What Home Buyers Need to Know About Appraisals

Dec 6, 2017Homebuying Process

When buying or selling a home, one crucial step is the home appraisal. A home appraisal determines the fair market value of a property, providing both buyers and sellers with an objective assessment of its worth.

However, the appraisal process is one of the most common reasons why real estate transactions fall apart. According to a 2021 survey by the National Association of Realtors (NAR), 11% of sales contracts were terminated due to appraisal problems, and 22% of contracts were delayed due to appraisals.

This blog aims to demystify the process of home appraisal, explaining its significance, how it works, and what factors influence the final valuation. Whether you are a homeowner, prospective buyer, or real estate enthusiast, understanding the appraisal process can help you make informed decisions in the housing market.

What Is a Home Appraisal?

A home appraisal is an unbiased and professional assessment of a property’s value conducted by a licensed appraiser. The appraisal is typically required by lenders when securing a mortgage, as it ensures that the loan amount does not exceed the property’s worth.

It also protects the lender’s investment in the loan for the property and ensures that the buyer is getting a fair deal. Before financing will be approved, an appraisal has to match at least the sale price to ensure a properly valued property. For cash-only transactions, a home appraisal is not required.

Why A Home Appraisal Matters

The difference between the property’s value and the homeowner’s loan will determine the homeowner’s equity in their home. Many Americans build wealth through home equity and understanding the value makes it less likely that they will be unable to repay a mortgage if financial hardship were to occur.

An appraisal is essentially protection for homeowners, despite it being considered an extra cost. It can prevent a buyer from overpaying and can also be used as leverage in negotiating a deal.

When a home is being purchased, a sales contract with an appraisal contingency gives a home buyer an opportunity to modify the contract if the appraised value is less than the contract sales price. At that point, the buyer has a few options. They can move ahead with the current sales price and pay the difference themselves. They can ask the seller to reduce the sales price to the appraised value. They can split the difference with the seller. Or, if an agreement can’t be reached, they can void the contract. This is how an appraisal can protect a home buyer, but again, it only works if an appraisal contingency is written into the contract.

What’s The Difference Between a Home Appraisal and Home Inspection?

It’s easy to confuse a home appraisal with a home inspection, but they are not one in the same. Both processes will take place before a real estate transaction finishes, but they are entirely different in their approach to examining a home. For one, home inspections are not usually required by a lender.

A home inspection is used to determine the current condition of the home. An inspector evaluates the structural integrity of the home, looking for problems with the plumbing, electrical and HVAC system and appliances, as well as with the foundation and roof. Appraisals are solely focused on the overall value of a property.

What’s the Difference Between a Home Appraisal and a Tax Assessment?

The terms “appraisal” and “assessment” are often confused since both refer to an evaluation of a home. But they are based on different criteria and serve different purposes.

An appraisal is performed by an independent appraiser whose job is to establish a market value of a home at the time of the appraisal. It is most often done during a real estate transaction.

An assessment is performed every few years by the state and local taxing authorities to establish a taxing value for properties. Assessed values are often less than the current market value because of local taxing requirements and criteria, which are different from the criteria used to establish current market value. Occasionally the two values are close to equal, but assessed value is a much less reliable measure of a home’s current market value.

The Home Appraisal Process

The home appraisal process isn’t that complicated once broken down into the following steps. It’s important to understand the process though so that you can truly understand the value of your home and how it was determined.

Engagement

Once a buyer’s offer is accepted, the lender engages an independent appraiser to evaluate the property. The appraiser should be licensed and familiar with the local real estate market.

Property Inspection

The appraiser visits the property to assess its condition, size, layout, and features. They take note of both the interior and exterior elements, including the number of rooms, square footage, structural integrity, and any upgrades or renovations.

Comparable Market Analysis (CMA)

The appraiser conducts research to identify similar properties (comparables) recently sold in the area. These properties should be similar in size, location, and condition. The CMA helps establish a baseline for the property’s value.

Evaluation of Factors

The appraiser considers various factors that influence the property’s value, such as location, amenities, proximity to schools or parks, and market trends. They also analyze the condition of the property, including any obvious repairs or maintenance that is needed.

Report Preparation

Based on the inspection and analysis, the appraiser prepares a detailed report that includes the property’s valuation, comparable sales data, and supporting documentation. The report outlines the methodology used and explains the reasoning behind the final valuation.

Valuation and Review

The appraiser determines the property’s fair market value by weighing all the relevant factors. The report undergoes a review process to ensure accuracy.

Several key factors influence the outcome of a home appraisal. These include:

Location

The property’s location plays a significant role in its value. Factors such as proximity to amenities, schools, transportation, and desirable neighborhoods can positively impact appraisal values.

Size and Features

The size of the property, including the number of bedrooms, bathrooms, and overall square footage, affects its appraisal value. Additionally, features like a garage, swimming pool, or a well-maintained backyard can contribute to a higher valuation.

Condition

The appraiser assesses the overall condition of the property, considering factors such as the age of the home, structural integrity, and any necessary repairs. A well-maintained property typically receives a higher appraisal value.

Comparable Sales

Recent sales of similar properties in the area, known as comparables or “comps,” heavily influence the appraisal. The appraiser compares the subject property to these recent sales to determine its value. Since the appraiser cannot get inside these comparable properties, they rely on the information provided in the multiple listing service and in the public record.

Market Trends

The state of the local real estate market, including supply and demand dynamics, can impact appraisal values. If the market is experiencing high demand and low inventory, it may lead to higher appraisals.

A home appraisal is a crucial step in the home buying and selling process. It provides an unbiased assessment of a property’s value, ensuring that lenders and buyers have an accurate understanding of its worth. By considering factors such as location, size, condition, comparable sales, and market trends, appraisers strive to determine a fair market value.

For homeowners, a favorable appraisal can increase their equity and provide confidence when refinancing or selling their property. For buyers, an appraisal helps validate the purchase price and ensures they are not overpaying for a property.

It is important to note that appraisals are not a science but rather an educated opinion based on professional expertise and market analysis. As a homeowner or buyer, it is beneficial to be aware of the factors that influence appraisals and work towards maintaining and improving your property’s value.

By understanding the appraisal process, you can navigate the real estate market more confidently, armed with the knowledge necessary to make informed decisions about buying or selling a home.

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