An appraisal is a document provided by an appraiser (the person who conducts the appraisal report) that provides a professional estimate of the value of your home.
Appraisals are conducted by a third-party appraiser who is completely objective in their process. Appraisers do not work in favor of the lender nor the borrower. They simply conduct the appraisal and produce their findings.
Appraisals are most often conducted two ways. The first way an appraiser can conduct an appraisal is by noting comparables. Comparables, or comps for short, are properties within the neighborhood of the home you’re buying that are similar to yours. The appraiser will use the values of the similar properties nearby to determine the value of your home. The second way is by estimating how much it would cost to replace your home should it burn down or be otherwise destroyed. The appraisal will compile all of the findings of the appraiser including:
Comparisons with homes near the subject property
Notes about the real estate market in the area as a whole, including the ages of the homes and the average selling prices of the homes nearby
Notes about the appearance of the inside, outside, and surrounding area of your home
Notes about any visibly unfavorable characteristics about the home like cracked concrete or damaged windows
Pictures of everything that adds value to the home including, bedrooms, appliances, and fixtures
Why Lenders Need Appraisals
Lenders do not want to dish out more than the actual market value of the subject property. An appraiser’s goal is to determine that value. With this figure, the lender knows how much the property will sell for if you default on your loan. They also know how much they can lend to you without taking a loss if you default.
For example: If the subject property is appraised at $150,000 – that’s how much it will sell for on the open market. If your lender gives you a loan of $175,000 and you default on your loan, they now have to try to sell the home at a higher amount than what its appraised for, which can be difficult. If they end up selling the home for the actual market value, they’ve just lost $25,000. It is for this reason that lenders usually give a loan amount that is at or under the appraised value.
Why Borrower’s Need Appraisals
Appraisals are usually buyer paid and can be paid for at closing or during the application process. If you’ve signed a contract to buy a new home for $200,000 and the appraisal comes back valuing the home at $150,000, you should negotiate with your lender to lower the loan amount because you’re paying more for the home than it’s actually worth.
Overall, appraisals are a measure of protection. They ensure that neither party is lending or spending too much during the purchase process of a home.
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We can bet you’ve flipped a coin, but have you flipped a house?
High priced homes are exactly what house flippers are looking for. Why? Because high priced homes turn out a more profitable result. Flipping houses is a trend that has recently re-started during the better parts of the housing bubble. A flip occurs when a person has purchased and sold the home within a year. Financing was a lot easier back then compared to what it is now, so investors were buying cheap homes and flipping them. Now, as pocket friendly priced houses are more scarce, investors are forced to buy the more expensive homes. Though this may have seemed like something that would slow down the flipping process, according to a CNBC mortgage article by Diana Olick, house flippers are finding this method to be more lucrative. The return on a flipped house has gone up from 24 percent last year (2014), to 36 percent this year (2015).
House Flipping Around the Country
Olick also tells us that “Nevada and Florida, where the share of distressed homes are still relatively high, are still seeing the most house flipping action. Chicago IL, Dayton OH and Baltimore MD offer some of the best gross returns.”
What’s the Catch?
The downside to flipping homes, that has to be taken into consideration before venturing into such a big project, is the possibility that home flippers could quite possibly lose everything they are investing in. If you buy a property that you plan to invest in and find the cost of renovation is something you can’t afford, then you’re stuck with a house that you can’t sell. You may be able to sell the house to another home flipper, but you’re not going to get all of your investment back. An even worse situation would be where you’ve done everything you can and still can’t sell the home, because of the location or other factors. You could be looking at paying the cost for the home, the renovations, and any new upgrades you may have already done and never even see a profit returned.
What Are Some Of The Draw Backs?
When you decide that flipping a home is the right move for you, there are a few things you need to consider before you start purchasing materials. If the home is older, you may be forced to bring the electrical wiring up to code. Homes that were built in the late 1950’s and 1960’s, were in fact built to code. That code however, was set during the same time period. As the years clicked by, building codes have changed a number of times. The codes are updated every time a new discovery is made that could result in structural damage, fire damage or simply put, the home could collapse at any moment. Even if you’re remodeling your existing home, you’re going to need to update all of your electrical to the current building codes. We’re not talking about just one section of your home. The entire home will need to be rewired. This also goes for the plumbing and any insolation you have in your current home. Commercials on television and radio make remodeling your home sound so easy. In some case’s it really can be. If you have an older home though, you will have a few hurdles to overcome first.
Mold is another factor that you need to consider when you decide to flip a house. In Las Vegas, and other warm cities, the mold removal industry has seen a recent spike in business. A small leak from your bathroom faucet could possibly end up causing more damage than you would think. Molds are a kind of fungus that can grow on wood, concrete, bread, oranges, or any surface that provides a suitable combination of temperature, moisture and food. Molds feed on nutrients on the surface of wood – they do not eat or weaken the wood itself.
When buying a home, to flip or just to live in, you’re going to need a home inspection. Most inspections will identify any issues the home currently has. This includes mold damage, faulty wiring practices and building code violations.
How You Can Flip a House
In order to flip a house you have to be sure that the market is right. By that we mean, the housing market. You want to try and buy your investment property at a time when your investment will return the best profit. The idea is to buy a house for a low value, reconstruct and fix it up, make it livable and give it some eye appeal. After jazzing up the property, you sell the property and ideally because you’ve put so much work into the property, you sell the property for a higher amount than what you paid for the house and its repairs. It can be a risky but rewarding business. Maybe flipping homes could be a new hobby for you.
Third Quarter hurts Freddie Mac.
Freddie Mac sold fewer homes in the third quarter then they have earlier in the year. Freddie Mac being one half of the Lending Powerhouse Team, sold more than 25,300 repossessed homes in the third quarter, down 13.5% from the nearly 30,000 in the previous three months. It was also a 17% decline from the record-setting 31,600 sold in the first quarter. Freddie Mac also repossessed another 24,300 homes back into the inventory. At the end of the quarter, Freddie held 60,000+ REO on its books, which has been reduced ever so slightly — as new foreclosures are completed — from 75,000 one year ago.
If this pattern continues and the GSE reduces a net of 1,000 REO from its stock shelves and inventory lists during every quarter, it would still take 60 quarters to unload the entire stock. That is just shy of 15 years for all of you keeping score, and not to mention that with a severely constricted foreclosure pipeline due to recent servicing problems and new regulations. As things begin to open up, the market will be asked to take in even more REO sales just to maintain their current trends.
"This is Due to continued delays in the foreclosure process for single-family mortgages," Freddie Reported. "We expect these delays will likely continue into 2012. However, we expect our REO inventory to remain at elevated levels."
While all of this is going on, nonperforming assets continue to mount. Totaling 6.6% of its mortgage portfolio in the third quarter of 2011. That number has risen up by 3.2% from the previous quarter. The Obama Administration and the Federal Housing Finance Agency began asking market participants for bright ideas on selling these properties in large quantities and have even thought of possibly renting them to help manage the still accumulating problem holding back housing and as an extension the overall economy of 2011.
FHFA Acting Director Edward DeMarco reiterated thursday, that there is such a strategy that will not be implemented nationwide but on a local level.