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My Mortgage Blog

Changes in mortgage rules for home buyers and insurers certainly have had an impact on the housing market, and those changes have impacted property appraisals as well.

Typically, conventional mortgages – up to 80% of the value of the property – are required to have a full appraisal. Now, an appraisal may also be required on insured mortgages – 80 to 95% loan-to-value.

So what determines the value of a property? From a lender's perspective, the market itself determines the value and that number must come from an independent third-party – the appraiser. An appraiser, who is specifically trained and has experience, will be asked to offer an impartial, written opinion of the property's value.

Realtors normally use a comparative market analysis (CMA) to evaluate a property's value based on local market data. Agents analyze listing and sales data for comparable properties in the area to recommend a price to list or to offer. However a CMA is not an appraisal. Although appraisers use the CMA approach, they use it in combination with other factors to determine the value of the property.

The major difference is that appraisals are done for a specific client – the lender. Because real estate is the major security for mortgages, the market value estimate needs to be as accurate as possible. Appraisers use "sold" properties information only and compare similar property types, in close proximity, that have sold within a relatively short perior of time – usually 90 days.

Not all residential properties are subject ot a traditional appraisal. If the property is in an established area with similar properties then sometimes the price can be validated electronically. This model of appraising property, called automated valuation model (AVM), has become quite popular in the last 10 years.

At the end of the day, an appraisal must reflect a property's realistic true market value and needs to be backed up with accurate data.

So why does an appraisal come in lower than expected?

With the introduction of bidding wars, where, in some areas, prices may be artificially inflated, appraisers are still tasked with coming up with a property’s fair market value. Rapidly changing markets can be very challenging for an appraiser to properly evaluate a home’s worth.

Appraisers will try to get to the purchase price when evaluating a property. However, sometimes the sale is a few weeks ahead of the market.  If prices are increasing, it may not show up in their analysis yet and the appraisal will reflect a lower value.

At the end of the day, the appraisal has to be a realistic evaluation of a property’s true market value and be backed up with data.