Home Appraisals: What You Need To Know

What You Need To Know About Home Appraisals.

Home appraisals (aka: property appraisals) are a key component of every real estate transaction. The purpose of a home appraisal is to have an unbiased professional inspect a property and determine its fair market value (FMV). They are necessary when someone is buying, selling, or refinancing a home. Home appraisals include a physical inspection, as well as an analysis of the market and comparable home values.

Why Are Home Appraisals Important?

In an appraisal, a licensed appraiser will visit the property and conduct a physical inspection. Additionally, they will look at the current state of the market, demand, and comparable homes in the area to determine the home’s worth. The determined worth is referred to as the appraisal value, which is usually the same as Fair Market Value (FMV). Home appraisals are the best way to determine Fair Market Value (FMV) because an unbiased professional is in charge of managing the inspection.

Banks only provide loans up to the appraisal value. If the sale price of a home is higher than the appraised value, the buyer will need to pay the difference out of pocket. Banks limit the loan amount since a property serves as collateral in the case that a buyer defaults on their mortgage. Preventing over-borrowing is the bank’s way of ensuring that they will be able to fully recoup any losses through the property’s resale.

What Factors Are Considered In An Appraisal?

When an appraiser is determining the appraisal value, they take a variety of factors into account. Firstly, they look at the home’s physical features: Number of rooms, updates, amenities, location, square footage, and more. Secondly, they analyze current market trends by looking at the sale prices of comparable homes in the area, as well as buyer demand. Finally, the appraiser will look for any flaws with the property. This could be termites, mold, water damage, or even the fact that someone once died there. All of these factors contribute to the appraisal value, in addition to being important considerations for the home’s sale price.

How A Home Appraisal Can Impact You.

Appraisals are typically conducted during escrow after a sale price has already been negotiated. If the home is appraised at a value higher than the sale price, the buyers can rest assured that they got a great deal on the property while sellers will have the knowledge that their home could have sold for more. If the appraisal value is equal to the sale price, then nothing changes in the transaction. However, if the home is appraised at a value lower than the sale price, then buyers have three primary options:

Renegotiate the sale price. If you are able to show the seller that their home is appraised for a value lower than the sale price, you may be able to work with the seller to reduce the price. Typically the buyer in contract will have the upper hand since no other buyer will be able to secure a loan higher than the appraised value, meaning that finding another buyer willing to overpay will be difficult. However, if you are buying during a seller’s market (when there is a lot of buyer demand and high competition), the seller may decide to end the contract and sell to the next highest bidder. Make sure to assess your negotiation power carefully.
Pay the difference out of pocket. If you are set on buying the home even with a decreased loan, you will need to increase your down payment to pay the difference between the sale price and appraisal value.
Cancel the contract (ONLY if you have an appraisal contingency). If your accepted offer included an appraisal contingency, you have the opportunity to back out of the sale without any financial loss, provided that the home is appraised at a value lower than the sale price and all other contractual requirements have been met. The appraisal contingency also gives you more negotiation power if you are interested in reopening negotiations.

Final Notes.

An appraisal is an important step in the contractual process that allows both buyers and sellers to understand a home’s value given the current market. If a home is priced correctly, there shouldn’t be any setbacks in the appraisal stage of escrow.

When having a home appraised, you want to make sure you have a reputable appraiser that will provide the most accurate assessment. If the appraisal value stirs conflict in a transaction, you can always hire another appraiser for a second opinion.