Property Appraisal

 

The Bank Qualifying The Property

As I mentioned in Things You Need To Know When Buying A Home the Bank qualifies the borrower AND the property. Let's talk about qualifying the property, for the most part it means an appraisal. When you are borrowing money the bank will require it. If paying cash it is not necessary and sometimes a good set of comparable sales can satisfy the need for an appraisal. How an appraiser does an appraisal.

There are three approaches to appraising a property.

1.    The cost depreciation approach. First the appraiser will establish the value of the land and then what it would cost to build the home today and then minus for depreciation of the building.

2.    The income approach. Take the income of the property minus out expenses and determine a net income and then divide it by the average capitalization rate of the area (look for a post on CAP Rate in the future)

3.    The comparable sales approach. This is the most common used in residential real estate sales. An appraiser will take the recent sales in the area that closest match the subject property and make adjustments to the comps to determine an estimate of value. They are really not trying to establish an exact value such as $218,953.28. They are really trying to determine if the property will work as collateral for the loan. They also do a basic inspection (NOT to be used instead of a professional home inspection). They will indicate the overall appearance and note if there are utilities and the property appears to be in a normal condition for the area.

An appraiser can require that certain items be certified by a licensed professional such as a roof if the roof looks suspect or evidence of electrical malfunctions, then they can ask for an electrical certification.

The next thing that the bank looks for in a property is the title work. They want to know if there are any deed restrictions that could affect the value. In residential there are not too many things that will have a real affect.

A good example of a deed restriction. The old Villa Theater on Highland Drive. Well it was bought by Harmon's grocery store and they put  a restriction that if anyone were to buy the land they could not build a grocery store to protect their interest of their store a couple blocks away.So once the borrower and the property finish being qualified then the loan can close and you get the property.