What Exactly Goes Into a Home Appraisal?

If you thought finding the perfect home was the hard part of the home buying process, what until you actually have to go from offer acceptance to closing.

A bunch of steps need to be taken in proper succession order to take you through escrow, one of which is a home appraisal.

What Exactly is an Appraisal, and What’s it’s Purpose?

When you finance a home purchase, your lender is going to want to know exactly how much the property is worth under current market conditions to make sure you’re not over-paying for it. Lenders won’t provide loan amounts that are greater than what the home is really worth – doing so will just put them at risk.

Since the home basically acts as collateral for the mortgage, your lender will want to ensure that you’re not over-borrowing for it. If you wind up defaulting on the mortgage at some point and go into foreclosure, the lender will have to turn around and sell the home in order to recoup the money loaned.

If the home is worth less than what the market dictates, the lender will take a loss on the sale. Having an appraisal offers financial protection for the lender when it comes to potentially lending out more than what would be reimbursed.

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Who Conducts the Appraisal?

The lender will usually appoint an independent appraiser who has no interest in the property. These professionals are trained and educated in the field of valuating properties, and often are hired through an accredited Appraisal Management Company (AMC). To help make sure that appraisers are as accurate as possible in their reports, standard practices from the Appraisal Standards Board (ASB) are encouraged to be followed.

Qualified appraisers must be licensed or certified and have experience and familiarity with the local area and similar properties to the one being appraised.

It’s usually the buyer who ends up paying for the appraisal, which could run anywhere between $300 to $400. It takes an average of two hours to complete an appraisal. Of course, some properties may be small and simple enough to take less time, while much larger homes with multiple issues could take a lot longer to be fully appraised.

How Do Appraisers Determine the Value of a Property?

A lot goes into appraising a property, including physically inspecting the home and the lot it sits on, as well as the surrounding neighborhood.

Physical Inspection – Appraisers will check out every amenity in the home, including the number of bedrooms and bathrooms, square footage, lot size, floor plan, number of levels, and so on. If any issues are discovered that negatively affect the value of the home, they’ll be duly noted on the report.

The actual physical inspection itself is a critical component of an appraisal report. Measurements are taken, photos are snapped, and notes are jotted down. Any recent additions or improvements are recorded, as are any issues that need repair.

If there are any other structures on the lot, the appraiser will have an in-depth look at those too, including garages and sheds.

To keep things consistent, appraisers typically use a standard Fannie Mae-approved Uniform Residential Appraisal Report for single-family homes. This report template requires a thorough description of the interior and exterior of the home, the area, and recent comparable sales. Notes, photos, maps and public land records can all be used in the report to generate a value for the property being appraised.

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The Research Phase – Much like real estate agents using “comps” to determine an accurate offer price for buyer clients or listing price for seller clients, appraisers also use recent sales of similar properties to come up with an accurate value. 

Of course, current market trends also play a key role in the valuation process. For instance, low interest rates might make it much more affordable for buyers to get into the market in that particular area, which can have a direct impact on an increase in demand and a jump in property values.

From the details gathered, the appraiser will then analyze the information and come up with a final value.

What Happens if the Property is Under-Appraised?

We’ve already touched up the reason why lenders shun an appraisal that comes under the purchase price. If your appraisal comes in lower than what you agreed to pay for the place, a few things can happen.

Many times homebuyers simply walk away from their deals, while in other cases, sellers may choose to lower the sale price in order to avoid a dead deal. Sometimes (though not likely nor recommended), buyers will pay the difference between the appraised value and the sales value in cash, then obtain a loan for the remaining amount.

In many cases, buyers will request that their lenders issue a second appraisal from a completely different appraiser. Maybe the initial appraiser made some errors, or wasn’t as qualified or familiar with the neighborhood as he or she should have been. Or perhaps the information that was being used was imperfect or inaccurate.

Buyers and sellers can also provide the appointed appraiser with appropriate information regarding the value of the home, including recent similar property sales that the appraiser might not have previously looked at or considered.

Under-appraisals are more typical when there’s a bidding war on a home, and each competing buyer raises their price higher and higher in order to outbid the others. When the seller finally picks a winner, and it comes time for an appraisal, both parties may quickly discover that the multiple bidding scenario pushed the sales price higher than what the current market value can support.

When it comes to real estate deals, a under-appraisal for a property can provide an opportunity for buyers and sellers to re-negotiate the conditions and clauses in the contract. In fact, buyers sometimes have an advantage in that a low appraisal can serve as some form of ‘proof’ that the home should be sold at a lower price. This in turn can help convince the seller to drop the price so the deal can proceed, at a price point that’s more favorable to the buyer.

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The Bottom Line

Appraisals usually come out as the buyer, seller, and lender would hope – either at or above the sales price. This task is just another step in the closing process, and is a necessary part of the equation if mortgage financing is needed. Under-appraisals, however, can throw a wrench in the deal, and can delay or cancel it altogether. Either way, it’s in your best interest to have a basic understanding of why an appraisal is needed, and what goes on throughout this process.

4 Things You Need to Know About Condo Insurance

The differences between condo ownership as opposed to single detached home ownership are obvious. For one, there are HOA fees that condo owners need to pay that aren’t applicable to most single detached properties. Part-ownership of common elements is another unique feature of owning a condo unit.

But condo insurance is yet another aspect that differs from that of freehold properties. While both types of properties require insurance, condo needs are different. This is because condos are covered by the community’s master insurance policy for specific elements, as well as individual condo homeowner insurance.

But what’s covered under one policy isn’t necessarily covered under another.

Here are 4 things you should know about your HOA’s master insurance policy so you understand exactly how you and your belongings are protected.

1. Two Types of Master Insurance Policies Exist

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Your HOA’s insurance policy falls under two broad categories: “all-in” and “bare walls-in.”

All-in – A lot more is covered through “all-in” insurance policies compared to bare walls-in coverage for condo owners. For example, if the walls in your condo are damaged by fire, your HOA community’s all-in insurance policy would cover many interior elements, such as fixtures, improvements and additions to the interior surfaces of the walls, ceilings, and floors. Under an all-in insurance master policy, you’d really only need limited coverage with individual homeowners insurance.

Bare walls-in – This type of condo insurance master policy covers all of the condo property from the exterior framing inward. But it doesn’t offer the individual unit owners as much coverage as an all-in master policy. Any damage to walls, floors and ceiling in individual units couldn’t be covered in the event of a fire, for example. Essentially, you’d require more coverage under your individual homeowners insurance policy in order to make sure your unit’s interior surfaces are covered.

Variations of both types of master policies exist, which should be detailed in the condominium association bylaws.

2. Your Individual Policy’s Coverage Will Depend on the Master Policy in Your Condo

Anything that exists within the confines of your individual unit is your responsibility. But depending on what type of master policy your HOA has in place, you may want to carefully consider the type of coverage that you get (and pay for).

The type of coverage you opt for can vary. But generally speaking, the following coverage options are available to offer protection on certain things that your HOA insurance might not:

Personal items – If any of your belongings are damaged or stolen, condo insurance can cover the replacement cost value (less depreciation).

Interior structure – Did you know that the actual flooring, drywall and fixtures are yours? As such, they’re your responsibility to protect under insurance if your HOA’s bare-walls in policy won’t.

Liability – If you have guests over and they’re injured during their visit, condo insurance may help cover the expenses if you’re deemed responsible.

Loss assessment – If your condo association determines that you’re responsible for any losses to the HOA – such as damage to one of the common elements – loss assessment coverage can protect you financially.

Loss of use – If your unit is damaged to the point that it becomes uninhabitable, your individual condo insurance policy may cover the costs associated with rental expenses while your place is repaired and brought back up to par. 

Identity theft – This is becoming a huge problem in the US. If your unit has been broken into and personal documents such as passports, credit cards and driver’s licenses are stolen, identity thieves can have a field day. This coverage comes with a minimal cost, but can be extremely helpful.

3. Should You Opt For Cash-value or Replacement-Cost Coverage?

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After you’ve determined the right amount of coverage, you’ll need to choose your coverage based on two basic categories: cash value and replacement cost. The difference between the two could mean hundreds if not thousands of dollars, which is why it’s critical to choose wisely.

Cash-value coverage – Only the value of the insured item less depreciation will be replaced with the cash-value option. Any item you buy will immediately start to lose its value the moment you walk out of the store. A 5-year-old television isn’t going to be worth as much as it did when it was first purchased, for instance. The insurance company would need to check out what that same (or similar) television could cost today, then deduct any depreciation.

Replacement-cost coverage – Unlike cash-value coverage, depreciation isn’t used to calculate how much you’d get back after the loss of your contents, such as a television. Instead, you would receive a check for the amount what it would cost to replace your old television with a new one on the market today.

4. Association Insurance Policy Deductibles Are Paid By All Owners

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Much like your own personal insurance policy requires a deductible to be paid should you file a claim, your HOA’s master policy requires the same. But the amount of this deductible can vary greatly, and is ultimately paid for as a group by all condo owners in the building.

Whether the condo community’s building was damaged by fire, wind, or natural disaster, the association would file a claim against the master insurance policy. The deductible amount would be spread out among all condo owners to be paid. So, if there are 50 unit owners in a building, and the master policy comes attached with a $5,000 deductible, each owner would be responsible to pay $100 towards this cost.

You need insurance for your condo, much like you would for any other type of real estate. But because of its unique traits, the type of individual coverage you get for a condo requires some careful consideration. Take the time to understand your particular HOA’s policy and coverage to make sure the policy you buy offers adequate coverage.

6 Things You Should Know About FHA Loans

After the financial crisis hit the US back in 2008, FHA loans suddenly became pretty popular among borrowers who found it tough to secure a conventional mortgage. Before that, FHA loans were typically an option reserved mainly for low-income homebuyers.

Fast forward eight years later, and FHA loans are still a popular option for homebuyers who might struggle to get approved for a conventional mortgage. Thanks to their lower down payment requirements and softer lending criteria, FHA loans often make an attractive alternative for many borrowers.

Here are a few things you should know about these types of loans if you’re considering one.

1. An FHA-Approved Lender is Required

Don’t let the name fool you – the FHA itself doesn’t actually provide loans directly to borrowers. Instead, these loans need to be funneled through an FHA-approved lender. The FHA insures these loans and backs up lenders who provide them to qualified borrowers. That means the FHA will reimburse the mortgage company for its losses should the borrower default on payments.

In exchange for this insurance, borrowers are charged both an upfront fee and a yearly premium. This added protection gives FHA-approved lenders the ability and peace of mind to offer financing to borrowers who might not necessarily qualify for a typical home loan.

2. Mortgage Insurance Can Make FHA Loans More Expensive Than Conventional Ones

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Speaking of insurance, it’s this feature that tends to make up the biggest cost for FHA loans. While the interest rates are often lower than conventional rates through Freddie Mac and Fannie Mae, mortgage insurance can make FHA loans more expensive.

As stated above, FHA mortgage insurance premiums (MIP) insure your loan in the case of default. It’s these premiums that allow the FHA to continue to keep this program available to homeowners without dinging the taxpayer.

FHA mortgage insurance premiums are paid in two parts. The first, referred to as “Upfront MIP,” is paid out at closing. This amount is automatically added to the mortgage balance by the FHA and is equal to 1.75% of the amount of your loan.

Your yearly mortgage insurance premiums, on the other hand, are paid out on a monthly basis. The cost of these annual MIP payments range depending on your location, and can be as high as 1.10% in more expensive areas of the country like New York City or San Francisco. On average, however, MIP is usually somewhere between 0.45% and 0.85% per year. The exact cost will also be based on how much is being borrowed, the length of the loan, and the loan-to-value ratio (LTV).

3. Minimum Down Payment is 3.5%

You’re probably already aware of the fact that FHA loans don’t require massive down payments in order to get approved for one. That’s probably one of the big traits that may have lured you to FHA loans in the first place.

What you may not know is that there is a minimum down payment, albeit a pretty small one. For the majority of borrowers, a minimum of 3.5% of the purchase price of a property is required by the FHA. That’s a very appealing feature of these loans when you factor in how expensive a home purchase can be.

4. Your Down Payment Will Determine the Credit Score Needed For Loan Approval

While FHA loans attract borrowers who don’t have excellent credit or a large amount of liquid cash to put towards a down payment, there is a caveat. The minimum credit score needed to be approved for an FHA mortgage depends on the type of loan that’s required by the borrower. In order to take advantage of a 3.5% down payment, your credit score needs to be 580 or higher.

If your score is between 500 and 579, you’ll need to come up with at least a 10% down payment. Make sure you know your credit score before applying for an FHA loan so you don’t come across any unpleasant surprises.

5. Closing Expenses May Be Covered

When buying a home, plenty of closing costs can creep up on the sale and really put a dent in the wallet. Appraisals, lawyer fees, title expenses, credit reports, and other closing costs can add up, but many times the FHA will allow such costs to be covered by sellers, lenders, and home builders. Oftentimes these costs are offered as an incentive for the buyer to purchase a certain property.

As great as this sounds, there’s a catch: lenders may charge a higher interest rate on the FHA loan if they pay for closing costs. Before agreeing to such an arrangement, it’s a good idea to compare loan estimates to determine which option makes more economic sense.

6. Costs of Certain Repairs Can Be Built Into the Loan

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If the home you plan on buying needs a little TLC, you might be able to access the extra cash needed to bring the home up to par. The FHA has a product called an FHA 203(k) loan which helps cover the costs associated with repairs and renovations. This specialized loan product is built into the mortgage, so you end up paying for the repair costs little by little rather than all in one shot. This can be extremely helpful if you can’t scrape together a lump sum of money to pay for the renovations.

As if this wasn’t beneficial enough, the loan amount is based on the forecasted value of the home after the repairs are done, rather the current appraised value.

Getting a mortgage can be tough if your financial ducks aren’t all in a row. FHA loans can be a great option if you find yourself struggling to scrounge a decent amount of cash for a down payment, or if your credit score is barely scratching the surface of what’s considered stellar. But there are also other expenses that come with these government-backed loans; namely, mortgage insurance. Make sure you have an in-depth chat with your mortgage specialist to determine whether or not taking the FHA loan route is best for you.

On the Fence About Title Insurance? Here’s Why You Need it

After pounding the pavement in search of the perfect home, you finally find one. An offer is put in and accepted, and all closing processes and costs are taken care of. You move in and begin life in your new home – what could possibly go wrong?

That depends on whether or not you opted for title insurance.

When you buy a home, you’re given title to the property. It’s this title that provides you – the new owner – with the right to possess and use the home and the land that it’s on.

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But sometimes title isn’t exactly yours, despite your name being on the purchase contract. That’s where title insurance comes into the picture.

Obtaining title insurance is a standard step before closing on the purchase of a home, and it’s a crucial one. It’s what protects you and your lender from the possibility that the current or previous sellers don’t actually have the legal right to transfer ownership to you because they never actually had free and clear ownership of the property in the first place.

Sure, these situations aren’t exactly common, but they’re still very possible, and do happen. And the cost associated with paying for such insurance far outweighs the nightmare that would ensue in the event that you discover that you don’t actually have free and clear title on the property, and stand the chance of losing it.

What Can Happen Without Title Insurance?

In the worst case scenario, sellers may willingly deceive you by selling you the property knowing that they don’t own it. These situations are far and few in between, but they have happened.

More typical title issues are more about pure ignorance and lack of facts about the true state of title. Let’s say the seller co-purchased the home with her then-husband, who now lives elsewhere following their divorce a few years back. Perhaps she is unaware that she actually needs her ex’s signature on the purchase agreement in order to legally sell and fully transfer title.    

Other common title issues stem from liens placed on the property for work performed on the home that was never fully paid for. For instance, a contractor may have completed an addition to the home, but the previous owners didn’t pay up for the work performed. As a result, the contractor placed a lien on the property, which means they’ve got their name on public record until the debt owed is discharged. Liens typically rear their ugly heads when properties are sold and unsuspecting buyers are suddenly faced with them.

In both of these situations – along with many more potential scenarios –  title insurance can offer protection.

Title Searches Can Help Uncover Issues

The first task that a title insurance agency will conduct is a title search before an insurance policy is even issued. This will help identify any potential problems with title on a property.

After analyzing public records related to the history of property ownership – such as divorce decrees, wills, trusts, and tax records – limitations on how the property can legally be used can be uncovered, as well as any rights that others might have on the property.

This preliminary title report will provide the opportunity to spot any issues before going any further with the sale, or even call it off completely if the problems are far too serious to deal with. It also offers the chance to keep everyone in the loop about what can and can’t be covered under insurance.

The good news is, any problems that arise are the seller’s problem, not yours – as the buyer, you shouldn’t be slapped with the responsibility of acting on any defects on title. You’re being promised title that’s free and clear, and as such, the closing agent will typically deal with the seller’s agent if the title report shows a problem.

Why Do You Need Title Insurance?

If an initial title search is conducted and you find that there are some issues, why do you need title insurance if you can just deal with these problems before you buy the property? If issues are uncovered, what’s the point of paying for title insurance after the fact?

It might sound counterintuitive to purchase insurance to pay for things that have already occurred and been discovered, as opposed to getting insurance to cover events that haven’t happened yet. You wouldn’t expect to get coverage for a car accident when you buy auto insurance after the incident occurs, much like buying property insurance wouldn’t be useful after a fire has already occurred.

But title insurance works a little differently. This type of insurance covers issues related to title of the property after they’ve already occurred, instead of covering events that happen after insurance has been issued. If there are liens on the property that weren’t paid by previous owners a decade earlier, or if a long lost relative suddenly appears and claims the property’s title, then you may have coverage under your current title insurance policy.     

Title searches are done to uncover potential issues with the title, which helps to minimize any risks when it comes to offering insurance policies. If certain issues related to the policy are not resolved through an initial title search, they’ll often be itemized as exceptions on the policy. It’s up to you if you want to still go ahead with the purchase following the discovery of known issues with title.

A competent title insurance policy will offer coverage for the financial repercussions of these events, since they significantly affect your ownership of the property. If a claim is brought up against your ownership rights in the property, your title insurance company will cover the expenses related to legally defending against the title claim.

With no title insurance policy, you’ll be responsible to come up with the funds needed to deal with these issues on your own. In that case, it’s worth the nominal fee needed to pay for title insurance for a little peace of mind.

How Common Are All-Cash Sales in San Francisco?

All-cash sales have surged across the country, and Bay Area cities are realizing some of the biggest spikes.

As of November 2015, 38.1 percent of real estate transactions of condos and single-family homes in the US were sealed with all-cash deals. That number is up 7.2 percent from the same time the year prior, and marks the biggest level of all-cash transactions since early 2013 after 29 consecutive months of yearly slumps.

San Francisco doesn’t exactly rank all that high among metro cities with the most all-cash sales across the country – it only lands at number 46 among the top 50 markets in the US for all-cash transactions.

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But this city has certainly made some ripples on the water as of late, with the San Francisco-Oakland-Hayward metro region experiencing the biggest yearly uptick – 89 percent to be exact – in all-cash sales of any area in the country with a minimum of 1 million residents. Of all real estate sales in the San Francisco area, all-cash sales account for 37.2 percent.

San Francisco isn’t the only California city on the list. Close behind San Francisco-Oakland-Hayward is the San Jose-Sunnyvale-Santa Clara region, which increased 74 percent in all-cash real estate transactions year over year. That marks the second-highest increase in all-cash sales in the nation, which currently accounts for 31.6 percent of sales in San Jose.

So what’s behind the boost in such confident buyers?

It’s interesting that such an increase occurred not long after the new disclosure rules for mortgages – otherwise known as the TILA/RESPA Integrated Disclosure – came into effect in October 2015. Such increased transparency makes it an even greater challenge for buyers dependent on mortgages to go up against liquid cash-heavy buyers in a market that’s already extremely competitive.

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The market in San Fran – and the Golden State in general – is hot. And with a shortage of inventory, the competition can be fierce. For this reason, some local buyers are coming in with all-cash offers in order to better compete with other interested parties.

Oftentimes these types of purchases are done with the help of family, after which a mortgage is taken out when the offer is accepted and the deal is done. With the housing market as hot as it is in San Francisco, buyers often need to pull out all the stops for the sellers to sway in their favor.

In fact, San Francisco clocks in at 24 percent of the counties in the US with the highest percentage of post-purchase mortgages.

But perhaps other factors have played a much bigger role in the all-cash real estate transaction increases in San Francisco, and the country as a whole.

Chinese Buyers

Plenty of foreign buyers with cash in hand are contributing to this increase as well, especially considering the current negative economic climate overseas. In particular, Chinese buyers are making up a big portion of foreign all-cash buyers, as they seek out safer investment havens in the US real estate market compared to the volatile one on home soil.

In fact, Chinese nationals are increasingly becoming the biggest percentage of foreign buyers of American real estate. According to the National Association of Realtors (NAR), Chinese buyers spent about $28.6 billion on US homes from March 2014 to March 2015. And among these, 51 percent of their transactions were done in California, New York, and Washington, and 76 percent of them were all-cash.

Older, Affluent Buyers

Perhaps the most accurate and prominent profile of the all-cash buyer in San Francisco and neighboring communities are those in their 50s and 60s. 

In fact, it’s this demographic of buyers who have contributed to 40 percent of all-cash transactions in the Bay Area. Whether they’re successful investment bankers, or are associated with family money, it’s this group that’s really upping the all-cash transactions in the city.

But these younger Baby Boomers who are approaching their retirement years are more apt to moving into the homes they purchase without financing rather than flip or invest. Two-thirds of these older, wealthy buyers of homes that were sold in all-cash transactions were simply moving in, with plans to stay for the long haul.

One thing’s for sure: given the fact that San Francisco is home to six of the eight most expensive cities in the US to purchase real estate, these all-cash buyers must be coming in with serious hauls to the negotiating table.