What is Appraisal in Real Estate?

What Is a Home Appraisal?

A home appraisal is an assessment of your property’s present market value done by a licensed appraiser. An appraisal helps determine how much you can buy or sell that property based on how much it is really worth. Some sellers would sell their home at an amount that exceeds how much it really is.

For example:

You are interested in buying a house worth $300,000. However, just before the bank approves you for that amount, they would want to know first if it truly is the present market value of the property in question.

Sometimes, property owners base their price on their emotions and sentiments rather than on the actual price as assessed in an appraisal. This process shows the exact condition of the home and what other homes nearby have sold for.

The Purpose of a Home Appraisal

The main purpose of a home appraisal is that an appraisal is the truest basis of the real price of the home based on actual data gathered upon the appraisal. This is essential when applying for a home loan.

The main idea for the appraisal is to avoid situations where buyers or sellers either undersell or oversell, just so it is fair for everyone concerned. This allows all parties to mitigate properly the risk along with the property being bought or sold.

Just because a seller asks for a certain price doesn’t mean the home is worth that much. The appraisal puts a fair, fact-based number on the home. This keeps things balanced.

When Does the Appraisal Happen?

The home appraisal usually happens after the buyer and seller agree on a price—but before the loan is fully approved. It’s one of the last big steps in the home buying process, and it has to be done before closing day.

Once the buyer’s offer is accepted, the lender will order the appraisal. Then, the appraiser will schedule a time to visit the home, look around, and do their research.

If the buyer is paying with cash, an appraisal isn’t required, as it is not legally required if paying cash. But if a mortgage is involved, most lenders will always require it.

What Factors Are Considered in an Appraisal?

Appraisers are professional individuals who, under no circumstances, can just guess the exact price of the property. An appraiser will look into things such as:

• Location: Where the home is matters a lot. Is it in a nice neighborhood? Close to schools, stores, or parks? Where the property is situated, especially near these, will increase the amount of the house.
   
• Size and Layout: The larger the house, the higher the price will be. Even higher when the number of rooms is more than enough for a regular-size American family.
   
• Condition: Homes that are very well taken care of are more expensive, especially when there are no structural damages like cracks on the walls or major structural remodelling involved that degrades their integrity.
   
• Upgrades and Improvements: A good kitchen always increases the appraised value of the house because a kitchen can also be a hot commodity.
   
• Age of the Home: The time from when it was built until the present is also calculated in the appraisal. Time slowly causes damage in the overall structure of the house. Meaning an older house will more likely need a remodel which means even more expenses.
   
• Lot Size: A big yard or extra land can make a home more valuable.
   
• Comparable Sales: The appraiser will compare the surrounding or nearby homes that have been recently sold as one of the bases of market value. You cannot exceed too much in the market value around you; otherwise, it won’t sell.
   
• Market Conditions: Supply and demand will also affect the price of the house. Especially with the increase of inflation, which in turn increases interest rates
   

Appraisal vs. Home Inspection: What’s the Difference?

• An appraisal tells you how much the home is worth.
   
• An inspection tells you what condition the home is in.
   

The appraiser will look at the value of the home and they will base their appraisals on factors such as the size, location, nearby sales (market value), and the overall condition of the home as mentioned earlier.

An inspector provides the overall condition of the home by inspecting issues found in the home during the inspection. They will then have a report based on their findings and these findings will highlight the main things that the owner, or potential buyer must repair.

What Happens If the Appraisal Is Too Low?

It is very common that the prices you see on marketplace platforms will have a lower actual appraisal value than what is being advertised. This is not marketing deception but more of like the choice of the people to price their property in whatever amount they think is reasonable and that is also fine.

Because of this there are common problems like the appraisal is actually lower than the price asked for. For example, there is a home and the buyer offered the amount of $310,000 but the appraisal is actually worth $290,000. The lender will only give a loan for the amount of $290,000 so what happens to the $20,000 difference?

Here’s what can happen next:

• The buyer pays the difference in cash (in this case, $20,000).
   
• The seller agrees to lower the price to match the appraisal.
   
• They meet in the middle, splitting the difference.
   
• Either side can walk away if they can’t reach an agreement (depending on the contract).

What If the Appraisal Comes in Higher Than the Sale Price?

When the appraisal comes in higher than the agreed sale price, that’s great news—especially for the buyer.

Now let’s reverse the situation in the first example. Let’s say the buyer offered to buy the house for $290,000 but the appraisal of the property is actually $310,000. The $20,000 difference will now be called built-in equity where you actually gain a $20,000 “free equity” without having to pay for it.

To make things simpler:

• A low appraisal can slow things down.
   
• A high appraisal can speed things up and make the buyer feel confident.

What You Should Remember

• An appraisal is an assessment conducted to determine the current value of your home.
   
• It is usually done by lenders (banks) to get an exact and true amount of what they are about to lend.
   
• The appraiser is a professional third-party who conducts the assessment of the house and gives an unbiased or neutral outcome based on the findings.
   
• A home inspection is different from an appraisal. It checks the home’s condition, while the appraisal focuses on value.
   
• Both the inspection and appraisal matter. One helps you spot problems. The other helps confirm a fair price.
   
• You can renegotiate on the price if the appraisal is too low, and you can also decline the transaction if not in the best interest.
   

If the appraisal is higher than expected, the buyer may start out with extra equity.

 

 

 

 

 

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