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Buying a home? Review that property appraisal carefully

Gregory A. Lang

A lender will not approve a mortgage loan without a property appraisal (that the purchaser generally pays for). Lenders like to say that the appraisal protects both lender and homebuyer: The former wants to make sure that it will recoup its investment if the buyer defaults, while the latter wants to know that he will recoup the investment when he sells.

How many buyers really know what the appraiser is looking for, though? The lender is used to looking at these reports, but buyers, especially first-time buyers, may focus on that final dollar amount without understanding how the appraiser came up with that number and what it really means.

The housing bust and mortgage servicing debacle called the appraisal process into question, especially the relationship between lender and appraiser. With the passage of the Dodd-Frank Wall Street Reform and Protection Act of 2010, Congress made sure that state and federal regulators would have more control over appraisers and that lenders and appraisers would be less apt to take advantage of buyers.

Critics, however, say the new regulations resulted in an even more complicated process, something that may protect buyers but that buyers cannot understand.

The appraisal: A home's value is determined based on a number of factors. First, the appraiser looks at sale prices of comparable properties in the area as well as current trends for the market. The home's square footage, number of bedrooms and bathrooms, overall floor plan and amenities are also factored in. Most importantly, the appraiser must complete a visual inspection of both the interior and exterior of the home; if the home needs repairs or has not been properly maintained, the appraised value will go down.

Effects of regulation: Critics have noted at least one unintended consequence of Dodd-Frank. In order to maintain complete separation, lenders may use appraisers from different parts of the country. An appraiser who is not familiar with the area may look at the wrong comps and may not know the subtleties of a particular market. For example, in Minneapolis, being two blocks instead of one block from a lake could mean a value difference of thousands of dollars.

Another catch: Because appraisers now must meet strict licensure requirements, an aspiring appraiser will have to put a good deal of time and effort into becoming certified. The upshot for homebuyers could be higher appraisal costs over time or overworked appraisers who cut corners to save time.

Buyers beware: The increased scrutiny and compliance requirements may cause some confusion for buyers. Appraisers are not inspectors. The appraiser is interested in the value of the home. The inspector is interested in the safety and habitability of the home, especially with respect to local building codes.

Remember, though, that buyers have recourse. First, federal law requires that lenders and appraisal companies share the report with the buyer upon written request. And, if an appraisal undermines the transaction or does not make sense, the buyer can get a second (or third) opinion.

Source: Minnesota Market Watch, "10 things real estate appraisers won’t tell you," Daniel Goldstein, Dec. 28, 2015

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