Home Appraisals: 5 New Truths

Do you know how much your home is really worth today? Have foreclosures affected its value? Can you trust the appraisal?

"Homeowners don't know what's going on around them anymore," says Kim Bradley, of Marquee Properties, a full service realty company in Northern Virginia.

A lot of the confusion centers on appraisals--the process of estimating what a home is worth. Gyrations in the housing market have made appraisals more fraught than ever. For their part, banks have tightened up appraisal requirements, in some cases leading to delays that may cost sellers money. On top of that, new rules designed to protect the integrity of the appraisal process may be having the unintended result of pushing valuations lower, according to the National Association of Realtors and other industry critics.

So what's the truth about the current state of home appraisals? Here are four things you need to know, whether you're buying, selling, or refinancing.

1. Inflating home values is a thing of the past

During the boom years, appraisers often felt pressured to inflate home values. Today, the opposite is true. "Lenders are calling appraisers to make sure we're not pushing the value," says Bradley. Currently, half of the appraisals conducted by Bradley's company come in below the sale price, she says. "The banks' primary concern is that the mortgage note is secure -- that the house will be worth what someone is paying for it."

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2. A wall has gone up between lenders and appraisers

Previously, lenders could hire their own appraisers and provide an estimated home value when ordering up an appraisal. That number was often the contract offer or an amount needed for a cash-out refinance, and appraisers felt pressed to hit it, says Danny Wylie, a Nashville, Tenn. appraiser and consultant. New rules prohibit lenders from hiring appraisers directly. On the one, hand, that eliminates bank influence. On the other, it puts the process in the hands of an "appraisal management company," which may hire outside appraisers unfamiliar with the local market.

3. You need to price your home right the first time

Once upon a time, sellers could name their price, then sit back and let the bidding begin. No longer. "Sellers need to price their homes right the first time or risk losing more value, says Wylie. He offers the example of one Nashville couple who listed their home for almost double Wylie's $1 million appraisal. The house sat on the market for two years before the it finally sold -- for $850,000.

"If you let a house sit on the market for a long time, it gets a stigma, and people begin to wonder what is wrong with it," Wylie says. He also points out that overpricing your home today sends the wrong message. "People will have higher expectations than what the house offers. They will either walk away or counter for much less than the home is worth."

4. Comps don't have to include distressed properties

The presence of local foreclosures doesn't necessarily bring down your property value. "Appraisers can ignore bank-owned properties and short sales when evaluating home values, as long as there are ample non-distress sales to choose from in the market," says Bradley (and as long as the subject is not a foreclosure or a short sale itself). However, if your home is surrounded by distressed properties, she warns that your home value may be affected.

5. The new appraisal guidelines can be a good thing in the long run

These adjustments are intended to provide a more accurate valuation. "Every home appraisal must be backed by home sales within the past 90 days," says Bradley. Keeping the market window within a tight time frame prevents prices from jumping all over the map. Also, the comparative listings used to analyze an appraisal property need to be from the same neighborhood. "You're no longer just appraising a house as much as the neighborhood," says Wylie. " If prices in the neighborhood are dropping, an appraiser will adjust for that."

More changes to come?

Increasingly, there's a trend for sellers to request their own appraisals prior to listing their properties. With appraisers working on both the buying and selling side of the equation, home values are more likely to remain balanced into the future.

The good news is that overall home values are climbing again. "They are going up at a nice slow pace," says Bradley.

For more on the appraisal process see these AOL Real Estate guides:

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Find out how to calculate mortgage payments.
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