I have to admit lately it has been quite difficult in the Indiana market to explain to people why their home values have dropped. "But my home was appraised last year at $200,000 and now it's appraising for $180,000, I don't understand". Well, I'm going to give a little bit of a crash corse in the information that I know about appraisals and I hope that this helps people in the future!
When you are going to buy a home or even refinance, your loan to values are based solely on the value of your home. When I was a mortgage underwriter we had to go with, on a purchase, whichever was lower of the purchase price or the appraised value of a home. But what is it that lenders and appraisers look at when appraising a person's home?
First, your home in general. What type is it? Two story, one story, one and a half? Does it have a finished basement, how many square feet etc. All these play a factor into what your home value starts with. The next thing is the sales of similar homes in the area of your home.
Now, for the lender I worked for, if your home was suburban, which most are, the comparable homes that they would look at had to be sold in the past 6 months. Some lenders go out a year, but let's work with 6 months because I believe this is what many lenders will start going to. Plus, 6 months is closer to what the true values of a home is. If your home is near a decent amount of homes that are worth $200,000, BUT the homes in the area have gone into foreclosure and sold for $150,000, then this is most definately going to drop the value of your home! I know, it sucks! But unfortunately, homes are just like the bond market, they can rise and fall with whatever is around it. The comparable homes in the area will be compared to your home and have a lowest value home and a highest value home and hopefully a home that is about the same value as your personal home. That is how they determine the values.
Adjustments can be made for certain things in a home. For instance, if you are comparing an 11 room home versus an eight room home, then there would be an adjustment to make a few more additional rooms for the eight room home. You want to make sure that your home is SIMILAR to homes around it, especially when building a new home; this will make for a stronger appraisal. If you are building a home and the homes in the area are being sold for $200,000 but you want to build a home in the $450,000 range, look elsewhere where there are homes of that value. It is often difficult for lenders to approve the "cream of the crop" homes in suburban areas.
Now, my advise to buying homes or trying to sell; just check out the other homes in your area. What are they selling for? Are they similar in size, build, and year? This is often times a good indicator as to what the value of your home may come to. This can help you decide whether it is better to stick around for another year or so, or if you have to sell, what kind of things you can expect out of your home.
I always suggest talking to a qualified realtor in your area to help with all the "behind the scenes" situations. They have a better idea of what market prices are, how to work with buyers, and just all around make sure that everything goes smoothly for you. I truly hope that this advice is helpful to some of you out there and I wish all of you the best of luck with your future homes!
How Ironic! This came from one of our lenders today. Please feel free to take a look at what they had to say!
- Comps should have similar # of bedrooms i.e., a 2 bedroom subject should have 2 bedroom comps
- Log cabins and unique properties should have at least 1 similar comp.
- Subjects with acreage should have similar comps.
- Comps should be within the following distance guidelines. While this is not etched in stone, these are the prescribed standards. Comps outside of this distance may still be acceptable with underwriting approval. Also note, several AVM reports are pulled to make sure comps in neighborhood have not been passed over even if they are located within the prescribed area.
- Urban comps should be within 1 mile of subject.
- Suburban comps should be within 5 miles of subject
- Rural comps should be within 10 miles of subject.
- Have your appraiser search for 2 additional comps up front as they may be needed. This will also help expedite the process.
- Finally and most importantly, we need 2 comps that have sold within 6 months, and this should be relayed to your appraiser up front. He/she should make every effort to find these comps as close to the subject property as possible, as our reports will indicate if they were passed over.
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