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Demystifying Home Loan Appraisals: A Conversation with a Rural Appraiser

home in the country with green trees and field

On this episode of Living Rural, our experts break down the appraisal process for rural home loans – why an appraisal is needed, for lenders and borrowers, what determines value, what is unique to the rural market.

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First, what is an appraisal and what does it consist of?

It's an overview of property involved in a transaction. It lists all the features -- size, room count, garage, site size, all the information about the property.  Then the property is compared to three similar, most comparable sales in the neighborhood. Maybe comparable by size, condition, acreage, age. This paints a picture of how the subject compares to others in the market, and that's how we come to an opinion of market value.

If we have a ranch, we're looking for different ranches. Are you able to use a two-story home for comparison to a ranch home?

You can use different design. Sometimes with rural properties, it's more about the location. People just want to get out to the country. So while a ranch might be ideal as a comparable, there might be a two-story that's really similar -- maybe on a similar five acres or something in the neighborhood.  Bedroom count and square footage also are given consideration.

But like I said, the rural location drives buyers more than the specifics of the dwelling.

We pride ourselves on financing rural America, and there are lots of times where a home is on 5, 10 or even 40 or 80 acres. How do we value that for our loan customer?

It depends on the type of land and its utility. Is the 40 acres pasture, timber? That helps determine the value per acre. All-timber ground would have a different value than 40 acres that could be planted for row crops.

Can we dive a little bit deeper into what determines that value, what paperwork you look for when you receive an appraisal request?

When we receive a request, we first determine the reason for the appraisal. That is very important. Is it a refinance or a determination of collateral on a house to be built somewhere else?

We require the address, unless it's a vacant parcel and an address hasn't yet been assigned; legal description; borrower's names; contact information if we can reach out to the borrower. Also, is it a sale and on the MLS, or Multiple Listing Services? We might ask for the selling or listing agent. Then the purchase agreement is very important if it's a sale that gives us the agreed-upon purchase price between the buyer and seller.

For new construction, we do need the plans, the specifications, and the cost sheet or a budget -- just to, to make sure everything is in line with the market.

What determines an appraised a value?

The market. When we have a willing buyer and a willing seller and they come to an agreed price and properties sell for that price, that sets the market for that type of property. There might be a range within several thousand dollars. When we take all the information I mentioned before about the property, such as how big it is, how many bedrooms, bathrooms, the age of it, the condition and then compare it to other properties that have recently sold in the market -- that's how we come to our adjusted range of sale prices. How does our property compare to three properties that are similar and just sold in the market? What are people paying for this type of property? How many days on the market? That makes a difference, too.

There's a lot that comes into our determination of market value.

So, you make adjustments -- good and bad, you might say -- to get that value?

You're correct. Say our property is 1,400 square feet and it's on two acres, has a typical three bedrooms, two baths. If we're comparing it to one of our sales that's maybe 1,800 square feet, three bedrooms, three baths, there are adjustments we make to bring them more in line and be more equal. Those adjustments help us figure out that range of adjusted sale prices when we look at all the comps compared to our subject property.

Typically, we want to compare to sales within the past six months. But depending on the market, the location and the property itself, we might have to go back 12 months, even two years to find something similar. The last couple years, the market has been pretty stable, so you can use something that's sold two years ago with not much of a difference in the market.

In my area, I do a ton of construction loans and people don’t sell these homes. They build them to stay. Do we use those new homes as comparables?

We do not. You could build a home as custom as you want, and just because you spend a certain amount of money on your property, doesn't mean that it's comparable in the market. That is because it hasn't sold so there hasn't been a willing buyer to says, ‘Hey, this is what I'm willing to pay for your property.’

In more residential areas, it's not hard at all to find new construction. But typically, rural properties are built as forever homes. People aren't in the business of building and selling a lot of homes. So, it is sometimes hard to find something brand new that has sold. If I can, I try to stay within five years for comparables. Two to three years is great.

Talk to me about how fast we can turn around an appraisal.

On our consumer lending team, we cover South Dakota, Nebraska, Kansas and Iowa. We all have different areas within those states, and markets are different in different areas of each state. For example, property in Pottawattamie County might be different than something in Cass County closer to metro areas where prices tend to increase a bit. Rural markets tend not to have such a big difference compared to residential markets. 

We also belong to MLS so we can see what realtors are listing properties for and what the properties are selling for. That's how we get the best information.

We are an in-house team and guarantee appraisals in 10 to 14 days. Sometimes we’re quicker because we only have the one lender, Rural 1st®. This means the people we're working with, the lending officers, underwriters, everybody, is on the same page.

My customers and realtors, if it's a purchase, are truly amazed when I say I should have the appraisal back in 14 days or less. Thank you. You cover essentially a third of the state of Iowa. How do you get around and get them done so quick?

We do not have to physically inspect each property that we appraise. We have some tools, software that we can email to homeowners, that allows them to do a walkthrough of their house and take pictures.

They can use their phone, take pictures of the living room, kitchen, bathroom, everything we need. In fact, we have a list of every picture that we would like them to take. They send those back to us and that speeds up the process a bit. And they do a great job of taking pictures. They're proud of their property.

And if they've made any changes, most people are agreeable to using photos to show you what it looks like. Technology today is great.

Most people work eight to five. This saves them from the hassle of taking time off to make sure somebody's there to let the appraiser into the house.

I do go out and inspect properties. Sometimes, you want set of eyes on it yourself, or maybe someone isn’t really familiar with technology or isn't comfortable taking their own photos. It's great to get out there and meet the borrowers and see it for yourself.

One of our niche products here at Rural 1st is our construction product. I let my customer know loan approval is subject to the appraisal and the better information I get, the better value they're going to get. Why is it so important to have thorough documents about what is going into a project?

When we receive all the documentations for proposed new construction, we start our research based on the information we get. Sometimes when you're building, you might see something that you hadn't thought of before. Or maybe costs are higher than you thought so you're not going to finish that basement now or you're not putting up that second garage.

There's a lot of different things that can happen and things can change. We want the most accurate information for the most accurate outcome -- so you get credit, in a sense, for everything you're doing.

You don't have to put in expensive countertops and backsplashes and things. You just want to make sure your home is functional, that everything is safe and built very well. While you don't have to spend a lot of money to build a new home, is somebody willing to pay a little more, will your value might come in a little higher if you include upgrades. Interior finishes do make a difference.

If you can give your lender the best idea of what you're going to do in the beginning, that's a great place to start. We have a spreadsheet that we share. If a customer isn’t working with a general contractor, I give them the spreadsheet and sometimes they're like, ‘Oh yeah, I forgot landscaping,’ or ‘I forgot excavation.’ It’s not necessarily things that would help the value, but sometimes it does. Is there water on the property or do we have to dig a well, or is rural water close? How far is the electricity, does it need to run up hill? That is all part of the cost of the project that we want to know.

We want to know right up-front what kind of property this is going to and what it will be valued at, which helps to determine the final loan amount. 

Rural 1st is a tradename and Rural 1st, the Rolling Hills Window icon, Rural Logic, and Closer to What Matters are exclusive trademarks of Farm Credit Mid-America, NMLS 407249. Rural 1st products are available to consumers within the territories of participating Farm Credit System Associations, including Farm Credit Services of America (NMLS ID #579135).


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