If you’re selling or refinancing your home, your lender probably conditioned for an appraisal. This helps the underwriter determine whether the collateral (the house) has enough value to support the loan amount being offered.
Naturally, borrowers hope for a high appraised value. This lowers the prospective loan-to-value ratio and may result in faster approval and even a better interest rate. Sellers like to see a favorable value as well, to ensure that the lender can make a loan based on the agreed-upon purchase price.
Do you want to know how to prepare your house for an upcoming appraisal? It might help to first know the basics of the Uniform Residential Appraisal Report (URAR). The URAR is the standardized document that licensed residential appraisers use when determining a value for a subject property.
Subject Property – This section comes first on the URAR. The appraiser lists details of the subject property such as the address and recent sale date if any. The appraiser performs a visual inspection to verify that the subject property is in fact at the location named on the purchase agreement.
Contract – This section includes pertinent details from any purchase agreement in effect (if one exists).
Neighborhood – A description of the surrounding neighborhood and relevant statistics appear here.
Site – The site section discusses land, utilities, and easements/encroachments.
Improvements – Improvements refer to features of the subject property, such as flooring.
Sales Comparison Approach – The sales comparison approach is the most common method of valuation. It occupies a substantial section of the URAR. To complete the sales comparison approach, the appraiser finds and assesses comparable properties. Ideally, comparable properties include a mix of active, contingent, and sold properties that are geographically close to the subject.
The comparable properties, also called comparables, help the appraiser determine a value for the subject property. Each property and its features are rated as the same, inferior, or superior to the subject and the value is adjusted accordingly. Many items are assessed in this section. For example, a three-car garage would be rated as superior to a two-car garage.
Income Approach – This approach to value is useful in the appraisal of income-producing properties. Therefore, it is often required for investment loans.
Cost Approach – The cost approach assumes that a buyer would not pay more for an existing home than they would pay for the cost to construct the same home. Construction loans typically condition for this part of the URAR to be completed. FHA and VA loans may require a value estimate based on the cost approach (in addition to the sales comparison approach).
Planned Unit Development (PUD) Info – PUD’s often have features like recreational facilities and homeowner’s services that could affect the value of the subject property. If this is the case, the appraiser will make any relevant value adjustments.
Additional comments (if any) and the appraiser’s contact information are included near the end of the report.
The appraiser uses all of the information listed above when making a determination of value for the subject property (in this case, your home). This value is an opinion, but the lender will rely heavily on the figure when determining how much money they are willing to lend to a potential buyer.
Most commonly, an appraisal is ordered by a lender in conjunction with a mortgage loan. Purchase transactions as well as refinances usually require an appraisal, though sometimes exceptions are made. A homeowner might also contract an independent appraisal when shopping for a better homeowner’s insurance rate or when attempting to have private mortgage insurance (PMI) removed. Estate valuations and non-arms-length transactions (e.g., the sale of a home to a relative) may also necessitate an independent appraisal.
Many sellers ask, “How can I prepare my house for the appraisal?” The good news: most of the work is already done. The appraiser will give heavy consideration to location, square footage, and prices of recently sold properties in the area.
With respect to things you can control, it does make sense to present your home in its best light. A good rule of thumb is to prepare as though your home will be shown to a potential buyer. Make sure that each room is clean and uncluttered before the appraiser arrives. He or she will need to move through the home to take measurements and photos. A busy appraiser may have several homes to tour that day and will not have time to wait or declutter.
Know that appraisers look more at location, livability, and structural integrity than cosmetics. Keep your house tidy and in good working order and you should be ready to go when the appraiser arrives.
You may be wondering if the seller should be present for the appraisal. It is not required, though it helps to expedite things if the appraiser has questions. Typically, Realtors do not attend appraisals as they are not involved in this independent, third-party assessment of value.
Whether or not you plan to attend the appraisal, prepare a list of improvements you have done to the home. This helps the appraiser determine whether the value of the property has increased since the last sale. Also, you are welcome to present comparable properties that you know of, though the appraiser may or may not choose to consider them. It may be helpful to an appraiser to know about recently sold properties in the area that do not appear on the local multiple listing service (MLS). Typically, for sale by owner transactions (FSBO) are not listed on the MLS. Also, if you know that a home recently sold for below market value in your neighborhood as the result of a non-arms-length transaction, it is okay to inform the appraiser of this anomaly. An example of a non-arms-length transaction would be the sale of a home from a parent to their adult child.
Finally, provide your phone number and email address to the appraiser. He or she may have questions as they prepare the final report.