What you think your home is worth may not be what your lender thinks your home is worth. Rather, what the appraiser tells your lender what it’s worth. The final word comes straight from the appraisal, not the lender. The lender simply reports to you what the appraiser determined. Here’s how to interpret how the appraiser arrived at the value that it did. You can get the final appraised value but it’s also important to know how the final value turned out the way it did.
First, there are different types of appraisals. There’s a desk appraisal, a drive-by and a full appraisal. The determination of which appraisal your lender uses is a result of what’s required on the electronic “findings” various automated underwriting systems say. A desk appraisal is one where the appraiser goes online and looks at public records showing recent sales of similar properties in the area. A desk appraisal is typically the result of someone with a larger amount of equity, say at least 20-30% down and a stronger financial profile.
A ‘drive-by’ appraisal is just that…the appraiser first performs some online research and then literally drives by the property to make a visual inspection from the street of both the property as well as the neighborhood. Sometimes there are pictures taken and sometimes there are not. Again, what’s needed in the appraisal is determined by the automated underwriting findings. A full-blown appraisal includes online research, a visual inspection and literal inspection of the property, typically with photos of both the exterior and interior of the home. A full appraisal is usually the result of both the type of loan being taken out as well as the amount of the initial down payment or equity position going into the loan.
Appraisals will compare the subject property with other similar type properties in the area. The sales prices of these ‘comparable’ homes are reviewed and then compared with the subject. Most loan programs ask for at least three such sales in the area within a six to twelve month period along with an active listing. One of the pieces of data the appraiser looks for is the ‘Days on Market’ number. This is literally how many days it took for a recent sale to commence from the initial listing to final sale. A 60 day DOM indicates a decent real estate market while a 30 day DOM would indicate a very hot, sometimes overheated real estate market. Longer DOMs would suggest a relatively sluggish market.
Finally, the appraiser will then make certain adjustments to the comparable sales. One ‘comp’ might have an outdated kitchen compared to the subject property. Another property might have a pool in a neighborhood where pools are more prevalent whereas the subject does not. Lot size and the number of bedrooms are also adjustments. The age of the structure is also reviewed. All of this information is spelled out clearly in your appraisal. You just have to look for and understand it. All of these data bits are used to arrive at the number your lender uses when underwriting your loan file.