There are two types of Boston real estate appraisal reports; FNMA or lender reports and market value or non-lender reports. For this article I will focus on the 7 most common issues and errors with market value appraisals. All errors are violation of the requirements set forth in an ever-changing set of quality control standards called the Uniform Standards of Professional Appraisal Practice (USPAP) to which all appraisers are bound.
Why is the home appraisal process so important in 2021?
The lender wants proof that the amount of the Boston real estate loan does not exceed the value of the home, or they end up taking on more risk in the event you default on your loan and go into bankruptcy. In that instance, the lender might not be able to sell the home for the same amount of money it loaned out and could lose money.
The Boston downtown home appraisal process is important to the seller because it tells them how much their home is worth (the fair market value of their property) and if they priced their home correctly. If they priced their home too low, they may not recover all the equity they have acquired while owning the property, essentially leaving money on the table. If the seller prices the house too high, they’ll likely have to renegotiate with the buyer to either drop their price to the appraised value or see if the Boston downtown condo buyer is willing to pay the extra cost out of pocket. Learn more about how to determine your home’s value.
An appraisal is important to the buyer because it provides proof that the property has been priced fairly, and hopefully appraises for at least the offer price they submitted to the seller. If the home appraisal comes in lower than their offer, the homebuyer will have to renegotiate with the sellers or possibly pay more out of pocket since the lender won’t cover the full amount.
- Using the wrong appraisal form
- Missing highest and best use analysis
- Excluding an approach to value with no explanation
- No reconciliation between various value approaches
- Lacking time adjustments
- Incorrect date of value
- Factual errors
Sometimes I see forms that were designed by FNMA for use with federally insured loans being used for divorce, probate, pre-listing, tax or other non-lending appraisals. So how does this cause a problem? These lending forms have pre-printed scopes of work, certifications and intended uses and intended users that are not appropriate for non-lender assignments.
Highest and best use is always that use which would produce the highest value for a property, regardless of its actual current use. It is necessary for the appraiser to develop an opinion of the properties highest and best use and then to report a summary of the analysis within the appraisal report.
There are three approaches to value; the cost approach, the income approach and the sales comparison approach. When an appraiser uses more than one approach usually they won’t lead to exactly the same value. So how does an appraiser arrive at one final opinion of value? the process is called the reconciliation between value approaches.
An appraiser does not have to develop all three of the approaches to value as long as the resulting conclusion is not compromised and can be relied upon for its intended use. However, the appraiser is required to explain why any of the three approaches was excluded.
Lacking time adjustments
When the real estate market has increased (or decreased) since the time a comparable was sold a date of sale adjustment will help to bring the old comp up to date with the current market. The lack of an adjustment in this case is likely to affect the final valuation.
Incorrect date of value
Each appraisal has an effective date of value. It can be current, retroactive (past) or prospective (future). I primarily see this error with tax abatement appraisals. When homes are assessed for 2021 taxes the values were based on the fair market value of the home as of January 1st 2021. In that case the appraiser must complete a retrospective appraisal using only sales that closed before January 1st 2021, the effective date of value.
Most appraisals tend to rely on the sales comparison approach to value. This means that fact checking comparable sales is perhaps the most important parts of the appraisal process. The MLS data is entered by individual brokers and not policed by MLS or anybody else. As a result it is full of errors. As the saying goes “garbage in, garbage out” meaning that the use of inaccurate data will lead an appraiser to arrive at an inaccurate valuation.
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