A closing cost is a payment required to finalize a home loan and is separate from a down-payment. Read about closing cost, their purpose, how you can pay them and more by clicking learn more below.
An Appraisal is an estimate of a property’s fair market value. It’s a document generally required (depending on the loan program) by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property. The Appraisal is performed by an “Appraiser” typically a state-licensed professional who is trained to render expert opinions concerning property values, its location, amenities, and physical conditions.
Obtaining a loan is the most common reason for ordering an Appraisal, however there are other reasons to get one:
- Contesting high property taxes
- Establishing the replacement cost for insurance purposes
- Divorce settlement
- Estate settlement
- Negotiating tool in real estate transactions
- Determining a reasonable price when selling real estate
- Protecting your rights in an eminent domain case
- A government agency requirement
- A lawsuit
There are 3 common approaches, or Appraisal Methods, used by Appraisers to establish property value. After thorough exercise of all 3, a final value estimate is correlated. When evaluating single-family, owner-occupied properties, the Sales Comparison Approach is heavily weighted by an Appraiser.
- Cost Approach – A formula is used to obtain the property value: Land value (vacant) added to the cost to reconstruct the appraised building as new on the date of value, less accrued depreciation the building suffers in comparison with a new building.
- Sales Comparison Approach – The Appraiser identifies 3 to 4 comparable comps, recently sold properties in the neighborhood, ideally, sold in the previous 6 months and within ½ mile of the subject property. A comparison is done between the recently sold properties and the subject property including square footage, number of bedrooms and bathrooms, property age, lot size, view, and property condition.
- Income Approach – The potential net income of the property is capitalized to arrive at a property value. Capitalization is the process of converting a future income stream into a present value. This approach is suited to income-providing properties and is used in conjunction with other valuation methods.
The mortgage company owns the appraisal even though the borrower paid for it. This is because the mortgage company orders the appraisal on the borrower’s behalf, and the Appraiser lists that mortgage company on the report. The borrower does have the right to receive a copy; however it’s the mortgage company’s discretion to give the borrower the original appraisal report.
The major portion of other up-front expenses is the deposit or binder you make at the time of the purchase offer, the remaining cash down payment you make at closing, or can include:
Inspections – Lenders may require inspections, and you can make your purchase offer contingent based on satisfactory completion of some other inspections such as structural, water quality tests, septic, termite, roof and radon tests. You and the seller can negotiate these inspection fees.
Owner’s Title Insurance – You may want to purchase title insurance in case of unforeseen problems so you’re not left owing a mortgage on property you no longer own. A thorough title search ensures a clear title.
Appraisal Fees – You may want to hire an Appraiser either before you sign a purchase offer, or after reviewing the lender’s appraisal report.
Money to the Seller – You’ll need to pay for items in the house you want that were not negotiated in the purchase offer such as appliances, light fixtures, drapes, lawn furniture, or fuel oil and propane left in tanks.
Moving Expenses – If you are changing jobs, your new employer may pay for your relocation, otherwise you must figure in the moving costs such as truck rentals, professional movers, cash for utility deposits like telephone, cable, electricity, etc.
Repair Expenses – In the purchase offer, you can request that the seller set up an Escrow Account to defray any costs for major cleanup, radon mitigation procedures, house painting, appliance repairs, etc. Depending on the purchase offer contract and contingency clauses, you may discover that you have expenses upon moving in.
Example: Your purchase offer contract has a clause making the purchase contingent on a satisfactory structural inspection, and it’s determined that the house needs a new roof. You can negotiate to have the seller arrange for the work to be done but, this will delay the closing date. You may have to agree to a higher price for house, or to pay some of the new roof repair expenses. Or you and the seller may split the cost using estimates from a contractor of your choice, and each of you will put funds into an Escrow Account. Or, the seller may be willing to reduce the sale price of the house, but either way cash will be needed for the new roof.
Time Investment – One often overlooks major up-front costs in buying a home. The time and expenses invested in house-hunting, which can take up to 4-months, plus the time spent searching for the best mortgage for you, the right real estate agent, an attorney, and other related things that take up your valuable time.
The property seller sets the price, especially for residential property, not the Appraiser. Sellers usually don’t order an appraisal because they want to obtain the highest price for their home and therefore don’t want to be bound by the Appraiser’s assessment.
The real estate agent receives a percentage of the price as compensation and often represents the seller in the transaction and assists them in setting the sale price. They perform a Comparative Market Analysis (CMA), which real estate agents in most states are allowed to perform without an Appraiser’s License or Certification. The CMA is vital to the agent’s preparation for a listing examining recent property sales in the neighborhood to arrive at a listing price. Typically the agent will suggest a price to the seller based on the CMA however the seller may choose to list their property for a higher price.
It’s to your advantage to help the Appraiser perform the assessment by providing additional information:
- What is the purpose for the appraisal?
- Is the property listed for sale, and if so, for what price and with whom?
- Is there a mortgage? And if so, with whom, when placed, for how much and what type (FHA, VA, etc.), at what interest rate, or other type of financing?
- Are any personal properties or appliances included in the property?
- With an income-producing property, what is the income breakdown and expenses for the last year or two? A copy of the lease may be required.
- Provide a copy of the deed, survey, purchase agreement, or additional property papers.
- Provide a copy of the current real estate tax bill, statement of special assessments, or balance owed on anything, i.e. sewer, water, etc.