Consumers are often baffled by the home appraisal process. They may feel theirhome is worth a certain dollar amount, and therefore, the appraised value doesn'tmake sense to them. It is important to know that appraisal guidelines are dictated bythe lenders. In many states, the lenders must disclose the purpose of the appraisal,as each situation carries its own set of rules.

In essence, lender guidelines force appraisers to put a fair market value on a homebased upon comparable sales in the area where the home is located, as the homemust be bracketed according to size and value. For example, there is no set amountassociated with a great view, pool, spa, bathroom upgrades, etc. If a homeownerinstalls a custom pool that cost them $30,000, and the local marketplace supportsthe value of a pool at $15,000, that item will be bracketed as [$15,000] on theappraisal.

Upgrades can usually be expressed at full value in newer homes since they requiredinvesting additional money onto the cost of building the home. On the other hand,the amount invested in upgrading or remodeling an older home is rarely reflected infull in the final appraisal. The reason is the home had value in its original condition, and again, the value of the upgradesmust be supported by comparable examples within the same marketplace..

These comparisons must be drawn from current market activity within the last six months. Some lenders may want to lookat both closed and pending sales to see if there is any room for negotiation. This is a safeguard to prevent appraisers fromover-valuing the home in question. It is further stated in the guidelines that appraisers can only place a value on homesthat have closed escrow. However, when property values rapidly increase within a marketplace, appraisers are generallypermitted to make concessions and put more weight on the evidence provided by comparisons to pending sales andlistings. This allows for a "real time" appraisal.

Although there is no formal standard to speak of, most lenders give the appraiser a 5% margin of error. If the file isreviewed and the appraiser is off by 8%, there is a good chance the value will be cut by the full 8%. It is in the best interestof both the appraiser and the homeowner not to push the value up higher than the market will support, otherwise theproperty evaluation may be exposed to a strict appraisal review.

As a loan executive, I make it a point to follow lender guidelines at all times, and work within the systems they provide.This promotes a good relationship with the lender, and smooth closure for my borrowers. As always, you are welcome tocontact me if you have any questions.

Call me directly for a free consultation.