Property valuation expectations
It’s been a while since we addressed an often forgotten or overlooked part of the mortgage process: the appraisal. It’s not for the lack of their importance, but for the fact that they aren’t always a requirement in mortgage transactions. Often, they happen behind the scenes without clients knowing or paying for them; even when there is no appraisal, the value of a given property is always taken into consideration. It is a huge part of the risk factor and thus the appraisal is required to ensure the lender’s position is protected. That may prompt you to ask, “what good is that for me?” and the answer to that is: if the lenders aren’t protected through the proper steps, the integrity of the entire mortgage lending industry could falter and the consequences of that could land in the laps of everyday consumers.
The appraisal i s certainly something which has increased in popularity in the last five to seven years. It’s another step in the process and another expense as well. It can amount to another three to five days of coordination, execution and distribution which can create a timing issue on impending closings; but the expense isn’t going to break the bank as most run about $300-$350. The more unique the property, the greater the expense and of course commercial properties can be considerably more.
In simple terms there are basically three types of appraisals: the electronic appraisal, the drive by, and the full appraisal.
Each lender will have an appraisal program to determine whether a full or just a drive-by appraisal is required. This is known as an Automated Valuation Model, or AVM. There is typically not a fee for this; in fact, I believe that there is only one lender who charges for the use of this system and it’s around $100 or less. Depending on the deal, most brokers would cover this cost for their client, especially on five-year terms or mortgages above the 300k range.
When the AVM fails to produce a value that is relative to the actual purchase price a full appraisal will be required. Sometimes this can be reduced to a drive by appraisal if other strengths of the application deem an exception.
What is confusing about the appraisal is when we actually need one. When it is an insured mortgage (so those individuals with less than 20 per cent down) there is always an appraisal be it a full, drive by or AVM. The cli- ent rarely ever knows that this happens since insured mortgage appraisal fees are covered by the insurer.
Refinancing a mortgage or an equity line or credit appli- cation will almost always require an appraisal. If the lender is a sub-prime lender, aka, a “B” lending deal, there will always be an appraisal regardless of it being a pur- chase or refinance. Typically, on these deals there is an issue with credit or income and the risk is inherently higher, prompting the necessity for an appraisal to minimize risk.
There is not always an appraisal when it is a purchase, especially if you have 20 per cent down. This is especially the case in dense urban areas which have highly sought after real estate pockets. In these cases, the AVM will produce an expected value which is comparable to the purchase price. There are typically other sales within a reasonable time frame of the same or similar properties which help ensure that the lender isn’t lending beyond their loan to value guidelines.
In many cases, rural properties will require appraisals regardless of the downpayment amount provided or any other application details. Another unique example would be age restricted properties, those that may be in age restricted communities, where the required age of individuals must be above a certain threshold, such as 55+.
Manage your expectations about an appraisal and keep in mind that it can or will be an additional expense and time constraint in the mortgage process. The possibility of an appraisal should be discussed in the preliminary stages and keep in mind that it doesn’t really matter which lender or mortgage agent you use, the appraisal condition, if required, will be there. It doesn’t hurt to push back on this condition to try and have it waived but in the end if the appeal for a waiver is declined you will have to cover these costs.