Q&A: How does a home appraisal work? |
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Q&A: How does a home appraisal work?

by MyProperty.phPublished: August 1, 2018Updated: August 1, 2018

People who cannot afford to fully pay for their new home would have to take out a loan, but they cannot do so without security. This is when a home appraisal comes in.

Q&A: How Does A Home Appraisal Work?

Estimating the value of a home can be based on opinion. This can otherwise be called an opinion of value. While an actual sale of a home could transpire under such circumstances, it is more difficult to do so when seeking a housing loan. Lenders will turn to appraisers to determine the fair market value (FMV) of a home.

Also, buyers might have a personal opinion as to how much a home is worth, but this would not be a reasonable basis for its actual value. This is what makes home appraisal a necessary process. It serves as a good starting point when it comes to its price by providing evidence of its worth.

Q: What is the home appraisal procedure?

Presidential Decree No. 464, Section 3 (d) defines appraisal as “the act or process of determining the value of a property as of a specific date for a specific purpose.”

Section 5 further states that “all real property, whether taxable or exempt, shall be appraised at the current and fair market value prevailing in the locality where the property is situated.”

Home appraisers are required to perform impartial estimates to determine the FMV of the property against other similarly situated houses in its district. There must be a date when such appraisal was made, indicating why it was requested. It usually involves purchase and sale transactions. This gauges the propriety of its price given its physical state, site, and characteristics.

There are also times when home appraisals are also required in times of refinancing. This would guarantee that the borrower is indeed borrowing less funds than the property is worth from the lender. It would protect the lender in case the borrower defaults and would have to sell the mortgaged property to recover the borrowed funds.

Q&A: How Does A Home Appraisal Work?
Photo via Depositphotos

Q: Who hires the appraiser?

This process is undertaken by a disinterested third party to the transaction, ideally a licensed real estate appraiser. It is the lender that is tasked to hire the appraiser. A higher appraisal price might favor the buyer when it comes to sales, or the homeowner in case of refinancing. This would work to the disadvantage of the lender because the loan given could result to an amount higher than the real FMV of the property. The extent of the loan should ideally be less than or equal to eighty percent the FMV of the property mortgaged as security.

A seller can explicitly state that cash payments alone and not bank loan transactions will be accepted. Cash payments would necessarily rule out the need to have an appraiser because there is no need to take out a loan to settle the rest of the contract price. An appraisal should ideally come before listing a home for sale due to the likelihood that the appraised price would be set below the agreed purchase price. This would force the buyer to look for other means to secure funds for the shortfall in case the seller has already accepted the offer.

Q: What does an appraiser usually look for?

An appraiser would need to take actual measurements of the improvements to get its floor area, note its features, and find other factors that could influence its price. Field work also entails researching on the property’s surroundings and finding out the contract price of recent sales in the area. Note that evidence of its lot area will be required in order to make an accurate assessment. Providing a lot plan and the certificate of title is firm evidence of its lot size. Anything that has an aspect of permanence or attached to the home will likely be included in the appraisal.

Q&A: How Does A Home Appraisal Work?
Photo via Depositphotos

Q: What are the ways to determine value?

An owner will naturally want to get the best price for the property being sold. This could be based on a mixture of factors, such as its acquisition cost, sentimental value, included movables, and embellishments. With the exception of acquisition cost, however, these have little material effect on its FMV. To determine its value, Philippine real estate appraisers use three approaches:

● Cost Summation - land value is summed up with the value of the depreciated improvements
● Sales Comparison - FMVs of similar properties in the vicinity are compared to the home being appraised
● Income Capitalization - used for investment or commercial properties to determine how profitable a property is

Q: How long does it take to complete an appraisal?

The process can take anywhere from 15 minutes to a couple of hours, depending on the size and complexity of the home. An appraisal can extend beyond the home inspection and includes a survey of its neighborhood or surrounding area, though. This could potentially yield information on similar properties that were sold within the year or so.

Q&A: How Does A Home Appraisal Work?
Photo via Depositphotos

After the fieldwork, an appraiser would then return to his office to draft the appraisal report. The length of the report would again depend on the complexity of the task. It can take anywhere from a day to a few months to prepare the report. This would depend on the speed at which the information is acquired and the amount of data involved in the undertaking.

Main photo via Depositphotos

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