Appraisal value? $20,000 low. Uh-oh.
Buying a home isn’t as simple as signing a purchase contract and packing a few boxes. All parties to the transaction must be fully on board with the purchase.
And a VA lender will refuse to step on-board if a property’s value falls short of the loan amount. Should the VA appraisal value fall below the desired loan amount, buyers must either make up the difference in cash, renegotiate the purchase price or walk away from the purchase.
So how does the VA appraiser calculate the value of your desired property? It all boils down to four key steps.
The first step for a VA appraiser is to gather pertinent property information. Some of this information is gathered from the contract or public records, but much of the data comes from the appraiser’s visit to the property. The appraisal report lists details such as:
The report is supplemented with photos, a location map, and a floor plan layout. And while those are important details, the most critical component of the appraisal is the one that can easily derail a VA purchase:
The comparable sales analysis.
The VA utilizes the “sales comparison approach” to value. In layman’s terms, that means the VA appraisal value is determined by the final sales prices of similar homes.
To arrive at this value, VA appraisers must select comparable sales. These are recently completed sales that are similar to the subject property in:
Comparable sales need to be recent sales. The VA recommends comp sales to be no more than 12 months old, and ideally less than six months old.
Comps should also be close to the subject property. Proximity recommendations vary by location and population density. The St. Paul Regional VA Loan Center, for example, prefers comps to be located within one mile of the subject property.
The VA appraiser makes adjustments to the subject property’s value based on both the sales prices and characteristics of the comps. If the subject property has something the comp does not, a positive adjustment is made to the comp for that item. The reverse is also true: If the comp has something the subject property is lacking, a negative adjustment is made to the comp for that item.
Adjustments are frequently made for the following sale characteristics:
After adding and subtracting value to the comps, the appraiser uses expert valuation knowledge to arrive at a final “indicated value by sales comparison approach,” or VA appraisal value.
It’s a “make or break” figure for a VA purchaser. A VA loan can’t be issued for more than the home’s appraisal value, so a low appraisal value can often send a purchase into a tailspin.
But keep in mind that although frustrating at times, the VA appraisal is a process built to protect veterans, their collateral, and the VA loan program.
Still, it’s life. Mistakes happen (even to VA appraisers). Should you feel a VA appraisal value is erroneous, you have options.
Midway through Fiscal Year 2021, the VA loan program is on pace to blow past last year's record-setting 1.2 million loans. See which cities are seeing the most growth compared to last year.