If you have plans for home buying, selling, or refinancing, it will likely require an appraisal. While the mortgage lender will order the appraisal to ensure that they are not issuing a loan for more than what the property is worth, it’s still best for buyers and sellers to understand the home appraisal process and the different types of home appraisals that exist.
Below is an overview of each type of appraisal and the pros and cons of each. So the next time you decide to buy a home or draw from your home equity with a cash-out refinance, and an appraisal is needed to complete the transaction, you can keep these considerations in mind.
Full Home Appraisal
A full home appraisal is when a licensed appraiser inspects the interior and exterior of a home. Appraisers working on a full appraisal will take pictures and measurements of the subject property, provide commentary on its current condition, and compare its square footage, number of bedrooms and bathrooms, and more to similar properties in the area that have recently sold. These are referred to as comparable properties or property comps. Appraisers then use the sale price of those comps to help determine the subject property’s value.
A traditional, full appraisal is what most lenders use before funding a mortgage. It’s usually considered the most accurate, complete method for determining a property’s current market value.
Pros
- The lender, buyer, and seller all get a precise assessment of the home’s value through a licensed appraiser’s work.
- For the buyer, it provides peace of mind to ensure that they are not overpaying on the home’s purchase price.
- For the lender, it is the most accurate way to ensure that they are not issuing a mortgage for more than what the home is worth.
Cons
- Full appraisals can slow down the mortgage process if not managed properly.
- The full home appraisal cost is more expensive than other valuations, as it requires more work from appraisers.
Drive-By, or Exterior-Only, Appraisal
Exterior-only appraisals, or drive-by appraisals, are just what they sound like. The appraiser literally drives by the subject property and takes exterior pictures without going inside the home.
Then the appraiser uses available real estate records and property comps to determine the home’s valuation. For a home purchase, the appraiser may use listing photos to verify the features and condition of a home.
While drive-by/exterior-only appraisals were popular during the pandemic, they’ve become less common today.
Pros
- There is no need to enter the home to complete the appraisal, making scheduling much easier.
- It’s often done in refinance situations when the owner has a lot of equity in the home, so the refinance process can move more quickly.
Cons
- Since the appraiser doesn’t enter the home, there’s a lot inside that can get missed, affecting the valuation.
- Using photos supplied by the seller or buyer may not represent the home’s actual condition, and misrepresented or fraudulent images could artificially inflate what the home is worth.
- If the appraiser feels there is insufficient data and decides that a full appraisal is still needed, it could cause further delays.
- This method potentially could take longer than a full appraisal, as the appraiser may have to research things that would have been evident in an on-site inspection.
ACE+ PDR Report
The ACE+ Property Data Report (PDR) is a new model that allows eligible borrowers on Freddie Mac–backed mortgages to avoid a full appraisal. Instead, property information is collected on-site by a real estate agent, inspector, or data collector using Freddie Mac’s proprietary PDR datasets.
When the ACE+ PDR option is accepted, and a PDR is used to originate the mortgage, Freddie Mac will accept the estimated value submitted by the seller for underwriting the mortgage. Freddie Mac is still testing various components of its ACE+ PDR offering, and this bulletin outlines the current requirements and eligibility.
Kairos Appraisal uses trained data collectors to provide ACE+ Property Data Reports that support the Freddie Mac PDR data set. You can find more details in our blog here.
Pros
- The cost to determine an opinion of value for a PDR can range from $200 to $350. This is less expensive compared with a full appraisal fee, for which the national average is $400 to $550.
- With a PDR, mortgages may be closed more quickly because the process for completing them is less cumbersome than the full appraisal process.
Cons
- It does not determine the actual value of the home. Instead, it is only an estimation.
- A PDR does not require facilitation by a licensed appraiser, so it is considered less reliable. For this reason, many lenders may still require a full appraisal.
AVM (Automated Valuation Model)
An automated valuation model is a computer program that uses an algorithm to calculate a property’s value. Several different AVMs are available, and each may provide a different valuation. There are AVMs for mortgage lenders and real estate agents, as well as those that anyone can access, like Zillow’s Zestimate, a popular example.
An AVM comes up with an approximate home value by comparing the values of similar properties at the same point in time. It considers factors like location, square footage, and more without needing a professional appraisal or on-site inspection.
Pros
- As the process is fully automated, it saves time by eliminating the need for an on-site assessment.
- This method can remove the potential for human error, bias, or fraud.
- AVMs are usually free to use and easily accessible.
Cons
- AVMs are only as good as the data they have, so they must have sufficient data on a property to work as intended.
- They don’t factor in the property’s current condition, which could cause a discrepancy between the estimated and actual property value.
- While they can be helpful for buyers, sellers, agents, and lenders, the result is still only an approximate value. For instance, if Zillow’s Zestimate is $500,000, there is no guarantee that the home will sell for that price.
- You may still need a full appraisal later, especially if the AVM comes in too low and impacts the home sale.
Kairos Reinvents the Appraisal Process
Kairos Appraisal has developed innovative technologies that expedite home appraisal work like never before.
By combining data analytics, leveraging geocoding, implementing cutting-edge scheduling technology, and utilizing interactive communication tools, we’ve given the appraisal process a complete overhaul. These are just some of the ways we are changing the traditional appraisal process. If you’d like to learn more about partnering with Kairos Appraisal as your preferred AMC, click here to connect with us. If you have any questions about the different types of home appraisals, reach out to us anytime.
