Five Home Value Appraisal Myths

Milwaukee Appraisal MythsFive Myths About Home Values

When home values are going up, most homeowners do not question appraisals.

When property values are declining, home sellers and even listing agents quite often question and pick apart appraisals.

However, the actual appraisal process changed very little over the course of the housing boom and bust cycle American homeowners witnessed between 2001 – 2009.

Since the topic of home values seems to be a hot discussion, let’s address the top five appraisal myths.

Appraisal Myths / Questions:

“I just put $15K into the property, why isn’t the appraised value higher? ”

Few improvements to a home will greatly impact the amount of an appraisal. Very rarely will a homeowner receive a dollar-to-dollar matching on an appraisal for the improvements they make. Just because you have made improvements to the home doesn’t mean it will make it appraise like the newer home up the street.

Even with cosmetic repairs, the property may still be much more comparable to the foreclosure next door than the new home a block away. Look first to the functional parts of the property such as the windows, electrical, heating & air, etc. Then the number of beds/baths and square footage are the next biggest weight, followed by a genuine updating of cosmetic improvements such as updating an outdated, less functioning kitchen.

“But my home really compares to some of the properties in the neighborhood across the way…”

For example, if a homeowner preparing a house to sell makes $150,000 in upgrades to the kitchen, built-in cabinets and flooring, it may help the property show better in an open house and in advertisements.

However, the seller might still be stuck with a $450,000 appraised value like the three comparable properties on their street vs the $750,000 they were hoping to list it for.

Even though the neighborhood across the main street had similar homes in the higher price range, especially after the seller’s extensive upgrades, appraisers have to follow strict guidelines and standards of practice and will always use homes from the actual neighborhood to establish value first.

So basically, the seller simply over-improved their home for their specific neighborhood.

“This appraiser included foreclosures as comps – that’s not fair”

It isn’t fair, especially if your home is well-kept and in great condition compared to the run-down foreclosures in the neighborhood.

Unfortunately, if every recent sale, or nearly all sales, are foreclosures at reduced prices, then the appraiser is forced to use the recent sales and trends as comparable values. High foreclosure rates generally depress values and show a trend of lowering prices.

If you are experiencing this type of market and don’t need to sell then it may be best to wait for the trend to change. Since real estate has shown to be a cycle of ups and downs, patience may payoff in the long run.

“But I just put in a $50K pool, doesn’t that count for anything?”

Pools and professional landscaping rarely see a dollar for dollar value in an appraisal. The value is going to mainly be based on comparable sales in a neighborhood. For example if homes in your area have sold with pools then they will be considered equal regardless of the amount you spent. If there are not any sales in your neighborhood with pools then appraisers will use a standard adjustment for the area. This adjustment can be somewhere between $15,000-$35,000 but really just depends on your market.

“How can similar homes in the same neighborhood appraise for such different values?”

This is a typical question for older neighborhoods where similar models may have drastic price differences.

Additional rooms and square footage can be the main reason for one property appraising higher than another.

Keep in mind, just because the market trend in a particular neighborhood is improving over time, the individual properties need to meet the same conditional improvements as the others in order rise with the tide.

An appraiser is looking at several things when determining the value of a property: improvements, size and square footage of the living area, neighborhood amenities, location and the market trends around the area.

Understanding The Home Inspection Process

Milwaukee Home Inspection ProcessWhat You Need To Know About The Home Inspection Process in Milwaukee

Congratulations on finding a house in Milwaukee!

Once the seller accepts your offer “Time is of the Essence”. Depending on your purchase contract you now have only a few days from when you signed the purchase and sales agreement to have a home inspection.

Typically, your real estate agent made the offer contingent upon a satisfactory home inspection and obtaining mortgage financing. Communication with your real estate agent is key. Ask about your due diligence period and exactly what day this period expires.

What Is A Home Inspection?

A home inspection is performed by a home inspector, typically the job of the home inspector is to examine the conditions of the home, this process of inspection is often in connection with the sale of that property. Usually the home inspector who is conducting the inspection is trained and certified.

The inspector is required to do a visual inspection of the home along with checking to see if certain systems in the home is functioning properly. The inspector would then compile all information on the conditions of the home to place in a written report onto a home inspection software to deliver to the homebuyer and the real estate agent.

It is not the job of the home inspector to estimate market value or to let you know you got a good deal on the price of the home. This is done typically through an appraiser.

The buyer uses the knowledge gained from the home inspection to make informed decisions about their pending real estate purchase. The inspection needs to be completed within the time allowed. If there are any items found in the inspection that need to be addressed with further negotiation then all parties need to be notified as per the terms of the contract. This is why it is important to stay in constant communication with your real estate agent during this process so you don’t miss these deadlines.

Why Have A Home Inspection?

Buying a home is the single most expensive investment many of us will ever make.

A home inspection is designed to provide the home buyer with the information they need to make a more informed decision about the property.

The home inspection report should clearly identify any potential significant defects, and give the home buyer a realistic estimate of the costs of repairs so that they can be negotiated in an updated purchase contract. An inspection should also highlight any areas or features that need to be addressed in the near future which may be reaching the end of their useful lifespan. This will also help in determining if a home warranty may be a useful purchase.

What Do Home Inspections Cost?

The home buyer generally has to pay for the inspection up front, but there may be an agreement in the purchase contract for the seller to reimburse those fees at the time of closing.

Home inspection fees vary from state to state. An estimated cost of a home inspection is around $250-$400, depending on what services have been selected, where the house is located and the size of the home.

In addition to the general home inspection, there are many common services that home buyers also choose to have performed when having a home inspection. These additional services are not typically included in the general home inspection fee.

Optional Home Inspection Services:

  • Wood destroying pests such as termites
  • Mold Testing
  • Pools, spas, barns, or other external structures
  • Radon gas
  • Lead base paint (homes built before 1978)
  • Asbestos
  • Carbon monoxide
  • Docks and seawalls
  • Underground sprinkler systems
  • Septic
  • Well and Well Pump

The sellers may not be obligated to make every repair, so make sure you read the purchase and sales contract carefully to make sure the agreement does not state that the home may be sold in “as is” condition.

The Home Inspection Process:

A home inspection should include examination of all major systems, including the plumbing, heating, air conditioning, electrical, and appliance systems. Also, the home inspector will look at the structural components such as the roof, foundation, basement, exterior and interior walls, chimney, doors, and windows.

It is recommended that the home buyer be present at the time of the home inspection. A typical home inspection can take between 1 ½ hours to 3 hours, depending on the size and condition of the home.

Remember you are paying for the home inspection. Follow the home inspector around and ask questions about the condition of your home and how to maintain it. A good and knowledgeable home inspector will be happy to discuss all these things with you as they go through the home.

The attached link will help give you a better idea of what happens during a home inspection provided by the American Society of Home Inspector’s visual home inspection demonstration video. CLICK HERE FOR VIDEO

Buying In A Home Owners Association HOA

Milwaukee Home Owners AssociationsHOA Hurdles to be Aware of When Looking at New Properties

A Home Owner Association (HOA) can have a huge impact on your life when you buy a home in a PUD (Planned Unit Development) or Condominium Project.

According to Wikipedia:

“A homeowners’ association (abbrev. HOA) is an organization created by a real estate developer for the purpose of developing, managing and selling a development of homes.

It allows the developer to exit financial and legal responsibility of the community, typically by transferring ownership of the association to the homeowners after selling off a predetermined number of lots.

It allows the municipality to increase its tax base, but reduce the amount of services it would ordinarily have to provide to non-homeowner association developments.

Most homeowner associations are incorporated, and are subject to state statutes that govern non-profit corporations and homeowner associations.

State oversight of homeowner associations is minimal, and mainly takes the form of laws, which are inconsistent from state to state.”

The Pros and Cons of HOA’s:

A Home Owner Association may have the power to determine the color of your home, the number of pets you have and the type of grass you have to plant. They also may have the power to levy assessments, dues and fines. Or, they may be as simple as collecting a few dollars per year to make sure the grass is cut in the common areas.

It is also found that communities with an HOA have higher property values and a greater sense of pride of ownership.

HOAs are set up by CC&Rs (Covenants, Conditions & Restrictions) which are recorded and become part of your deed.

The CC&Rs dictate how the HOA operates and what rules the owners, tenants and guests must obey.

You should take the time to review the CC&R for any prospective purchase. Most purchase contracts have a due diligence period to allow time for review of these documents.

For instance, if you operate an Amway business from your home, it is possible the CC&Rs prohibit this type of activity. Or, if you have two dogs and three cats, the CC&Rs may limit you to one pet. There could also be restrictions on whether or not you can rent your property.

The CC&Rs are only a portion of the HOA. Bylaws are another component of HOA’s that reflect the intention of the association and Rules and Regulations which are a more detailed list of do’s and don’ts.

Each HOA may have a managing Board of Directors and/or a third-party property management company.

One issue to be sure you check on is potential assessments.

An HOA may levy assessments when there is some major repair in order replenish the HOA’s reserve account.

For instance, recently a Condo Association had a foundation problem and was assessing the members over $10,000 per unit. Another PUD had a pool that required routine maintenance and certification.

Within a master planned community there are individual subdivisions. These subdivisions are commonly set up as PUDs with an additional HOA.

Until the subdivision is complete, the builder is generally in charge of the HOA.

When complete, the management of the PUD is typically turned over to the homeowners at a special membership meeting.

Buying Foreclosures And Short Sales

Buying-ForeclosuresImportant Factors To Consider When Getting Financing On A Foreclosure, Short Sale or New Construction

When purchasing a foreclosure, short sale or new construction home in Milwaukee it is important to understand they each have their own unique factors that can affect financing.

If the guidelines and potential pitfalls are not properly understood, you could face delays in closing or, worst case scenario, a denied loan.

Having an open line of communication with your mortgage professional will help you successfully navigate through the purchase process.

Short Sales & Foreclosures

Currently, short sales and foreclosures are everywhere. They often represent great value when looking to buy a new home.

However, they also present a unique set of problems that home buyers need to be aware of and plan for.

1.) Property Condition

Typically, when homeowners are facing foreclosure or looking to short sell their house, it means they lack the financial means to pay the mortgage or maintain the property.

A property in poor health can cause many financing issues for traditional financing. FHA loans have specific rules requiring that the property is move-in-ready condition, unless you’re using a 203(k) Rehab Loan.

2.) Timing Challenges

Foreclosures can take longer to get an executed purchase contract due to the seller is a bank and the paperwork must go through appropriate channels for approval. For the same reason, it is important your lender has loan documents ready a few days early for closing to ensure everything is approved and closes by the agreed to deadline.

Short sales typically come with awkward timeframes for purchase contract approval and loan closing. Each bank is different, but approval can take anywhere between a week to 120 days. As a general rule, the larger the bank the longer it takes to get short sale approval.

The lack of a set time frame for short sale approval makes the timing of loan submission, rate locks and closing very challenging. You have your approval conditions cleared to close on time, just to find out that new appraisals, income, employment and asset verifications need to be updated by an underwriter to cover the most recent 30 days.

Worst case, purchase contracts and legal documents may have to be re-submitted to a bank for an updated approval.

Either way, be prepared for a lot of redundant paperwork when purchasing a short sale property.

New Construction

Home buyers looking to purchase new construction using FHA financing will have more hoops to jump through than those purchasing through conventional (Fannie Mae / Freddie Mac) financing.

If you want to use FHA financing to purchase new construction then you need to be aware of a number of issues that can trip you up.

First, you MUST have a certificate of occupancy (C.O.) certifying that the property is complete and move-in-ready. If you do not have this then you typically CANNOT go FHA. You’ll need a renovation loan, but a FHA 203K WILL NOT work.

You’ll need to employ the Fannie Mae Home Style for a property without a C.O.

In addition to the C.O. you’ll need some combination of the following documents as dictated by your lender and your unique situation:

  • Builder’s Certification
  • One Year Builder Warranty (10 YR Warranty may be required)
  • Termite Inspection (when applicable)
  • Septic Inspection (when applicable)
  • Well Test (when applicable)
  • Construction Permits

There are a number of factors which go into exactly what combination of documentation will be required to satisfy your lender and FHA, so it is best to work with an experienced loan officer when purchasing new construction with FHA Financing.

Where Does My Earnest Money Deposit Go?

Earnest Money DepositWhere Does My Earnest Money Go?

A basic and very obvious question that most first-time Milwaukee home buyers ask once their purchase contract gets accepted.

When a buyer makes an offer to buy residential real estate, he/she generally signs a contract and pays a sum acceptable to the seller by way of an Earnest Money Deposit or Good-Faith Deposit.

An Earnest Money Deposit (EMD) is simply held according to the terms of the executed purchase contract.

Earnest Money Deposit (EMD)

The amount varies enormously, depending upon local custom and the state of the local market at the time of contract negotiations. These funds are simply to show that you are a serious buyer and in good faith have put forth a sum of money to show your commitment.

Earnest money is is a payment deposit that is put towards the purchase of a real estate or a public tendered government contract that a buyer or a registered contractor has established in order to demonstrate that they are serious “earnest” about closing the transaction.

For example, there may be a contingency period for appraisal, loan approval, property inspection or approval of HOA (homeowners association) documents.

In most cases, the Earnest Money is held by the escrow company or in some cases can be deposited into a brokers specially appointed trust account and later transferred to escrow or title. The EMD is credited towards the home buyer’s down payment and/or closing costs.

*It’s important to keep in mind that the EMD may actually be cashed at the time escrow is opened, so make sure your funds are available and from the proper sources for your lender to verify if you are doing a mortgage.

The Process:

  1. Earnest Money is submitted to an escrow company with the accepted purchase contract
  2. At the close of escrow, the EMD is credited towards the down payment and / or closing costs
  3. If there are no closing costs or down payment, the EMD is refunded back to the buyer after closing

Who Doesn’t Get Your Earnest Money:

  • Listing Agent
  • Sellers
  • Buyers Agent

Your earnest money deposit cannot be released without a contractual reason. If there is a default of the contract then the earnest money could be released. In most cases it still has to be signed off by both parties to the transaction before the escrow company can release it. Otherwise, it will sit there until legal proceedings decide who prevails. Always ask how these situations are handled in your area before you hand over your money.