They are looking at condition and when things fall outside of their scope of expertise, they can direct you to get further inspection from someone who does. If they see roof issues, they might suggest you have a roof inspection or electrical issues to be inspected by an electrician. Home inspection isn’t required, but definitely a good idea. Make sure your person is licensed and bonded for the most reliable results.
A home or investment property is a big financial commitment. Doesn’t it make sense to know everything you can know going in? You can’t always get by without an unwanted surprise, but due diligence will put you in the driver’s seat of power by obtaining as much knowledge as you can.
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