What is it used for?
Appraisals can be requested for a number of purposes, but perhaps the most common and important reason is to apply for a mortgage loan to purchase a home. Moreover, appraisals are also usually requested to value the immovable property of companies, especially of financial institutions (banks, insurance companies, real estate investment funds), to assess personal assets (in inheritances, for example), to determine the value of non-monetary contributions to companies, to get advice in a sale, etc.
To ensure adequate collateral for a mortgage loan, banks must ask for an appraisal, and in the Spanish mortgage market that usually means that a specialized company – an appraisal company officially approved by the Bank of Spain – estimates the value that could be reached by a home, business premises or factory that is going to be mortgaged.
If the bank also endeavours for the loan to be used as collateral for mortgage-backed securities (bonds, certificates or shares) that it is going to place among fixed-income investors, then the appraisal value of the immovable property will limit the amount of the loan. In the case of homes, that limit will be 80% of the appraisal value. However, in other cases the bank could grant credits that exceed those limits.
The valuations made by appraisal companies for the purpose of granting mortgage loans must respect many standards, most of which are included in Ministerial Order ECO 805/2003. The most important thing about those standards is the following:
- On the one hand, it is mandatory that an appraisal provide a prudent long-term value for each piece of immovable property, known as the mortgage value, even though it may be less than the market price at the time of the valuation (see the “What is valuation?” tab). The standards consequently seek to ensure that the collateral of mortgage loans is solid and long-lasting, thereby providing security to investors who acquire mortgage-backed securities that are issued by banks.
- They also attempt to establish rigorous valuation methods.
- And finally, they seek to help customers understand the criteria followed by the professionals who make the valuation. Therefore, appraisal reports have to necessarily include certain data about the home (surface area, location, state of upkeep, etc.) and the aspects that are considered for establishing the value (price per square meter in the surrounding area, expectations of price increases or decreases, etc.).
Appraisal reports have a validity of 6 months, which means that if six months have elapsed since an appraisal, then it is highly likely that the appraisal would not be the same, given that the market reality and the expectations of variation could have changed. This is nothing unusual if we think that the values of assets quoted daily on deep markets (such as shares traded on the stock exchange) change every day. Therefore, it would be imprudent to think that appraisal values would continue to represent the true value of properties after the passage of a certain amount of time since the estimate.
Other important aspects about the contracting of a mortgage loan can be appreciated in the mortgage guide prepared by the Asociación Hipotecaria Española (Spanish Mortgage Association).