What Your Bank Wishes You Knew About Valuations
Our firm collaborates with banks every day. So we know what they want you to understand about real estate valuations for your loan.
1. Your bank will not issue you a loan for more than the appraised value based solely upon the collateral.
The single most important item to understand is that your bank will not give you a loan for your property for more than the appraised value unless the loan is based upon credit rather than collateral. This concept causes confusion, especially when the appraised value is lower than the anticipated value or agreed-upon sale price of a property. Keep reading to understand common misconceptions associated with appraisal.
2. The appraised value is not necessarily the same as the market value.
There are many different types of value. Bank loans are predicated upon market value (value in exchange). Market value addresses the question, “What would the property likely sell for on the date of value after a typical exposure period on the open market?” In other words, market value is the price an interested party would most reasonably pay. An appraiser arrives at the requested value of the property being appraised by applying three methods, the Sales Comparison Approach, the Cost Approach and the Income Capitalization Approach. (These methods will be further explained in future blog posts.)
3. Your bank relies heavily on the appraised value to determine the final loan amount.
To determine the amount for financing, your bank’s underwriter relies heavily on appraised value of the real estate only (land, structures, and improvements). Appraisals protect the bank, but they also protect you as the borrower. An appraised value at less than your pending purchase price frequently supports sale price renegotiations.
4. The appraised value is not the same as the assessed value.
The assessed value of a property is determined by a public tax assessor who is employed by the government to levy taxes on the property. The assessor’s value is not to be confused with or assumed to be the same as market value.
5. The appraiser is bound to confidentiality by banking law and regulation.
The intended user (the party that will rely on the results of our appraisal) and the client (the party that engages a licensed appraiser) are not necessarily one and the same. For federally regulated transactions, the intended user and client will most likely be your lending institution. Appraisers, therefore, are limited in the amount of information they can freely share with you as the property contact.
6. At the end of the day, financial institutions are risk adverse.
Always keep in mind your bank or financial institution is risk adverse. Their goal and fiduciary duty is to ensure the loans they issue meet federal banking laws. As required by law, all federally regulated transactions must have an appraisal through the financial institution. Alexander Argianas, Associate Appraiser and Corporate Client Liaison, recommends that you consider hiring a licensed, bonded appraiser prior to any negotiations or decisions involving real estate, even before your bank gets involved. “This ensures you are an informed property owner and have the right information to help you make smart decisions,” Alexander shared. “When it comes to commercial real estate, knowledge truly is power.”
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