The Appraisal Process

Part 8. The Appraisal Process
Appraisal involves your lender verifying the value of the property you want to purchase. Appraisals are an estimate of the value performed by a Certified Real Estate Appraiser (CREA) who is licensed by the state to do this. The appraiser will look at your property inside and out. He will examine sales records for nearby comparable properties over the last 6 months ("comps"). Photographs will be taken and eventually a full report will be prepared and forwarded to the lender. For a residential property, the usual cost for this service is between $250 and $400. In some cases the lender may also wish to have a surveyor examine and certify the property's boundaries.

Sometimes problems come up: what if the property appraises for less than the price you have agreed to pay? Then the seller will have to lower their price, or you will have to pay more cash at down payment, because the lender is not going to lend more than a certain percentage of the value.
Title search/abstract and title insurance have been covered by me in previous articles, so here I will just briefly reiterate that the purpose of researching a property's title is to ensure that the lender is not going to lend money to you against a property that may already have prior encumbrances such as unpaid taxes, liens, zoning issues, lawsuits, etc. The title company will research the property title and certify it free of problems and then issue a title insurance policy. Just remember that title insurance does not cover future events, like life or auto insurance. It covers past events!

Flood certification is always required to insure the lender that your area is not in a flood-prone area. Flooding is usually not covered by your homeowners hazard insurance policy, so if you are in an area likely to be flooded, experience hurricanes, etc., then you will be required to purchase flood insurance.
While an appraisal will certainly be required, you may want to protect yourself by having an independent home inspection performed. Especially if you have no experience in the building trades! Some lenders and states actually require this to be done. The inspector will look at the home's foundation and roof and systems such as plumbing, electricity, heating and air-conditioning. If there are serious defects, bring these to the seller's attention as needing repaired prior to sale, or negotiate the selling price down in compensation. Get repair estimates in writing to strengthen your position when discussing this with the seller. A professional home inspector will probably charge from $200 to $400 or more for very large or complex homes.
After the appraisal has been done you and the lender will have a definitive idea of the property's value and now you can start shopping for homeowners/hazard insurance. You will be required at closing to show that this coverage has been purchased. Do not leave this item in the lender's hands to do for you because policy costs can vary widely. Shop around and be sure to ask about discounts for alarm systems, deadbolts, hurricane shutters, impact glass windows, etc. I have a separate article about purchasing homeowners insurance so I will nor cover this extensively herein, except to say that you can usually choose a "Replacement Value" policy for older homes full of furniture, appliances, electronics, etc., or choose a "Cash Value" policy which accounts for depreciation of contents over time. An old computer would be seen to have no remaining value and would not be replaced, for instance. Cash value polices are cheaper.

Unforeseen problems: As the lender's underwriters process your loan, things can come up. Condominiums, for example, can be a problem. In a condo purchase you are only purchasing the interior space. The outside of the building belongs to the association as a whole. With a townhouse you may also have garage space and a small front and/or back yard area that is your own private property. The value of this space you will own can be affected by what is going on in the condominium as a whole. The lender will usually have you take a questionnaire to the condominium association to be filled out. They will not want, for instance, to see that more than half the units are rented versus being owned. Renters tend not to care for their units and thus bring down property values for everyone else. Lenders will also want assurance that the association's management is competent, has an adequate maintenance budget, carries adequate insurance, etc. What is a storm blows off the roof or a fire 2 units down engulfs your unit?

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