If the house you want is worth only $200,000, your mortgage lender isn't going to let you borrow $300,000 or $750,00 to buy it. To make sure that doesn't happen -- or to try to make sure, at least -- the lender requires an appraisal of the property before approving the loan. Some appraisals, though, are more thorough than others. As you can probably guess, a "drive-by appraisal" is one of the less-thorough options.
Appraisals are designed to protect the bank in the event you stop paying your mortgage. (Nothing personal -- it's standard procedure.) If you default on your mortgage, the bank will foreclose and take the house away. If that happens, the bank wants to be able to sell the house for at least as much as you owe on it. That's where the appraisal comes in. The appraiser examines the house, the neighborhood, similar properties, recent sales in the area and other things to come up with a value on the house. The lender then uses that value in evaluating your loan application. For example, a bank may say that it won't write a mortgage for more than 80 percent or 90 percent of the appraised value. You have to make up the difference as a down payment.
The defining characteristic of a drive-by appraisal is that the appraiser doesn't go inside the house. The appraiser merely goes out to look at the property -- "drives by it," in other words -- to take pictures and verify that there's actually a house there that bears some resemblance to what you say you want to buy. The rest of the appraiser's work is done with real estate records -- analyzing assessments on the home and neighboring properties and looking at recent sales of comparable homes.
Pros and Cons
As with just about anything that's done in a less-than-thorough manner, drive-by appraisals are motivated by a desire to save money. They take less time to do, so the charge to the buyer -- and it's the buyer who pays for the appraisal -- is lower. According to ClosingCorp., a real estate information service, the appraisal on a typical home costs $350 to $600, while a drive-by costs less than $275. Drive-by appraisals carry obvious risks. There could be heaps of asbestos dust in the corners, or a charred hole where the kitchen should be or the plumbing might have all been torn out by scavengers -- all these things significantly decrease the value of the home but wouldn't show up on a drive-by appraisal report because the appraisal never goes inside. Critics of drive-bys say that a savings of $75 to $325 is trivial on a transaction worth hundreds of thousands of dollars, and that it might not be worth such a risk. Although lenders often approved loans based on drive-bys during the red-hot real estate market of the early 2000s, ClosingCorp says lenders have become much more likely to require a full appraisals.
A full appraisal is often referred to as a "1004 inspection," because the appraiser fills out Form 1004, the Uniform Residential Appraisal Report, created by the government-backed mortgage repurchaser Fannie Mae. This form requires the appraiser to actually get inside the house, measure its size, count the bedrooms and bathrooms, check for water damage or harmful bugs, verify that the appliances are all there and note the general condition of the place. This is all stuff that's impossible when the appraiser just drives by a snaps a picture.
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