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Class Is in Session: Appraisal 101

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The appraisal is part of the escrow process. It seems bizarre to many new buyers, but though you have already made an offer denoting a value for a home that makes sense to you, and your seller has agreed to that price, banks need independent confirmation that the home is in fact worth what you are paying for it. That's what appraisal does.

Who pays for this?
Sadly, you do. The cost of appraisal is part of your closing costs, those extra thousands of dollars you pay to get your loan. In most cases, appraisal is less than $500, but if you prepare for a range of $300-$900, you won't (hopefully) be shocked by whatever your fees turn out to be.

New laws
In the halcyon days of pre-crash real estate, Realtors and lenders would often use the same appraisers over and over, always with perfect confirmation of the needed price (the lender "chose" the appraiser, but the same team would generally work together over and over.) Then, there were rarely any snags with the loan process. However, rather hideous snags came up later, when the market crashed and took property values down with it. Turned out that many of those homes had been over-valued, and appraisers should have been more discerning on signing off on the value. The conflict of interest potentially involved in Realtors using particular appraisers came under scrutiny with mortgage reform. Now, an appraiser is assigned by the bank/lender.

The appraisal too is also now regulated, using the new template for collection of data approved by the federal government as part of mortgage industry overhaul.

Problems to anticipate
If an appraiser is unfamiliar with the current market conditions, he or she may not agree with the value of the home written into your offer. The Voices of Real Estate blog explains also that "appraisals generally lag market conditions and some changes to the appraisal process have caused difficulty" in the lending process. If your value and the appraiser's do not match, you and your seller will have to go back to the negotiating table, because your bank will not approve your loan.

This issue may or may not be a real problem in San Francisco, where property values are inarguably very high. If you over-bid to the point of lunacy, however, your bank may balk. Or, if the appraiser is using old comparable data (as in a few months ago, even) in an area like the Mission, which has recently shot up in value, you may again have a mismatch in estimated value.

Other new laws of note
U.S. mortgage lenders making higher-priced loans (AKA jumbo loans, common in SF) to consumers must have properties appraised and provide borrowers a free copy of the report. But in addition, to crack down on home flipping, which is frowned upon in the post-crash industry, creditors will now have to obtain a second appraisal if the difference between what the seller paid for the property and what the buyer is offering to pay exceeds certain levels. Ostensibly, this could be a problem in San Francisco where property values have inflated alarmingly, and rapidly, in the first quarter of 2013, but we don't have reports of that happening? yet. Readers may know more, and as always, we welcome your insight in the comments.
· Appraisal Guidelines for 2013 [official site]
· Appraisal [The Voices of Real Estate]
· Your Monthly Analysis: Price Trends for SF [CurbedSF]
All Curbed University coverage [CurbedSF]