One of the biggest issues in mortgage lending is the value – or price – of the house. The house’s value provides security for the loan, and the loan can never be more than a percentage of what a house is worth. So how do we come to a value for a property?
Many times on calls people will suggest values for their houses, based basically on rumor. Often the conversation goes something like this, “I heard that so and so who lives across the street just got $X for their house – and it is not nearly as nice as mine. So my house is worth way more than what I heard he received.”
For the purposes of secured lending, however, rumor will not do. The value that matters is the “Appraised Value”. I made mention of this in an earlier blog post http://talktogerry.com/increasing-house-prices/.
Some people do not need to get an appraisal to obtain a mortgage. If their credit score is really high – sometimes the lender will not require it. Or if they have good credit and the loan-to-value is a low value as compared to the value of the house, sometimes the lender will not require it. Instead, they will estimate the value based on a computer model – which uses selling prices for houses located near the subject property. In these cases – no physical inspection is required, and the computer model estimate is close enough.
However – I do not get many calls from people with excellent credit, nor even good credit. People who call me have bad credit, some even horrific. So an appraisal is almost always required.
When we refer to an “appraisal”, it does not mean a realtor’s assessment. The appraisal will be done by a certified appraiser, who is in the business of reaching (valid) conclusions as to what the property will sell for, over a period of a set number of days, in an arms-length transaction. Some appraisers are realtors also – but that is really a separate issue. Even if they are a realtor, they still must be a certified appraiser.
Each appraiser operates in a certain geographic region. So they might appraise properties in Newmarket, but not Ajax – or in Oakville but not Hamilton. Obviously this is a matter of convenience for the appraiser, who only wishes to travel so far to inspect a property. But it also has to do with familiarity with an area, and what values can be expected for a house in that city or region.
An appraiser that is familiar with an area will know the things that influence value in that region – and be aware of those items as they determine a value for your house. Proximity to highways or busy streets, changes in development patterns, increasing demand for certain streets/areas over others. An appraiser sees many properties in that same vicinity, and so they are familiar with what is “going on” – and can develop an expert opinion as to what the house will sell for.
There are many appraisers, so how do we choose one over another? In my case, because I operate in so many regions of Ontario – I have one or two “go-to” appraisers in each geographic region. These are chosen because they are “universally accepted” or virtually “universally accepted” by lenders.
If we use an appraiser that is not “universally accepted”, or is not accepted by many lenders – what happens if the deal with a given lender falls through, or does not close? If we have an appraisal from a particular appraiser that is not widely-known or respected, the appraisal might not be able to be used when we try to put together another finance deal, with another lender.
While each lender has their own “appraiser list” for a given geographic region – appraisers whose reports they will accept – the same names often appear on nearly all the lender “appraiser lists”. So by using a “universally accepted” appraiser, we dramatically decrease the probability that we will need to order a SECOND appraisal, should something go wrong with the current deal.
So even if a less well-known appraiser will do the appraisal for $25 less – I will normally use the “universally accepted” appraiser, so I know we will be able to use the appraisal, regardless of who ends up funding the deal.
An appraisal can take several days to obtain – so I often order them even before we have put together the finance deal.
The longest period I have waited would be around 10 days. This was during a particularly busy spring, when many houses were changing hands – and appraisals were needed to satisfy conditions of purchase financing.
The shortest period I have waited is one day. This was during a particularly slow period for real estate sales – February, if I recall.
Holidays can also play a part in delay. Around Christmas many appraisers close for two weeks, and this can dramatically delay the availability of an appraisal.
As we will almost always need an appraisal, the safest and most efficient path is to obtain an application, order an appraisal from a “universally accepted” appraiser, develop a list of potential lenders while we wait on the appraisal, then go get the most advantageous finance deal – appraisal in hand.
If we wait to obtain the appraisal until AFTER we obtain the finance deal, putting together that finance deal may be a waste of time, as the appraisal comes in lower than we expected, and will not allow the current finance deal to proceed.