Real Estate Questions Answered Here
by Art Santellen, REALTOR®
Note: This is the 10th installment of a special series of
11 columns I'm writing to teach you everything you need to know about buying a
home and getting yourself ready to buy a home. This week, I'll tell you about
step #9 - The Home Appraisal.
Step #9 - The Home Appraisal
Many people have the idea that home appraisers work for the
buyer. Wrong. Home appraisers work for the buyer's lender.
It just so happens that (most of the time) it's the buyer who winds up
paying for the home appraisal. Remember,
your loan approval is based on two things:
First, your credit and financial ability to pay your house
payment needs to be determined.
Second, the property you want to buy must be worth the
purchase price you and the seller agreed upon. The only way a mortgage company
can determine step #2 is to have a licensed professional establish the market
value of the property you want to buy.
In other words, the mortgage company is going to get your home's value
appraised. Just like there are
three kinds of loans (VA, FHA, and conventional) there are also three kinds of
appraisals (VA, FHA, and conventional). Each type of appraisal has pros and
cons. In fact, besides the interest rate you're going to pay, some people will
decide on one type of loan over another simply based on the appraisal. Usually,
conventional loan appraisals are the easiest and government loan appraisals are
the most difficult.
An appraiser in the state of Colorado must attend certain
classes, pass a state test, and get licensed by the state of Colorado in order
practice in our state. It's not an easy or inexpensive line of work to get into.
Even after all this testing and licensing, an appraiser must attend even more
classes to get certified to become an appraiser for VA loans and still more
classes to become an appraiser certified to perform FHA loan appraisals. That's
because there are at least three different people who want the appraiser to look
in certain areas. For example, a conventional loan underwriter is primarily
interested in the market value of the property. The federal government, however,
seems to be just as interested in certain health and safety issues. Issues
involving lead-based paint the physical condition of heating, water, and
electrical systems. Why, I even had a VA appraiser insist that the seller fix a
tear in a sliding screed door before authorizing the sale of the home. Of
course, you, the buyer, want to know what the true market value of the home you
In spite of the thoroughness of FHA and VA appraisers, the
buyer should not depend on an appraiser to identify "physical conditions ,
which must be repaired prior to closing. That's the job of the home inspector.
Instead, the buyer should expect the market value of the home to equal or exceed
the agreed upon purchase price. The buyer should also ask their lender to
receive a personal copy of the appraisal report at closing.
Well, all this sounds like a "slam-dunk" . Not
really Problems do have a way of surfacing during an appraisal.
The next-to-the-worst problem is when the appraiser
identifies certain repairs that must be made prior to closing. Remember that the
state approved real estate forum allows you until a certain date to tell the
seller that you want certain repairs made or else you're walking. Remember also
that I recommended that you not get the house appraised until after the
inspection. So who fixes what after the inspection objection (to the physical
condition of the property) deadline? The answer: It's negotiable.
Sometimes (but not always) the mortgage company will allow
the buyer to fix something after closing. Usually, one and a half times the
mortgage company holds the expected cost of the repairs in escrow. When the
repairs are done, the mortgage lender will have the appraiser go back out to
re-inspect the repairs. This is done to make sure everything is done to the
appraiser's satisfaction. Remember that the appraiser is working for the
mortgage company, not you, and not the seller.
Sometimes, the seller will understand that the buyer cannot
purchase the property without the mortgage lender being satisfied with the
findings of the appraiser. So, the seller will fix whatever the appraiser says
need fixing. Remember that the seller doesn't have to do this.
More often, your Realtor will recommend that certain things
get fixed (based on his or her experience with previous appraisers) and identify
those things prior to the inspection objection deadline.
No doubt about it, the biggest problem to surface as a
result of the appraisal is when the appraised price is LESS than the agreed upon
purchase price. In other words, you and the seller agree to a purchase price of,
say, $100,000 but the appraiser says the market value of the property is only
The first thing that happens is that your mortgage lender
will tell you and your Realtor that they will not give you a loan for $100,000
where the collateral for the loan (the house you want to buy) is only worth
$95,000. At that point your Realtor tells you that you have three options: walk
away from the deal, make up the difference with cash as closing, or somehow
convince the seller to drop the price so it matches the appraisal. Well, I
suppose there's a fourth option: you and the seller can split the difference. In
our example that means that the seller drops the price down to $97,500 and you
come up with extra $2,500 cash at closing.
The seller also has a couple of options: they can tell you
to go fly a kite, they can tell you to come up with the difference in cash at
closing, they can lower the price to the appraised value, or they can split the
difference with you. Hey, the seller's options sound an awful lot like your
options. That's because the solution to this problem is, again, negotiable.
Just a footnote. Whenever the appraised value of the home
is greater than the agreed upon purchase price that also raises its own problem.
Most important, you don't ever, ever, NEVER tell the seller the appraised value
of the property. Since a real estate transaction is never fully over until it's
fully over, you don't want to encourage the seller to back out of the deal
because he/she foolishly sold their home for less than as fair market value.
Whew! Let's see you've been loan approved, the house passed
its inspection, and the appraisal is fine. So what's left? Only the most
important pail: the closing.
Well, all this brings me to the next step in the home
buying process: so, next week, I'll explain step #10 - The Closing.
NOTE: As you can see, I really do get questions from the public. To add your question to this list, please send them to me at the address listed below. Thanks.
The answers to these, and other fascinating real estate questions will be answered here, in Hispania News, next week.
When you're ready to buy or sell a home, see a REALTOR®
Art is a REALTOR® with Heritage Realtors in Colorado Springs.
If you have a real estate question you’d like answered, please send them to:
Art Santellen, care of Hispania News
PO Box 15116
Colorado Springs, CO 80935