Author Archives: ed.johnson@dcmetrorealtyteam.com

Verify Your Property Taxes

Taxes“Do you ‘know’ when your mortgage company paid your Property Taxes?  Almost everyone who has a mortgage on their home pays their Property Taxes each month into an escrow account, expecting the mortgage company to pay them.  Be aware of when your lender is paying taxes each year.”

Denise Buck & Ed Johnson – DC Metro Realty Team

 

If you have a mortgage with an escrow account to pay your property taxes and insurance, you expect the company servicing your loan to pay this year’s taxes this year so that you can deduct them on your 2014 income tax return. After all, your monthly payment includes 1/12 the annual amount so there will be money available for them to be paid on time.

IRS requires that expenses must actually be paid in the year that a deduction is to be taken.

The predicament occurs when you’ve made your payments but the mortgage company didn’t pay the taxing authority in the tax year they were due. If they paid your 2014 taxes in January of 2015, they wouldn’t be deductible for you until you file your 2015 income tax return.

Verify with your lender after you make the December payment that they did indeed pay your property taxes. The question for your lender’s customer service is: “Have you or will you pay the 2014 property taxes this year so I’m eligible to deduct them on my 2014 income tax return?”

Consider an Adjustable Rate

Adjustable Rates“Adjustable Rate Mortgages can be the right answer for some buyers.  In the past, there were buyers who used them, that shouldn’t have.  But there is a time and place for everything.  If you are not going to be in the home you are preparing to buy for very long, an Adjustable Rate Mortgage might just save you money.  Talk to a Lending professional to find out what is right for you.”

Denise Buck & Ed Johnson – DC Metro Realty Team

 

With fixed rate mortgages as low as they are, most purchasers or owners wanting to refinance might not even consider an adjustable rate loan. The determining factor should be how long the person plans to be in the home and which mortgage will provide the cheapest cost of housing.

For instance, if you compare a $300,000, 30 year term mortgage with a 4.125% rate on the fixed and a 3.25% on the 5/1 adjustable, the breakeven point would be almost seven years assuming the rates adjusted the maximum that they could in each year.

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Therefore, if a person is going to stay in the house less than 7 years, the ARM would provide the cheapest cost of housing. This example shows that at the end of five years, the ARM would generate almost $13,000 savings over the fixed-rate.

On the other hand, this could be a good time for homeowners with an existing adjustable rate mortgage to consider refinancing into a fixed-rate mortgage. The longer that they intend to stay in their home, the more advantageous it might be for them to convert their mortgage to lock-in their payment and fix their housing costs.

A trusted mortgage professional can analyze the alternatives to provide you with the information necessary to make a good decision. You can try the Adjustable Rate Comparison with your own numbers to see the effect.

Realize Tax Savings Sooner

W4 Allowances“Taking extra allowances on my W-4 is something I have practiced for about 30 years now.  At first it was just a way to get a little more money during the year.  But then I realized that I could take a little more, and then afford to ‘save’ more all during the year and earn ‘interest’ all year long!  It’s a balancing act that takes a little practice and tweaking, but it can really pay off once you get it in place.  Most years I only get about $200-$300 back at the end because I’ve already received the rest and invested it.”

Ed Johnson – DC Metro Realty Team

A homeowner’s tax saving benefit is generally realized when they file their federal income tax return after the money has been spent for the interest and property taxes. Some people look forward to the refund as a means of forced savings but some people need to realize the savings during the year.

It is possible to adjust the deductions being withheld from the homeowner’s salary so they realize the benefit of the savings prior to filing their tax returns in the form of more money in their pay checks. Employees would talk to their employers about increasing their deductions stated on their W-4 form.

By increasing the exemptions or deductions, less is taken out of the check and the employee will receive more in each pay check. If a person over-estimates their exemptions and therefore, underpays their income tax, they might incur interest and would have additional tax to pay when they filed their tax return.

Buyers considering this strategy should seek tax advice and discuss it with their human relations department at work. Additional information is available on the Internal Revenue Service website about Completing Form w-4 and Worksheets.

What’s that Creepy Sound in my Home?

Nightmare on Elm Street“All homes make sounds.  Some different than others.  We get used to them and they become part of our everyday life.  But sometimes you start to hear a new or different noise.  Learn about the one’s to really pay attention to.”

Denise Buck & Ed Johnson – DC Metro Realty Team

Homes make strange noises. They’re built from many different materials — glass, concrete, wood — that expand and contract at different rates.

“[But] the most noise your house should make is a popping sound, like your knuckles cracking, and only once in a while,” said Bill Richardson, former president of the American Society of Home Inspectors and owner of Responsive Inspections in Bosque Farms, N.M.

If your home is making noises that rival the best of Metallica, then it may be sending you signals that there’s a problem. We asked the experts to catalogue some of the more worrisome pops, hisses, groans, creaks and knocks, and tell us what they mean and how they can be remedied.

Here are the top seven problem noises and how they can be solved.

1. What is that clanking sound when I turn on the heat?

The problem: When most homeowners first turn on their heating system in the fall, they hear a little moaning and groaning as the heating system expands and rubs against the frame of the house, says Mike Kuhn, the New Jersey owner of HouseMaster inspection service and coauthor of “The Pocket Idiot’s Guide to Home Inspections.” With a baseboard hot-water system, you can also expect “normal clinking and knocking,” says Kuhn. The circulator pump or pumps to the system, however, “should be silent when they run,” says Kuhn. If you hear knocking or clanking, typically located at the boiler itself, it might be a sign of impending failure of the circulator pump, he says.

The solution: Get a repairman out to check on it, pronto.

2. There’s a strange scratching sound coming from behind the walls.

The problem: If you hear strange noises like scratching and possibly chittering coming from places where no one lives in the house, you could have mice, squirrels, raccoons or even bats sharing your quarters, says Richardson. “Any kind of wild critter could be up in the attic,” he says. And these freeloaders aren’t just a nuisance; bats can carry deadly rabies. In the Southwest, the droppings of mice can spread hantavirus. Some animals will tear up insulation to nest or chew through siding and even electrical wires, causing fires.

The solution: As soon as you suspect an intruder, get on it: Set traps. (Call in a pro if the animal is stubborn or large.) Finally, prevent the problem from reoccurring by sealing up the entrances to your house with steel wool, metal sheeting, caulk and/or hardware cloth.

To keep raccoons away, put garbage in sealed, secure metal cans that can’t be tipped. Bring pet food inside. After pests have been removed, make sure vents and chimneys are securely covered with mesh or a grille, so those spaces can still breathe.

3. There’s no one in the house and I can still hear running water. How can that be?

The problem: “You definitely don’t want to hear water running if nobody’s using anything,” says Richardson. The sound could indicate many things — a busted pipe in a wall, under the floor or even in the irrigation system.

The solution: If you hear running water when you shouldn’t, shut the main off and see if the noise goes away, says Richardson. If it does, you’ve got a leak somewhere — and a problem in need of fixing. Unless you’re really handy and ready to do surgery on your home, call in a plumber.

4. I hear a bubbling (or cracking) sound coming from the water heater. Is that normal?

The problem: A gas-fired hot-water heater works pretty much like boiling a pot of water: A fire is lit and the water inside is heated until it’s ready for use. “A lot of sediment builds up at the bottom of ahot water tank, and that sediment works like an insulator,” forcing the burner to work harder, Kuhn says. The strange noise you hear is the bubbling sediment — and a sign that the tank is probably experiencing fatigue and may be facing premature failure, he says.

The solution: Ideally, you should flush out your hot water tank every few months, using the drain valve near the bottom of the floor. “However, nobody does it,” says Kuhn, because it can be a pain to do. If your water heater is already making these noises, draining it might help. “It could (work) a little bit longer, [and] it could go a lot longer,” but the damage is probably done, says Kuhn.

5. My furnace is making a whistling (sucking) sound that it’s never made before. Is it going to need to be replaced?

The problem: “What that can connote is that your filter hasn’t been changed,” says Richardson. “And your furnace is trying to pull in air from around it.” That’s not good, he explains, because it means the furnace is working too hard. “What it will do is start sucking exhaust gasses from the furnace into the house.”

The solution: Install clean filters regularly — “anywhere from three months to monthly, depending on atmospheric conditions,” says Richardson.

6. I hear a switch turning on and off regularly but can’t seem to isolate where it’s coming from.

The problem: If you have a well for your water, you’ve got a well pump — either in the house or above the well in your yard. “If you are sitting in your house and hearing the pump-switch click on and off, you may have a problem,” says Kuhn. The pump pulls water from the well and into a holding tank, where it’s stored for your use. If you’re hearing it when you, say, turn on the faucet, something may be wrong. The pump “should not operate every time there is a call for water. The wear and tear would cause the pump to fail prematurely,” he says. It’s likely that you have a leak in the system. “The leak is either going to be in the well equipment itself, or in a fixture,” says Kuhn.” For example, aleaky toilet fixture could be causing the holding tank to drain.

The solution: First, check your fixtures for leaks. Then, if needed, call a plumber familiar with well systems.

7. What’s that hissing sound?

The problem: If your home has gas, a strange noise that sounds like hissing could indicate a gas leak, says Richardson. Sometimes you can hear a hissing outside at the gas meter, or at a home’s outdoor gas light post — places where the line could have corroded, he says. “You should be able to smell it, but you never know.”

The solution: If you you smell gas around the gas main, don’t mess with the gas shutoff unless you absolutely know what you’re doing because any mishandling or spark could make things much worse, Richardson explains. If you hear the noise and smell the gas, immediately evacuate the house and call the gas company.

By Bob Villa, as published by Zillow

Best Countertops for Busy Kitchens

CountertopChoices“Thinking about replacing your kitchen countertops?  There are several options to consider, but which one is right for your kitchen?  It all depends on how you use it, and what your budget it.  Is it only for cooking, or is it where every member of the family works on projects?  Know the Pros and Cons of each type of countertop.”

Denise Buck & Ed Johnson – DC Metro Realty Team 

Replacing a scratched, scorched, stained, or just plain unattractive countertop can transform any kitchen. Happily, there are lots of options in a wide range of prices. A new laminate countertop can cost as little as $10 per square foot. Or you could easily spend 10 times that on quartz, granite, or recycled glass. Consumer Reports tested more than a dozen popular types of countertops to see how well they resisted stains, heat damage, cuts, abrasion, and impact, and found seven that passed muster. Here are the details.

In our countertop tests, performance varied from one material to the next but there was little difference among competing brands of each type, so be sure to shop around for the best deal on your countertop of choice. The prices below are for a typical kitchen with 56 square feet of counters and include installation. For the pros and cons of each type, see the numbered entries below.

1. Quartz
Cost. $2,240 to $5,600
Pros. It mimics the look of stone yet needs less maintenance. Hot pots, serrated knives, abrasive pads, and most stains were no match for quartz, which is a combination of mineral, color, and resin. It comes in vibrant colors in addition to patterns that look like granite and marble.
Cons. Edges and corners can chip, and you’ll need a pro to repair them. Rounded edges help.

2. Granite
Cost. $2,240 to $5,600
Pros. Each slab of this natural material is unique; rare colors and veining cost more. Heat, cuts, and scratches didn’t harm granite in our tests. Polished and matte finishes resisted most stains when properly sealed, so pick the look you prefer.
Cons. Periodic resealing is needed to fend off stains. Like quartz, edges and corners can chip and must be professionally repaired.

3. Soapstone, limestone, and marble
Cost. $2,800 to $5,600 (soapstone or limestone), $2,800 to $8,400 (marble)
Pros. Soapstone isn’t as common as granite, and it’s superb at resisting heat damage. Small scratches can be repaired by sanding finely and applying mineral oil. Limestone (pictured) and marble are classic materials.  Limestone also has a natural-stone look without heavy veining or graining and it resists heat.
Cons. Soapstone nicks, cuts, and scratches easily, and some stains are too tough to be washed away. Limestone and marble also have those drawbacks, and heat damaged our marble.

4. Laminate
Cost. $560 to $2,240
Pros. Inexpensive, easy to install, and so much better-looking than you probably remember, thanks to new printing technology and decorative edges. Stains and heat didn’t damage the laminates we tested.
Cons. Cutting directly on it easily and permanently damages laminate, so use a cutting board.

5. Solid surfacing
Cost. $1,960 to $5,600
Pros. Available in a variety of colors and patterns, it can be used for counters, sink, and backsplash, creating a seamless look because joints are almost invisible. And like quartz, its color won’t vary much from the store sample. Solid surfacing is resistant to most stains, and small nicks and scratches can be repaired.
Cons. It scratches and cuts easily, so a cutting board is a must.

6. Recycled glass
Cost. $3,360 to $6,720
Pros. Large shards give it a fun, contemporary look; finely ground glass makes it less busy. Most glass counters we tested resisted stains, cuts, scratches, and heat.
Cons. It’s the only material for which we found a difference among brands. Cosentino’s Eco counters were the only ones that developed a thin crack during our heat tests.

7. Butcher block
Cost. $2,240 to $5,600
Pros. It adds warmth and is easy to install and repair, but the finish makes a difference. Varnish improved stain resistance, but penetrating oils diminished it.
Cons. Nicks and scratches can easily happen, though they can be sanded out.

—Adapted from Consumer Reports Kitchen Planning & Buying Guide

Home Improvements that Pay Off

Home Improvements“Everyone thinks that upgrading and improving different areas in the home will add value.  Unfortunately that’s not always true.  Sometimes you need to do upgrades in order to prepare you home for Sale, but that’s so you can compete in the market, not add value. Sometimes you want to change something so that it will meet your personal desire or taste, again, it may not add value.  Be aware of what adds value so that you have realistic expectations on the return for your investment.”

Denise Buck & Ed Johnson – DC Metro Realty Team

Despite what you see on TV and what the conventional wisdom says, most of the home improvement projects with the greatest return on investment are unglamorous. According to Remodeling Magazine’s 2014 Cost vs. Value report, you’ll recoup the greatest percentage of your investment on projects such as replacing the front door with a steel one, adding a wood deck, replacing old siding, replacing the garage door and replacing old windows. Also contrary to conventional wisdom, most home improvement projects do not return more than your investment when you sell. In fact, the average remodeling project only recoups 66 cents for every $1 you spend on it. To get the highest percentage of your remodeling dollars back when you sell, here’s what to improve, what not to improve and why.

Best Options: Practical, Midrange Projects

Do you want to get back 96.6% of what you spend on a home upgrade? Then replace your old front door with a new, mid-range steel door with a clear dual-pane half-glass panel and a new lockset. You’ll spend an average of $1,162 for this project, but you’ll get back $1,122 when you sell, Remodeling Magazine reports. Another project in the same price range is replacing your garage door for $1,534; you’ll recoup $1,283, or 83.7%. You won’t need a home-equity loan to tackle these projects, and their low cost and high impact on curb appeal make them smart choices.

“Curb appeal is the biggest selling factor,” says Diana George, founder of Oakland, Calif.,-based Bay Area real estate brokerage Vault Realty Group. “If the house looks unkempt on the outside, buyers automatically assume the same will apply to the interior of the house.

If you can afford to spend more, consider projects such as adding a 16’ x 20’ wood deck, which costs $9,539 on average but recoups 87.4% of its cost; replacing 10 old 3’ x 5’ windows with new, double-hung, wood or vinyl ones, which costs close to $11,000 for wood and nearly $10,000 for vinyl but recoups about 79%; or replacing vinyl siding, which costs $11,475 for 1,250 square feet but should bring back $8,975 when you sell.

“Windows, garage doors and decks aren’t necessarily big-ticket items in terms of price or luxury,” George says, but “updating these items gives the home an instant facelift and contributes to a modern aesthetic, which is exactly what potential homebuyers want to see when they drive up to look at a new home.”

Pricier Projects

Two of the priciest – but still relatively worthwhile – improvements include attic bedrooms and basement remodels. These projects will set you back tens of thousands of dollars, but are a relatively inexpensive way to increase your home’s useable square footage compared with an addition. Minor and major kitchen remodels also make the cut, as do bathroom remodels. However, while it may be true that kitchens and bathrooms sell houses, forget about doubling your money. You’re likely to recoup just 82.7% of your $18,856 cost on a minor remodel of a functional but dated 200-square-foot kitchen; 74.2% on a $54,909 major kitchen remodel and 72.5% on a $16,128 remodel of a 5’ x 7’ bathroom. These are the types of expensive projects you might be tempted to finance with a home-equity loan, but you should think twice before borrowing money and paying 6% interest or more to finance a project with a negative return.

The costs Remodeling Magazine provides are averages. If you can get a project completed well for less, you might be more satisfied with the percentage of its costs you get back when you sell your home. Costs vary by geographic region, project size and scope, and the quality of finishes you choose.

“Bathroom upgrades can be done for a minimal cost using materials that look expensive, but are quite affordable,” says Jeff Dumas, owner and broker at Home Ventures Realty in Tempe, Ariz., where he’s rehabbed and sold residential properties for more than 10 years. “Most of the time, I can take an average starter home, put in a new tub with a porcelain tile backsplash, new toilet and vanity, tile the floor, and use some decorative hardware for about $1,500 to $2,000. The results are amazing and help the wow factor when potential buyers are viewing the property,” he says.

Surprising Disappointments

Backup power generators and roofing replacements are among the projects on which homeowners will recoup the least at resale. You might get back just 67.5% of the $11,742 you spend on a generator and 67.6% of the $18,913 you spend on a roof. Also at the bottom of the list are sunroom additions, bathroom additions and master-suite additions. These projects are expensive and involve weeks or months of disruptive construction, so don’t take them on unless they’re for your personal enjoyment and you’re planning to stay in your home for years to come. Remodeling a home office is the least worthwhile project on the list, recouping just 48.9% of the $28,000 it’s likely to cost.

That being said, some of these projects are more valuable if you live in areas where they’re in higher demand. In the West South Central region, which includes storm-prone areas in Texas, Oklahoma and Louisiana, a backup generator will recoup 86% of its cost, on average.

By Amy Fontnellie, Originally Published on Yahoo Homes

‘Bad’ Rules of Thumb for Retirement

retirement-planning-283x249“We’ve all heard words of wisdom from our parents and grandparents over the years and other friends and relatives.  But was it always right?  What was it based on?  Today and tomorrow are  very different times than when previous generations were preparing for retirement.  Make sure you understand the impacts of some of those old Rules of Thumb for Retirement.”

Denise Buck & Ed Johnson – DC Metro Realty Team

What makes a good rule of thumb? It should be memorable, pithy and, above all, useful. It also shouldn’t overreach; it just gives good guidance. “Measure twice, cut once” is a great example. It doesn’t try to explain carpentry. It just reminds us to take our time, be precise and avoid making a mistake that can’t be undone. (Not bad for four words.)

What makes a bad rule of thumb? How about this: it doesn’t work. Or worse, it brings about exactly the opposite of what you intended. Retirement is full of advice that sound reasonable but may be bad for your retirement health. Here are three to be wary of:

Rule of Thumb #1: Save 3% of Salary for Retirement

The most frequent auto-deferral rate into a 401(k) is 3% of pay, probably because it typically maxes out the company match. Unfortunately, 3% is just not going to get the job done.

Think of it this way: you will likely work for about 40 years and retirement can last up to 30. That means 40 years of pay checks need to be spread across 70 years. Common sense suggests that 3% (even with a company match) is not going to be enough provide the spending you’d like once you’re in retirement.

Our recent research suggests that 10 to 13% is more reasonable. If that sounds like a lot, think of it this way: paying your future self 13% of your current pay can buy you 30 years of retirement spending. It may actually be a bargain.

Rule of Thumb #2: The 4% Drawdown

Let’s say you retire with one million dollars in savings. One of the most common rules of thumb is that the first year you should withdraw 4%, or $40,000. Next year, add a cost of living adjustment, say 2.5%, and take out $41,000. And so on.

The risk here is that if the market moves against you, the odds increase that a rigid withdrawal plan will increase the odds of running out of money. If the market rallies, the opposite can happen and you will leave behind a large unspent surplus. (Great for your heirs, of course, but you would have enjoyed retirement less than you could have.)

So what’s a better rule of thumb? Probably one based on a dynamic amount, a percentage of your portfolio. You may have less to spend some years, and more others, but the risk of spending down your assets is substantially reduced. What’s more, as you get older and have a shorter retirement period to fund, you can increase the percentage.

Rule of Thumb #3: 120 minus Your Age

We know that it makes sense to have a more conservative portfolio as you get older. This Rule says the equity percentage in your portfolio should be 120%, minus your current age. So a 60 year old should have 60% equity while a 75 year old should have 45%. We can quibble over the percentage, but this sounds reasonable, right?

Well, no. And here’s why. Let’s say the 60 year old is retired and the 70 year old is healthy, happy, still working and plans on working until 75. The 70 year old can actually tolerate more risk than the 60 year old because she has five years of future wages to grow her assets and offset market loses. The 60 year old has no more future wages to offset losses and may feel that 60% equity is too high.

This idea of factoring future wage potential into the allocation is actually what some investment strategies do, and why a 30 year old (with 35 years of wages ahead of him) has more equity exposure than a 60 year old with only five years of human capital left.

Originally published in ‘The Street’ By Chip Castille, Managing Director, BlackRock

Save Interest & Build Equity in Your Home

Pay down your mortgage“It’s amazing how much you can save in interest is you pay just a little extra each month on your mortgage.  There are several ways to do this…adding $’s to each payment, or paying bi-weekly instead of monthly are just two examples.  Check this out for more details that may help you.”

Denise Buck & Ed Johnson – DC Metro Realty Team

 

If you invest in a savings account, you’ll make less than 1% and would have to pay income tax on the earnings. On the other hand, contribute something extra to your house payment and you’ll earn at the mortgage interest rate which is certain to be more than you are earning in the bank.

Making additional principal contributions on your mortgage will save interest, build equity and shorten the term. An extra $100 a month in the example shown will save thousands in interest and shorten the term of the mortgage as well.

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Reducing your cost of housing is another way to improve the investment in your home. Becoming debt free is a worthy goal that is achieved with discipline and good decisions. Suggestions like this are part of my commitment to help people be better homeowners when they buy, sell and all the years in between.

Check out what would happen if you were to make additional payments on your mortgage.

Enjoy Your Improvements and Profit by Them

Home Improvement $$“One of the things our clients usually ask about is how they can improve the value of their home.  Different projects have different returns.  Some add value, while others maintain. Want to know more?  Check out this article below for a few quick tips.”

 

Denise Buck & Ed Johnson – DC Metro Realty Team

Homeowners can raise the basis or cost in their home by money spent on capital improvements. The benefit is that it will lower their gain and may save them taxes when they sell their home.

Improvements must add value to your home, prolong its useful life or adapt it to new uses. Repairs are routine in nature to maintain the value and keep the property in an ordinary, operating condition.

Additions of decks, pools, fences and landscaping add value to a home as well as new floor covering, counter-tops and other updates. Replacing a roof, appliances or heating and cooling systems would be considered to extend the useful life of the home. Completing an unfinished basement or converting a garage to living space are common examples of adapting a portion of the home to a new use.

Other items that can raise the basis in your home are special assessments for local improvements like sidewalks or curbs and money spent to restore damage from casualty losses not covered by insurance.

Here’s a simple idea that could save you money years from now.

Every time you spend money on your home other than the house payment and the utilities, put the receipt or canceled check in an envelope labeled “Home Improvements.” Regardless of whether you know if the money would be classified as maintenance or improvements, the receipt or cancelled check goes in the envelope.

Years from now, when you’ve sold your home and you need to report the gain on the property, you or your accountant can go through the envelope and determine which of the expenditures will be adjustments to your basis.

Some people disregard this idea because of the generous exclusion allowed on principal residences. At the unknown point in the future when you sell your home, circumstances may have changed and the proof of these expenditures will be valuable. The tax laws could lower the exclusion amount or eliminate it altogether. Your marital status may change because of death or divorce. The market value of your home may skyrocket.

Since the future is unknown, it is better to keep track of the improvements as they are made and how much is spent on them. Download an Improvement Register and examples or read more in Publication 523 on Increases to Basis.

What to Know about Home Appraisals

Home Apprasails“Whether buying, selling or refinancing, when you use a mortgage, a home appraisal will usually play a major role in in the transaction.  You’ll want to understand how the appraisal process works and how an appraiser determines a home’s value.”

Denise Buck & Ed Johnson – Dc Metro Realty Team

What Is a Home Appraisal?
An appraisal is an unbiased professional opinion of a home’s value.  Appraisals are almost always used in purchase and sale transactions and commonly used in refinance transactions.  In a purchase and sale transaction, an appraisal is used to determine whether the home’s contract price is appropriate given the home’s condition, location and features.  In a refinance, it assures the lender that it isn’t handing the borrower more money than the home is worth.

Lenders want to make sure that homeowners are not over-borrowing for a property because the home serves as collateral for the mortgage.  If the borrower should default on the mortgage and go into foreclosure, the lender will recoup the money it lent by selling the home.  The appraisal helps the bank protect itself against lending more than it might be able to recover in this worst-case scenario.

The Appraisal Process and How Appraisal Values Are Determined
Because the appraisal primarily protects the lender’s interests, the lender will usually order the appraisal.  According to the Appraisal Institute, an association of professional real estate appraisers, a qualified appraiser should be licensed or certified (as required in all 50 states) and be familiar with the local area.  Federal regulations state that the appraiser must be impartial and have no direct or indirect interest in the transaction.  Fannie Mae requires appraisers to certify that they have experience appraising similar properties in the same geographic area.

A property’s appraisal value is influenced by recent sales of similar properties and by current market trends.  The home’s amenities, number of bedrooms and bathrooms, floor plan functionality and square footage are also key factors in assessing the home’s value.  The appraiser must do a complete visual inspection of the interior and exterior and note any conditions that adversely affect the property’s value, such as needed repairs.

Typically, appraisers use Fannie Mae’s Uniform Residential Appraisal Report for single-family homes.  The report asks the appraiser to describe the interior and exterior of the property, the neighborhood and nearby comparable sales.  The appraiser then provides an analysis and conclusions about the property’s value based on his or her observations.

The report must include a street map showing the appraised property and comparable sales used; an exterior building sketch; an explanation of how the square footage was calculated; photographs of the home’s front, back and street scene; front exterior photographs of each comparable property used; and any other information, such as market sales data, public land records and public tax records, that the appraiser uses to determine the property’s fair market value.  An appraisal costs several hundred dollars, and generally the borrower pays this fee.

What Homebuyers Need to Know

When you’re buying a home and you’re under contract, the appraisal will be one of the first steps in the closing process.  If the appraisal comes in at or above the contract price, the transaction proceeds as planned.  If the appraisal comes in below the contract price, however, it can delay or derail the transaction.

Chances are neither you nor the seller wants the transaction to fall through.  As the buyer, you have an advantage in that a low appraisal can serve as a negotiating tool to convince the seller to lower the price so the transaction can move forward.  The bank won’t lend you or any other prospective buyer more than the home is actually worth.  While appraisals help buyers avoid overpaying for homes, a seller may feel that a low appraisal is inaccurate and be reluctant to drop the price.  If a bad appraisal is standing between you and your home purchase, look into getting a second opinion via a second appraisal.  Appraisers can make mistakes or have imperfect information.

What Home Sellers Need to Know
As a seller, a low appraisal, if accurate, means you will have to lower your home’s price to get it sold.  Lenders won’t approve loans for more than a home is worth, and holding out for an all-cash buyer who doesn’t require an appraisal as a condition of completing the transaction is unlikely to net you a higher sales price.  No one wants to overpay for a home.

Unfortunately, recent distressed sales in the surrounding area can lower your home’s appraisal value.  If you feel that your home’s value has been dragged down by the sales prices of nearby foreclosures and short sales, you may be able to convince the appraiser that your home is worth more if it’s in significantly better condition than those properties.  Sellers should also know that federal guidelines (intended to eliminate the inflated appraisal values that contributed to the housing crisis) sometimes cause appraisals to come in below fair market value and can make low appraisals difficult to challenge.

What Refinancing Homeowners Need to Know
If you’re refinancing a conventional mortgage, a low appraisal can prevent you from refinancing your home.  The home needs to appraise at or above the amount you want to refinance for your loan to be approved.  However, if your existing mortgage is an FHA mortgage, you can refinance without an appraisal through the FHA Streamline program.  FHA Streamline is a great option for underwater homeowners.

The Bottom Line
When everything goes smoothly, the home appraisal is just another box to tick on a loan-closing checklist.  When the appraisal value is lower than expected, the transaction can be delayed or even canceled.  Regardless of which situation you encounter in your home buying, selling or refinancing experience, a basic understanding of how the appraisal process functions can only work in your favor.