Deciphering the VA Lender’s Handbook Chapter 11 Part 5
As we discussed in the first part of this topic, VA appraisers are required to use the “comparable sales approach” to determining the fair and reasonable value of the home being appraised. What this means is that the appraiser, after inspecting the house being appraised, finds three comparable homes and evaluates how much they were sold for. The appraiser then uses the sale prices of those homes, accounts for any differences between the comparables and the home being appraised, and determines a fair market value off of that. However, there’s a lot more that goes into not only selecting the comparables but also using them to determine a fair reasonable value for the home being appraised. If you’re a seller and you’re wanting to know how your home’s value is going to be determined, or if you’re a buyer and you aren’t satisfied with the value established by the appraiser, this article will help you understand why the appraised value is what it is and the steps the appraiser went through to get there. Using this knowledge, you can examine the appraisal and see if you have grounds to challenge it.
The appraiser is responsible for checking on information about the sale of the comparable house – was there an interest rate buy-down that drove up the purchase price? Was there inclusion of non-realty items in the transaction? For example, when my wife and I bought our house, our seller was desperate to sell and offered to pay off our car with equity from the house. Did the seller offer to pay closing costs on behalf of the borrower? Anytime a seller concession is used, there is an effect on the sale price. Usually it keeps the sale price higher than it otherwise would have been, since seller concessions are used to ‘sweeten the deal’. When an appraiser is using a comparable with concessions or other factors that affect the price, they not only have to evaluate the effect of those things on the sale price, but they have to consider the effect those things would have on the sale price of another house.
It’s not as simple as a seller concession worth $1,000 knocking down the price of the home by $1,000, because what is being calculated here is perceived value. How drastically would that $1,000 seller concession affect an informed buyer’s willingness to pay for the house? In addition, the appraiser takes into account local supply and demand for housing. One of the ways they do this is to compare the average listing price to the average sale price in the market area. If the average sale price is significantly lower than the average listing price, the demand is probably not as high, whereas when the average sale price is close to the average listing price, the demand is probably pretty high.
There is yet more that the appraiser needs to look for. The appraiser should also evaluate the current market trend (increasing or decreasing) in the area, particularly between the time the comparable was sold and the date of the appraisal to determine if prices will have generally risen or fallen during that period. The appraiser will also look at sales listings, contract offers, and unsettled sales to determine a number of things. Have market conditions changed? Are property values rising or falling?
Here’s the nice thing: If the appraiser determines that anything mentioned in this article affects the sale price, he or she is required to either put it in the “Neighborhood” section of the appraisal report, or as an addendum to the appraisal. Either way, it should be easy for you to find. Chances are, if the home appraised for either more or less than you expected it to, the answer is either in the “Neighborhood” section or an addendum. If, after reading the full appraisal report, you feel like you have a legitimate challenge to the appraisal, talk with your lender and/or real estate agent to see about getting the home re-appraised. You should know, however, that whoever requests the re-appraisal is the one who will foot the bill, even if the results come back exactly the same as the previous appraisal.