Deciphering the VA Lender’s Handbook Chapter 11 Part 3
Knowing how the value on the home you’re hoping to purchase is going to be established can answer a lot of questions, and help give you perspective and plan ahead. There are three approaches to establishing value that the Handbook outlines, but only one of which the VA relies exclusively on. The three ways the home’s value can be determined is with the Sales Comparison Approach, the Cost Approach, and the Income Approach. The VA relies exclusively on the Sales Comparison Approach. The only exception to this rule is when there are inadequate or nonexistent comparable sales.
The Sales Comparison Approach means taking comparable houses, analyzing what they sold for, and determine what a well-informed purchaser would generally pay for the price of “…acquiring a similar property of equal desirability and utility without an undue delay.” The Cost Approach is not commonly used for home appraisals, because the real estate market does not base their sales off of how much it cost to build the home or replace it. As such, the VA will only allow the Cost Approach to be used to add support to an appraised value with weak sales comparisons in the area. For example, if you are buying a new manufactured home in an area with normal homes or much older manufactured homes, there may not be a whole lot of sales the appraiser can compare the home to. Lastly, the Income Approach only applies to multi-unit property, also known as an income-producing property (you can make income from rent payments), and the property’s ability to produce income will be factored along with the sales comparison approach in determining the home’s value.
So how does it all work? If the appraiser is just basing the sale price of the home off similar homes, why does he or she bother coming to the house at all? More importantly, when I sell my home, what’s the point of upgrading my home or making improvements? Here are what you need to know about the steps an appraiser goes through:
- Pre-visit research: an appraiser will look up the history of the property, what it has sold for in the past and any records on what improvements have been made to the home.
- The visit: The appraiser needs to visit and inspect the home for a few very simple reasons:
- The appraiser needs to know what homes would be considered comparable, and whether the comparable homes are just a little better or just a little worse than the home being appraised.
- The appraiser is also responsible for making sure that the home meets the VA’s minimum property requirements, and no amount of comparable homes will tell them that.
- The seller or buyer of the home can inform the appraiser of improvements to the home that no records exist for that might affect the value of the property.
- Post-visit research: this is the phase where the appraiser will look for comparable sales. Armed with knowledge from the visit, the appraiser can determine what really qualifies as a comparable sale, and determine what the house should sell for based on what similar homes have sold for, while accounting for the differences between the comparables and the home being sold.
The reason the Comparable Sales Approach is so widely used is because it is the best indicator of how much a home can reasonably be sold for; just because a home would cost $500,000 to rebuild doesn’t mean it can sell for that much. If you’re the buyer, you can know that the appraised value is a fair asking price based on the current housing market and is not more than you’d be paying for a similar home in the area. If you’re a seller, you can plan ahead to try not to spend more money on improving the house than the improvements will add to the fair market value. In the next article we’ll tell you how appraisers are required to select comparable sales to be used in the appraisal, as well as more information on the requirements for comparable sales. If you have any situation-specific questions, please reach out to us here at Low VA Rates and we’ll do our best to answer them.