Many mortgage lenders, specifically alternative lenders, rely heavily on professional appraisal reports when making a decision to lend. Whether a client is refinancing, purchasing, building or renewing, obtaining a residential appraisal report for your lender may be required.
If there is a funding opportunity, the residential appraisal report assists in pricing the deal accordingly in terms of rate and potential fees. Although many large institutions are beginning to lean on computerized appraisal reports generated from historical sales and related data, it’s not one size fits all. When lending outside of the box, like Pillar does, whether it be construction deals that need continual progress reports during the build, rural properties which are difficult to value or another niche, these systems do not provide enough information, or are simply ineffective at making sound lending decisions.
Lenders often require the residential appraisal report to be conducted by an “approved appraiser” as the relationship between appraiser and lender is heavily based on trust. Appraisers are commonly added to a lender’s approved list in a similar fashion as an employee is hired by a company: interview, follow up, record checks and references can be required.
Both clients and brokers may wonder what details lenders deem important within the extensive report. “Don’t they just need the valuation? Do they really read that entire thing?” The answer is yes to both, sort of.
Underwriters become efficient at understanding details they need to focus on and will skim a residential appraisal report in a systematic way to ensure everything is aligned with the valuation provided.
Three approaches to appraising a residential property:
- Sales comparison approach: comparing a property’s characteristics with those of comparable properties that have recently sold.
- The cost approach: the buyer will not typically pay more for a property than it would cost to build an equivalent).
- The income approach: similar to the methods used for financial valuation, securities analysis or bond pricing – commercial properties often require this approach.
Examples of an underwriter’s focus when reviewing a residential appraisal report using the sales comparison approach:
- Comparable sales should be within a certain period of time (12 months in most cases with preferred 6 months)
- If comparable sales are outside this range (rural areas often experience this) the focus turns to location of sales.
- Gross adjustments should be within a certain range (20% for example)
- Are copies of MLS listings of comparable sales provided?
- Large focus on visuals with requirements for photographs of subject property for the exterior including front, sides and rear plus photos of concerning issues (neighborhood, structural, cosmetic, safety issues etc.) Interior photos must include all rooms as well as problems or deferred maintenance that is identified by the appraiser.
The ‘comments section‘ of the report is also a great source for additional information that can greatly influence overall marketability. What the underwriter is truly trying to determine is the marketability of the property with the value suggested. How long will it take to sell if it were placed on the market today at this price?
Conducting a professional residential appraisal report is an art.
These reports require a variety of information and creativity by collaborating the facts of the subject property and related data to come to a reasonable valuation a lender can depend on. As such, the lender’s underwriter could be considered the art critic – analyzing, interpreting and evaluating what has been suggested on the canvas.
To see Pillar’s List of Approved Appraisers, please visit our Resources Page: