A great majority don’t understand how the value of a home is determined.
One misconception homeowners generally have is that the appraised value is determined after the appraiser has completed their physical property inspection. However, the appraiser actually already has a good idea of the property’s value by the time they have scheduled an appointment to stop by the property.
I have had many people ask about cleaning up for the appraiser. While an organized home might be easier for the appraiser to notice improvements, its not really going to impact the value.
The Key Components Of An Appraisal
Number of bedrooms, bathrooms, Proximity to highways and schools and , view, lot size, public vs private water and sewer, zoning, external factors, landscaping features
Style of home, quality of construction, finish work, appliances and defining features
Age, upgrades, added features, renovations, improvements since last purchase
Health & Safety:
Structural integrity, code compliance, proper functioning utilities
Square footage of above below grade areas
Is the property conforming to the neighborhood, is it overbuilt or underbuilt for the area
Number of Carports, Attached or Detached garage
Curb appeal, lot size, & conforming to the neighborhood are obvious to the appraiser when they drive down into the neighborhood pull up in front of your home.
When entering your home, they are going to look at the overall design, condition, finish work, upgrades, any defining features, functional utility, square footage, number of rooms and health and safety items.
Have smoke detectors in working condition.
Since the appraisal provides half the weight in any credit decision involving the security of real estate, the appraisal should be done by a qualified, licensed appraiser whom is familiar with your neighborhood, and the type of home you are buying, selling or refinancing.
Here is a copy of the blank 1040 URAR form that is used by every appraiser in the country.
Related Update on HVCC:
Appraisers are randomly chosen from a pool of qualified appraisers that do business with American Midwest Mortgage Corp. Neither you nor I, nor anyone in our company has the flexibility of deciding which appraiser will inspect your home. This recent change was brought on with the Home Valuation Code of Conduct HVCC, and is effective with loans originated after May 1, 2009.
Related Appraisal Articles:
It’s obviously easier to picture the process of estimating value on an existing property in a neighborhood that has a history of home sales, but the task of determining the value on new construction projects does pose some challenges.
Appraisals on homes that haven’t been built yet generally require the contractor and home buyer to supply more documentation in order to get a more accurate estimate of the property’s value.
The main purpose of this article is to give an overview of the appraisal process for a home buyer that is building a home vs purchasing standing inventory.
For some, building a new home can be both exciting and overwhelming. Watching a project transform from idea to completed home with a front yard, white picket fence and a custom red front door is a rewarding experience.
Even if you are paying attention to all of the information from the beginning, there are still several details that have a tendency to catch even experienced builders off guard.
Game time decisions have to be made as cabinets and corners line up differently than the initial drawing could show, flooring doesn’t match the wall colors, or the sun hits a window the wrong way at dinner time.
While the last minute updates may cost you more money, they might also have an impact on the value of the property.
What Does An Appraiser Need For New Construction?
The plans or construction drawings are usually done by your builder or architect. It lays out the floor plan of your home, sizes of rooms and square footage of your home.
They should include a floor plan layout, front elevation, real elevation & side elevations, mechanical and electrical details.
Specifications / Descriptions Of Material –
A “Spec” sheet has the type of construction materials you will be using. For example, whether your home will be built with standard 2 x 4′s or 2 x 6′s.
It also contains the type of insulation, roofing and exterior products that will be used in the construction, as well as floors, counter tops and appliances for the inside dressing.
Cost Breakdown –
The document that breaks down all of the costs associated with the construction, including land, building materials and labor.
A lender can generally provide you with blank forms for the spec and cost breakdown if your builder does not have them.
Plot Plan –
Shows where your home will sit on the site, any accessory buildings, well and septic locations, if applicable, and the finish grade elevations and direction of the drainage.
Once the lender has obtained the above information from you, they will forward a copy to the appraiser. It is the appraiser’s job to determine what the future value of the home will be once it is completed, per your plans, specs & cost breakdown.
Even though an appraiser will use the cost approach in the appraisal report, it is not the value that will ultimately be used by the lender. The market approach to value, which uses existing sales of homes similar in size, quality, construction and location is the most common approach that lenders want for new construction.
The more complete and detailed your plans, specifications and cost breakdowns are, the more accurate your appraisal will be.
Once your home is complete, the appraiser will be asked to go out and inspect the home. They will report back to the lender what they have found, whether your home was completed according to the plans and specifications originally given, and if the value is the same as originally given in the report.
Sometimes the value has to be adjusted due to changes that were made during construction which may have affected the value of the home.
Frequently Asked Questions:
Q: Where can I obtain a set of plans?
Most builders have basic plans they work from, and make modifications specific to their clients’ needs. When building a custom home, it’s generally a good idea to work with a reputable architect.
Q: Is there a form I can use for the list of specifications?
Yes, HUD has a generic form that most lenders use and it will give the appraiser most of the details they need to complete your appraisal. Anything not listed on this form can be added by you separately on an additional sheet.
Q: Can I use my contract with the builder for the cost breakdown sheet?
In most cases, the lender will accept the contract, however, they will want the builder to provide a cost breakdown to ensure that the builder has accurately bid your home.
Related Appraisal Articles:
Timing the market for the best possible opportunity to lock a mortgage rate on a new loan is certainly a challenge, even for the professionals.
While there are several generic interest rate trend indicators online, the difference between what’s advertised and actually attainable can be influenced at any given moment by at least 50 different variables in the market, and with each individual loan approval scenario.
Outside of the borrower’s control, the mortgage rate marketplace is a dynamic, volatile, living and breathing animal.
Lenders set their rates every day based on the market activities of Mortgage Bonds, also known as Mortgage Backed Securities (MBS).
On volatile days, a lender might adjust their pricing anywhere from one to five times, depending on what’s taking place in the market.
Factors That Influence Mortgage Backed Securities:
1. Inflation –
According to Wikipedia:
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, annual inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.
A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.
As inflation increases, or as the expectation of future inflation increases, rates will push higher.
The contrary is also true; when inflation declines, rates decrease.
Famous economist Milton Friedman said “inflation is always and everywhere a monetary phenomenon.”
Public enemy #1 of all fixed income investments, inflation and the expectation of future inflation is a key indicator of how much investors will pay for mortgage bonds, and therefore how high or low current mortgage rates will be in the open market.
When an investor buys a bond, they receive a fixed percentage of the value of that bond as ‘coupon’ payments.
With MBS, an investor might buy a bond that pays 5%, which means for every $100 invested, they receive $5 in interest per year, usually divided up over 12 payments. For the buyer of a mortgage bond, that $5 coupon payment is worth more in the first year, because it can buy more today than it can in the future, due to inflation. When the markets read signals of increasing inflation, it tells bond investors that their future coupon payments will be less valuable by the time they receive them. So basically, this causes investors to demand higher rates for any new bonds they invest in.
As part of its 2008-2010 stimulus effort, the NY Fed spent almost all of its $1.25 trillion budget buying mortgage bonds. Many believe this strategy kept mortgage rates lower over a 15 month period.
The lending environment significantly changed between 2008, when the Fed began its mortgage bond purchasing program, and early 2010 when the market was left to survive on its own.
When the MBS purchase program was announced in November 2008, mortgage bonds reacted immediately and dramatically.
But at that time, there weren’t any investors willing to take a risk in buying mortgage bonds. The meltdown in the mortgage market and world economies lead many investors to shy away from the risks associated with MBS, which is why the Fed had to step in and basically assume the role as the sole investor of mortgage bonds.
However, loan underwriting guidelines drastically tightened up by 2010, which may create a little more confidence in the mortgage bond market.
3. Unemployment –
Decreasing unemployment will suggest that mortgage rates will rise.
Typically, higher unemployment levels tend to result in lower inflation, which makes bonds safer and permits higher bond prices. For example, the unemployment rate in March 2010 was at 9.7%, just slightly below its highest mark in the current economic cycle.
Every month, the BLS releases the Nonfarm Payrolls (aka The Jobs Report) which tallies the number of jobs created or lost in the preceding month.
The previous report indicated a loss of 36,000 jobs. Not necessarily a number that will move the needle on the unemployment gauge, but some economists suggest we need about 125,000 new jobs each month just to keep pace with population growth. So that negative 36,000 is more like negative 161,000 jobs short of an improving unemployment picture.
One flaw to pay attention to with unemployment rates is that the method of surveying fails to capture part-time workers who desire full-time employment, discouraged job seekers who have taken time off from searching and other would-be workers who are not considered to be part of the labor force.
4. GDP –
GDP, or Gross Domestic Product, is a measure of the economic output of the country.
High levels of GDP growth may signal increasing mortgage rates.
The Federal Reserve slashes short-term rates when GDP slows to encourage people and businesses to borrow money. When GDP gets too hot, there might be too much money floating around, and inflation usually picks up. So high GDP ratings warn the market that interest rates will rise to keep inflation concerns in balance.
Spiking GDP with flat/increasing unemployment begs some questions.
There are two major indicators that help provide more context:
1. Increases to worker productivity – employers are getting more work out of their current employees to avoid hiring new ones
2. Surges in inventory cycles – when the economy first started contracting, manufacturing slowed down to cut costs, and sales were made by liquidating inventory.
This is like a roller coaster cresting a hill, where one part of the train is going up, the other down. Eventually, the other side catches up, inventories are rebuilt by manufacturing more than is being sold. Both surges can throw off periodic reports of GDP.
5. Geopolitics –
Unforeseen events related to global conflict, political events, and natural disasters will tend to lower mortgage rates.
Anything that the markets didn’t see coming causes uncertainty and panic. And when markets panic, money generally moves to stable investments (bonds), which brings rates lower. Mortgage bonds pick up some of that momentum.
Acts of terrorism, tsunamis, earthquakes, and recent sovereign debt crises (Dubai, Greece) are all examples.
Putting It All Together:
Economic data is reported daily, and some items have a greater tendency to be of concern to the market for mortgage rates. If you are involved in a real estate financing transaction, it’s helpful to be aware of these influences, or to rely upon the advice of a mortgage professional who is already dialed in.
Related Mortgage Rate Articles:
When shopping for a new mortgage loan, you may notice an Annual Percentage Rate (APR) advertised next to the note rate. The inclusion of an APR is actually mandated by federal law in order to help give borrowers a standard rule of measurement for comparing the total cost of each loan.
The APR is designed to represent the “true cost of a loan” to the borrower, expressed in the form of a yearly rate to prevent lenders from “hiding” fees and up-front costs behind low advertised rates.
According to Wikipedia:
The terms annual percentage of rate (APR) and nominal APR describe the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a loan, mortgage, credit card, etc. It is a finance charge expressed as an annual rate.
- The nominal APR is the simple-interest rate (for a year).
- The effective APR is the fee+compound interest rate (calculated across a year)
The nominal APR is calculated as: the rate, for a payment period, multiplied by the number of payment periods in a year.
However, the exact legal definition of “effective APR” can vary greatly, depending on the type of fees included, such as participation fees, loan origination fees, monthly service charges, or late fees.
The effective APR has been called the “mathematically-true” interest rate for each year. The computation for the effective APR, as the fee+compound interest rate, can also vary depending on whether the up-front fees, such as origination or participation fees, are added to the entire amount, or treated as a short-term loan due in the first payment.
What Fees Are Typically Included In APR?
- Origination Fee
- Discount Points
- Buydown funds from the buyer
- Prepaid Mortgage Interest
- Mortgage Insurance Premiums
- Other lender fees (application, underwriting, tax service, etc.)
Since origination fees, discount points, mortgage insurance premiums, prepaid interest and other items may also be required to obtain a mortgage, they need to be included when calculating the APR. Fees such as title insurance, appraisal and credit are not included in calculating the APR.
The APR can vary between lenders and programs due to the fact that the federal law does not clearly define specifically what goes into the calculation.
What Does APR Not Disclose?
- APR on a loan tied to a market index, like a 5/1 ARM, assumes the market index will never change. But Adjustable Rate Mortgages always change over the course of 30 years.
- Balloon Payments
- Prepayment Penalties
- Length of Rate Lock
- Comparison between loan terms – EX: A 15-year term will have a higher APR simply because the fees are amortized over a shorter period of time compared to a similar rate / cost scenario on a 30-year term.
APR Comparing Examples:
- Bank (A) is offering a 30 year fixed mortgage at 8.00% APR
- Bank (B) is offering a 30 year fixed mortgage at 7.00% Note Rate
Easy choice, right?
While Bank (B) is advertising the lowest Note Rate, they’re not factoring in the origination points, underwriting / processing fees and prepaid mortgage interest (first month’s mortgage payment), which could essentially make the APR much higher than the one Bank (A) is advertising. So Bank (A) may show a higher rate due to the APR, but they could actually be charging a lot less in total fees than Bank (B).
Before lenders and mortgage brokers were required to state the APR, it was more difficult to find the truth about the total borrowing costs of one loan vs another. When comparing mortgage rates, it’s a good idea to ask your lender which fees are included in their APR quote.
Related Mortgage Rate Articles:
During periods of economic growth, when home values are typically just going up, most homeowners do not question appraisals much.
And in times of turmoil when property values are declining, home sellers and even listing agents quite often question and pick apart appraisals.
However, the actual appraisal process changed very little over the course of the housing boom and bust cycle American homeowners witnessed between 2001 – 2009.
Since the topic of home values seems to be a hot discussion, let’s address the top five appraisal myths.
Appraisal Myths / Questions:
“I just put $15K into the property, why isn’t the appraised value higher? ”
Not all improvements to the property are equal in producing added value. A local real estate investment club used to tout buying a run-down, roach-infested property cheap, and after de-bugging and adding a fresh coat of paint and carpet – *presto* – the house would appraise like the new homes up the street.
Even with cosmetic repairs, the property may still be much more comparable to the foreclosure next door than the new home a block away. Look first to the “guts” of the property, the electrical, heating & air, etc. If they are updated, then the number of beds/baths and square footage are the next biggest weight, followed by a genuine updating of cosmetic improvements.
“But my home really compares to some of the properties in the neighborhood across the way…”
For example, if a homeowner preparing a house to sell adds $150,000 in upgrades to the kitchen, built-in cabinets and flooring, it may help the property show better in an open house and in magazine advertisements.
However, the seller might still be stuck with a $450,000 appraised value like the three comparable properties on their street vs the $750,000 they were hoping to list it for.
Even though the neighborhood across the main street had similar homes in the higher price range, especially after the seller’s extensive upgrades, appraisers will always use homes from the actual neighborhood to establish value first.
So basically, the seller simply over-improved their home for their specific neighborhood.
“This appraiser included foreclosures as comps – that’s not fair”
It isn’t fair, especially if your home is well-kept and in great condition compared to the run-down foreclosures in the neighborhood.
Unfortunately, if every recent sale, or nearly all sales, are foreclosures at reduced prices, then the appraiser is forced to use the recent sales and trends as comparable values. High foreclosure rates generally depress values and show a trend of lowering prices.
And abnormally high foreclosure rates generally depress values and show a trend of constantly lowering value.
“But I just put in a $50K pool, doesn’t that count for anything?”
Pools and professional landscaping rarely see a dollar for dollar value add on a property. The value is going to mainly be based on comparable sales in a neighborhood.
“How can similar homes in the same neighborhood appraiser for such different values?”
This is a typical question for older neighborhoods where similar models may have drastic price differences.
Additional rooms and square footage can be the main reason for one property appraising higher than another.
Keep in mind, just because the market trend in a particular neighborhood is improving over time, the individual properties need to meet the same conditional improvements as the others in order rise with the tide.
An appraiser is looking at several things when determining the value of a property: improvements, size and square footage of the living area, neighborhood amenities, location and the market trends around the area.