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What is the Purpose of an Appraisal?

A mortgage has many specific pieces involved in it. Obviously there is the money supplied by the lender to pay the seller for their asking price. There are also many other items such as the title report and title insurance, a survey (sometimes), proof of homeowner insurance policy and an appraisal. An appraisal is actually one of the more important pieces and yet it still brings questions from buyers and sellers alike.

Required by the Lender

First and foremost, if a home is being purchased through the use of a mortgage then the lender will require a formal appraisal. A licensed appraiser works independently of the real estate agent and the lender to ensure that there is no undue influence on the process. The appraiser’s report will indicate if the home is worth the asking price.

Appraisal ordered after a Selling Price has been negotiated

The appraiser is contacted after the real estate agent(s) and all associated parties have worked out a price for the home. The appraiser will look at the contract along with a host of other items such as

* Square footage of the home

* Local property taxes for the home

* When the home was built

* General shape and condition of the property

* Average sales price of similar homes in the area

The price for the appraisal depends on the area of the country. Sometimes the appraisal fee is paid by the borrower up front and other times it may be paid as part of the closing costs.

Wise to Inspect First and Appraise Second

In an ideal world the buyer of a home would hire a home inspector to review a property before the home is appraised. The job of an inspector is to seek out any potential problems with the property. This can be as simple as finding a loose door knob to as complicated as finding out the entire heating and ventilation system needs replacing. Once the inspector has looked at the home the appraiser can approach the property with some idea of any possible short comings of the home and assign the correct value to the home. In a worst case scenario an inspection could lead a buyer to cancel a contract and look for a different home.

The Journey of the Appraisal

Once the appraiser has finished the report a copy will be sent to the mortgage lender and possibly the real estate agents. If the buyer paid for the appraisal up front then they too will get a copy when it is complete. Otherwise, the buyer will receive a copy at closing.

The lender, whether it is a bank or local mortgage company, will have their own process to review the appraisal and ensure the numbers look accurate. If the value of the home is much lower than expected then the lender may cancel the loan. On the flip side, if the home is determined to be worth more than the asking price then the buyer will have instant equity.

Understanding Specific Requirements of Appraisal for FHA Loans in Wisconsin

The all-time low mortgage rates combined with affordable home prices have generated a huge growth in business for FHA mortgages. People considering their first home need to understand the specific appraisal requirements for FHA loans in Wisconsin.

Basics of FHA Appraisal

In a nutshell, an FHA appraisal is a conventional appraisal with additional requirements. The goal is to identify any potential repairs that would need to be completed within the next 24 months and have those items addressed before the loan is closed.

It is important to note that an appraiser does not review a home to the depth of a home inspector. A home inspection is still a good idea for a home, especially if it is 5+ years old.

FHA Appraisal Caveats

Only appraisers listed on the FHA approved roster are allowed to inspect homes and complete the evaluation. Before an appraiser is assigned to review a home a FHA case number will be assigned to the loan. The appraisal is valid for the next 90 days. The lender or borrower may change during that time period without the need for a new appraisal.

Any home that has undergone a conventional appraisal within the last 90 days will still need a FHA case number. In addition, the home must be re-inspected to verify FHA specific items. Here is a list of the items:

• Confirm no existence of drainage or water damage
• Ensure water pressure is adequate for the home without any leaks
• Any exterior and interior lead-based paint must be inspected to identify peeling, chipping or cracking
• Identify exterior access for each bedroom
• Insure the minimum 18” egress and ingress from the lot line to the building
• Test the heater to ensure proper working condition as well as air conditioner
• Ensure electrical outlets are in every room and in working order
• Test the fan/hood over the oven for proper working condition
• Ensure screens are present on roof vents and no more than three layers of roof material
• Determine that the electric box has at least 60 amp
• Properly note existing wiring that is exposed as well as cover plates missing from electrical boxes
• Do a brief inspection of crawl space and attic

Any issue found on the interior portion of the home needs to be either repaired or replaced. On the exterior part of the home any issue needs to be repaired or removed.

Specific Areas of Importance

Of the items mentioned above three seem to get the most attention; water problems or drainage issues, lead-based paint and the ingress/egress points. Concerning the ingress/egress points, common problems occur with homes that have a garage touching the lot line. This prevents the homeowner from accessing the exterior wall of the garage in order to paint. If this is the case the neighbor may be asked for an easement in order to grant the homeowner access.

Consultant Required for 203(k) mortgage

Buyers that are approved for a FHA 203(k) mortgage need to understand that the appraiser will be working with a consultant. The consultant must be approved by FHA. This individual will inspect the home and determine the necessary repairs and improvements and formulate an estimated cost. The appraiser will inspect the home and ensure that the consultant has properly identified all necessary repairs in order to conform to the FHA guidelines.

“BPO” stands for “Broker Price Opinion.” It is a report for the given value of a property, that a real estate agent will give to a lender to determine what to do with a property where they have a loan. And it is just what it sounds like, an opinion! All they do is quickly glance at the recent solds in the neighborhood, and go to the house to take pictures(they are at the property no longer than 10 minutes – a time frame that no buyer would feel comfortable making a solid offer in, given that it is not enough time to do any due diligence on a property to see what it has/needs.

Without going into too much detail here, let me just tell you I met both an appraiser and a BPO agent at a property yesterday, on a property valued somewhere in the  $2 million range. Because I met both the agent doing the BPO, and the appraiser, the property will close because they have a keen understanding of what is really going on, since I took the time to enlighten them. Can you imagine if I just left it up to the opinion of the two people who had spent no more than a couple of hours looking at the subject property?!(and in cases of cheaper house, taken no more than maybe 20 minutes analyzing the value!)

And then this morning I met another BPO agent on another property we are doing a deal on, valued around only $100,000. The property probably would have came back to the bank with a broker price opinion at $130,000 or more if I hadn’t been there to meet the agent, in addition to sending her comps and letting her know the listing history prior to her arriving at the property. I also took the time to make sure she actually looked at all of the systems in the house and pointed out needed repairs. Had I not been there the agent would have not seen any of the needed repairs or structural issues to the house. These things have a significant impact to the buyer and many agents fail to realize they have two ends of each short sale transaction to work, not just the buyer, but the bank too!

If you were to ask a room full of real estate agents what the biggest factor is in the success of a short sale transaction, I would presume you would hear dozens of different answers. Answers ranging from how severe the homeowners hardship is, to how much money in retirement accounts the homeowner has, to whether or not the person that is on the loan actually ever lived in the house or was just a cosigner, or the most common…”who is the bank?” I would like to think one or two agents would get it right, but would be surprised to hear much more than that. While these factors do play a role in the short sale settlement, they are not THE most important factor.

The answer is simple, and it only contains three letters: BPO. The BPO is the hinge of the entire short sale. If you have a high BPO you are probably not going to close your short sale, unless that is of course, if you can get another BPO ordered and have enough time to go through that process. I have seen more short sales go to foreclosure because the BPO was not addressed properly then any other reason for short sale transactions not closing.

It takes approximately 10 minutes to comp a property(look up current home sales) and send that email to the agent who is processing the BPO, prior to them arriving at the property. It takes usually no more than an hour to drive to the property, meet the agent there, and then tell them where your offer is and the listing history,  shake their hand and walk away. Sometimes you may leave the property feeling like you are going to get a high-value, and sometimes it will be the opposite, where you will leave feeling energized and know that you are going to have a slam dunk deal when the bank finds out they are getting more money out of the transaction after their closing costs then the true value of the property.

Setting up properly and processing the BPO correctly as the listing agent will be the deciding factor in 90% of short sales. I don’t care what the hardship is or how much excess cash the seller has, or even how much assets they have or none of that. I care what the value is and what the net is to the lender. Since I do have control over these things, contrary to popular opinion, I close consistently the short sales I take on.

It’s not rocket science.. Influence what you have control over. This is no different than anything else in the real estate business or for that matter, life.

To inquire about referring Joshua Gayman a short sale in the Arizona area or for assistance with negotiating a short sale of your self or for a client, or if you are a homeowner and another state just looking for guidance and true counsel, give me a call – I’d love to chat!

-Joshua Gayman

The real estate industry is just like any other major industry segment. The people that work within the industry use specific phrases and words that are not too common in other types of work. Understanding some of the common jargon will help first time buyers feel a little more comfortable with the process.

Mortgage – This is a loan that provides the financing for the purchase of a home. Buyers will sign a promissory note that explains the terms of the loan. The interest rate, amount borrowed and number of payments required to repay the debt are all laid out in this document. A mortgage is different from a car loan or a credit card since a piece of property is used as collateral for the loan.

Appraisal – This is a report that explains the home's value. A professional appraiser will inspect the home and then compare it to other similar homes in the nearby area. Based on common criteria such as location, square footage, age and amenities the appraiser assigns a market value to the property. This is slightly different from a home inspection. A home inspection is designed to point out any areas in need of repair or replacement. An appraisal simply decides how much a home is worth as it currently stands.

Contingency – These are requirements spelled out in the real estate contract that must be completed or met in order for the sale to go through.

For instance, most contracts will have a contingency concerning the appraisal. If the home is not worth the sales price then the buyer may be able to get out of the contract.

Escrow – This refers to the funds, assets or securities being held by a third party separate from the buyer and seller. The buyer will place funds in escrow as proof that they wish to go forward with the sale. Once the seller has met the conditions of the contract the funds will be released.

Disclosures – The buyer must be informed of various details by the seller prior to the purchase. Each area will have slightly different requirements for the disclosures in their location. An example would be the location of a home in a known flood zone. This would affect the homeowner's insurance and could affect the buyer's ability to pay.

Closing – This is the last phase of the property purchase. All parties involved in the transaction will meet at either an attorney's office or an escrow agent's office (title company). The seller, buyer, and any attorney will typically attend the closing. At the closing the seller will receive funds for the transaction and the buyer will sign the necessary documents for the loan. The deed will be transferred from seller to buyer. Finally, the closing costs will be paid based on the agreed terms in the contract.