What is a home appraisal?
A home appraisal is a value analysis of your property from a certified or licensed appraiser hired by the lender during the home purchase or refinance process. It is a vital step in the home buying process because the results of the appraisal report will determine how much money a mortgage lender will allow you to borrow for the property. The average cost for an appraisal depends on a few factors including location, demand, the complexity, and home size. Typically, the buyer will cover the cost of the appraisal.
How is an appraisal conducted?
The appraisal process will start with the lender ordering an appraisal. One thing to note is an appraiser is an unbiased third party; they take in data from surrounding areas as well as aspects of the property itself before making an opinion. An appraiser will come in and take into account any recent property sales, as well as the current market value and any market trends. The report will also include a street map of the appraised property, any exterior photos of the property, all comparable sales used with exterior photographs, an explanation of how the square footage was calculated, public land and tax records, and any other comparable market sales data.
While they will compare the property to others, a thorough indoor inspection will be done as well. The key factors are the number of bedrooms and bathrooms, the floorplan, and while you may have just updated the kitchen from 1980, the bathroom may still be stuck in that decade. Any needed repairs or areas of concern will be added to the report as well.
Even if the seller decides they don’t want to invest a lot of money in the home they are selling, they can still make it feel more attractive before an appraiser comes by cleaning out any clutter, getting rid of nasty odors, landscaping around the home, and making the overall appearance comfortable; sometimes making the appraiser subconsciously value the home at a higher price.
What happens once the appraisal is completed?
If the appraiser comes in at or above the listed price of the property, this is fantastic news for both parties. The sale will proceed as planned, and whatever the difference is between the listing price and appraisal value can serve as equity in the home. However, if the appraisal is lower, this can act as a negotiation tactic for the buyer to lower the sale price, which means delaying or derailing the transaction.
How can appraisals be affected in a sellers’ market?
When markets accelerate quickly, like we are currently experiencing, the credit risk gap widens between the agreed-upon purchase price and what the data reflects and advises loan production teams to explore avenues to understand this delta, and historical data can struggle to catch up and create broad differentials between an agreed-upon price and the value.
Understanding the appraisal gap in today’s market:
In today’s real estate market, many buyers are shelling out thousands of dollars for their home’s appraisal gap. A house can be priced at $400,000, but buyers are offering far more than that to ensure they get their dream home. Since a mortgage lender will only give you what the home is appraised at, the buyer will have to cover the rest of the cost themselves, and there is no telling when equity gains will start making their way back to the buyer to help make up the cost. Before putting in an offer, decide how much you can truly afford, and stick to that number.