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When you buy a home you’ll most likely need to complete two very important things; a Home Appraisal and a Home Inspection.
In combination the two reports provide a wealth of information so you can better understand the value and condition of your home. The appraisal report will compare the home you buying to other homes in the neighborhood that have recently sold and homes that are currently on the market.
The appraiser is independent of the transaction and that’s important because you want a non-biased opinion as to the current value of the home. The Home Inspection report is key to understanding the “health” of your home and things about your home you may not know about it. Here we’ll cover the Home Appraisal and in another post I’ll cover the Home Inspection.
What’s In An Appraisal Report?
An appraisal report covers hundreds of topics and key points about your home and how it compares to other homes in your neighborhood. A home appraisal in California is completed by a fully licensed and insured appraiser. Before we break down some of the important topics and key points of information lets cover some of the basics:
- The official name of an appraisal report is the “Uniform Residential Appraisal Report“
- Most appraisal reports are on a standard form like Fannie Mae’s 1004 (more on this below)
- All appraisal reports will have the appraisers company name, appraisers name and contact information
- An appraisal report is NOT an inspection report
- There are three ways to appraise a home – the Value Approach, the Cost Approach and the Income Approach
- For most residential mortgages the Value Approach will be used by the appraiser
Page One Of The Appraisal Report:
Now let’s get to the good stuff. It goes with out saying that the report will have your information including the property address of the home (aka Subject Property). Additional information on the first page includes Neighborhood Characteristics, Housing Trends, market Housing Price and Age range and Land Usage Percentage (in the area). All these items fall under the category of Neighborhood.
The next major category on the first page is Site. This category covers the dimensions your land in which the home was built on and what utilities are connected to the property. It also says if your home is in a FEMA Flood Zone or not.
After that the next category is Improvements. The term improvements refers to the improvement to the land (otherwise known as the building of your home) as well as upgrades to your home. In this category you have the General Description, Foundation, Exterior Description and Interior Description. In this category the appraiser can provide written information on the “additional features” of the property which include things like special energy efficient items. There is an area to describe the condition of the property and if there are any physical deficiencies with the property. Lastly, this section includes an area that states if the property conforms to the rest of the neighborhood. All that information is on the first page!
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Additional Pages In the Appraisal Report:
Most residential home appraisal reports are twenty to forty pages long (when you factor all the pages including the supporting documentation). I’m not going to cover al the pages but I will point out a few important ones.
- Comparable Sales – perhaps the most looked at page(s) since this is where the appraiser compares your home to homes in the neighborhood.
- Cost Approach – Most consumers do not look at this section but mortgage and insurance companies do. This is where the appraiser estimates the cost to rebuild your home and mortgage companies require you have enough homeowners insurance coverage to do this.
- Legalese – The bulk of the appraisal of report is made up of standard legalese language which defines the role of the appraisal and what the report covers and what it does not cover. Scope Of Work, Intended Use, Intended User, Definition of Market Value, Appraiser Certification and more.
- Comment Addendum – An interesting part of the appraisal report in which the appraiser can comment on your property. Here is where the appraiser will give a general description of the property, the quality of construction and if any “deferred maintenance” is needed.
What Is Deferred Maintenance?
When it comes to a home appraisal report Deferred Maintenance is when the appraiser notes in the appraisal report that the home needs certain repairs. Usually the appraiser provides a cost to complete the Deferred Maintenance. Mortgage lenders usually (not always) require any Deferred Maintenance items be taken care of before you close your loan.
Items That Might Be Deferred Maintenance:
- Incomplete bathroom
- Broken window
- Missing flooring
- Rotted wood
- Termite damage
The list goes on but the above gives you a good idea of what might be listed in appraisal report if there were some issues with the property.
Different Types Of Appraisal Reports:
We’ll list the main types of appraisal reports a homebuyer might encounter when he/she buys a home.
- 1004 – Single Family
- 1004C – Manufactured Home
- 1004D – Appraisal Update or Completion Report
- 1025 – Multi-Family
- 1007 – Rental market
- 1072 – Condominium
- 203k – FHA
There are lots of other reports (for example vacant land) but the above probably covers 95%+ all consumer mortgages. So if you were to buy a Single Family Home the appraiser would use form 1004. And lets say the appraiser included Deferred Maintenance items in the report. Once the items were fully repaired the appraiser would return to the property and complete a 1004D report for the lender.
Why Do I Need A Home Appraisal In California?
You need an appraisal because the report will help you and the lender understand the true market value of the property. An appraisal report can confirm if you’re paying a fair price for the property or too much for the property. If the appraised value is lower you then should renegotiate the selling price with the current owner to ensure you do not over pay for the property.
How Much Does Appraisal Cost?
A home appraisal in California costs between $475 and $525 for a Single Family or Condo report (some are higher). A property with multiple units, a rental or a large home will cost more. Typically if the value is over $1,000,000.00 the appraisal fee will be higher unless that value, or near that value, is normal for the area.
If you are buying a multi-unit rental property with over a million dollars you may end up spending $700 – $900 for an appraisal. And the appraisal fee is normally paid up front to the appraiser prior to the inspection.
The Best Appraisal Tip:
This applies to when you do your first refinance. Make sure your home is clean and ready to show at the time of inspection. Throw away trash, make beds, vacuum the carpets, clean the bathrooms and make the kitchen shine. Treat the appraisal inspection as if you are selling the home and highlight the features and benefits the home offers. A “successful” home appraisal in California is vey much dependent on how the home looks to the appraiser. It may mean the difference between getting approved and not getting approved.
When an appraiser sees a home that is dirty and/or not well taken care of they’re more likely to come in on the low side of the value range for your neighborhood. A home that is clean and ready to show will usually come in on the higher side of the value you range. Most appraisers won’t admit that but it’s something I’ve seen over the years. To be clear; the difference between the two is not going to be huge but it could be enough to make a difference with your refinance transaction.