With interest rates remaining low, the most popular people in town (besides the maitre d’s at the new Michael Jordan and Planet Hollywood restaurants) may be real estate appraisers.
While housing sales remain slow in many areas of the country, the low rates are having a definite impact on real estate. They’re fueling demand for refinancings by current homeowners-eager to lock in lower rates than they currently pay-and increasing the calls on appraisers, who set values on homes for mortgage companies for an average fee of $250.
Why the need for an appraisal when a home isn’t being bought or sold?
Lenders want to be certain that the investment in question is financially wise and worth the amount of the loan or loans for which the home is pledged as collateral at that particular time.
If you’re seeking a home equity loan, the higher the appraised value of your home, the more money you can borrow against it. And, if, for instance, you originally put down only 10 percent to buy your home, a higher appraisal could raise your equity and let you drop the private mortgage insurance required of most borrowers who have less than 20 percent equity.
And, in the sale of a home, if a buyer is offering, say, $200,000, the lender needs an appraisal to see that your home is worth that much. If the home appraises below that amount, the deal could be off unless the seller lowers the price or the parties reach some other compromise. (Homeowners also hire appraisers themselves, often in the case of a divorce, when there may be a need to value assets, though this is a less common scenario, experts say.)
For the lender
“An appraisal is designed to represent the eyes and ears of the lenders, who can’t go out and inspect the properties they’re asked to make the loans for,” says Dale Kleszynski, owner of Associated Property Counselors Ltd., an appraisal firm in south suburban Lansing and a board member of the Appraisal Institute, a Chicago-based industry group that represents 32,000 members.
Because homeowners aren’t the ones who choose the appraiser in most cases, the process is somewhat of a mystery. And many owners rightfully wonder if there’s anything they can do to increase the appraised value of their home and the likelihood of securing the loan and the benefit of lower rates.
The answer is a qualified yes. It may not be economically worthwhile to call in a contractor and sink thousands of dollars into remodeling your kitchen or bathroom to make the house more appealing and valuable, unless you’re dying to have either room redone or planning to stay put for a while. But homeowners can enhance their chances for a maximum appraised value-with minimal energy and financial expenditure-just by getting out the mop to get rooms spic-and-span or by making a few cosmetic changes.
“Appraisers are human and, even if they don’t admit it, they are affected by what they see and smell,” says Reed Mitchell Hagee, an agent with Mitchell Bros. in Evanston.
Barbara DaVee, an agent with Beliard, Gordon & Partners in Chicago, agrees. “They’re supposed to look at the structure and size, but psychologically they look at the decorating, too, just as brokers do. It’s hard not to take them (into account), especially when the place next door, which is the same layout and size, is all spruced up,” she says.
Best foot forward
Do appraisers concur? Definitely. “Homeowners should put a property’s best foot forward and treat an appraisal the way they would a potential sale. If we have to climb over boxes and kick dust balls aside, it’s not going to leave the best impression,” says Scott Waxman, owner of Preferred Appraisal Inc. in Northbrook. He adds, “A lot of owners think we can make these decisions just by driving by their homes or taking a quick look around. We don’t. It’s not that we’re nosy. But we have to get inside, open closets.”
Kurt Breihan, general manager of Kuehn & Associates, an appraisal firm in Des Plaines, goes a step further and suggests owners tackle major deferred maintenance projects, such as holes in the walls or peeling paint. “It’s more important to eliminate negatives rather than add amenities,” he says.
There is no single mathematical formula appraisers follow, and they enjoy some subjective leeway to make their numerical calculations. But two major components enter into an appraisal that homeowners should understand as guidelines to get their properties ready for review.
These include, first, a written uniform residential appraisal report based on a look-see of the property and the net effect of improvements weighed against wear and tear; and, second, a market analysis of three comparable neighborhood properties, which creates a cap above which an appraisal won’t go, no matter what improvements were made.
What an appraiser sees at the property in question goes into the uniform residential appraisal report. The location factors in. Is it urban or suburban? How much growth is the area experiencing? A new mall could be a plus, for example. What types of public services exist, such as utilities and public transportation?
When it comes to the house itself, the appraiser evaluates the interior, the exterior and also the property it sits on. Among the specifics noted are the topography and its condition, outside elements such as gutters, streetlights, driveway, exterior walls, chimneys and roof, and all the major elements within, such as the walls, floors, heating, air conditioning and appliances.
Overall condition
Most note the overall condition rather than test systems and appliances. “They’re not mechanics and aren’t likely to run your dishwasher to see how well it works,” says Susan Schreiber, a broker with the Diamond/Schreiber Group of Kahn Realty in Deerfield.
While some appraisers may be delighted to receive a stack of bills to verify the cost of purchases and improvements, more are quite happy just to be handed a list of repairs and changes done through the years, such as those showing the addition of central air conditioning, a furnace or beefed-up electrical wiring.
Appraisers take room measurements and make sketches, unless owners have detailed recent surveys and up-to-date floor plans. “My appraisers tend to spend between 30 and 45 minutes inside and outside a home; any less than that and they’re not doing a thorough analysis,” says Kleszynski.
Mortgage companies require appraisers to use three houses of comparable size and value, within a mile or so of the home being appraised, to help determine the final appraisal figure.
While some appraisers show due diligence by finding and inspecting three comparable houses, the more common scenario is for them to depend on real estate agents and independent data sources-such as the multiple listing service (MLS) directory-for information about what sold in the last six months or so and what’s currently listed or under contract and how all the prices compare.
“The majority of homes are sold through Realtors and we’re always getting calls from appraisers who want to come in and use our data as a guide,” says Schreiber. Her partner, Jim Diamond, adds, “They’ll call the listing agents to ask, `Tell me about this house. What was the condition of such and such house?’ “
Just as you can overimprove your house and fail to recoup all dollars spent when you try to sell it, you may not get credit for all the outlays with an appraisal, Kleszynski warns. “If you’re in an area of single-story $50,000 bungalows and you double the square footage with a second floor, it may not get appraised for $100,000, even if that’s what it cost you to put on the new floor.”
And even though homeowners usually aren’t the appraiser’s clients and the reports are supposed to remain confidential, they can seek recourse if they are turned down for a refinancing or a new loan. “You can request a copy of the appraisal from the lender and ask to discuss its contents if you strongly disagree with the outcome,” Kleszynski says.
Rules for licensing or certification vary from state to state. In Illinois, an appraiser is not required to be licensed or certified. However, the Appraisal Institute says federal rules require that appraisers used in transactions involving federally chartered lending institutions be licensed or certified. That covers most lenders and most appraisals.
Randy Papp, president of Pacor Mortgage Corp. in Chicago, also thinks it’s highly acceptable for a homeowner to check an appraisers’ credentials by asking if they’re licensed or certified and if they’ve done many appraisals in their area. “You want to be sure they know the housing stock and understand what makes one location better or worse in your particular community,” he says.
