What Is a Home Appraisal and Why Is It Important?
If you are planning to buy, sell, or refinance a home, you may have heard of the term “home appraisal”. But what exactly is a home appraisal and why is it important for your real estate transaction? In this blog post, we will explain what a home appraisal is, how it works, and what benefits it can bring to both buyers and sellers.
What Is a Home Appraisal?
A home appraisal is an unbiased professional opinion of a home’s value by a licensed appraiser. It is typically required by lenders when you apply for a mortgage loan, whether you are buying, selling, or refinancing a home. The purpose of a home appraisal is to ensure that the home’s contract price is appropriate given its condition, location, features, and market trends. It also protects the lender from lending more money than the home is worth, in case the borrower defaults on the loan and the lender has to sell the home to recover its losses. It also can protect a cash buyer to make sure they aren't paying too much for the home they're buying.
How Does a Home Appraisal Work?
The home appraisal process usually involves the following steps:
- The lender orders an appraisal from an appraisal management company (AMC), which assigns a licensed appraiser to the property.
- The appraiser contacts the seller or the seller’s agent to schedule a time to visit the property and conduct a visual inspection of its interior and exterior.
- The appraiser also researches comparable homes that have recently sold in the area, analyzes public records and market data, and considers any special features or improvements that the home has.
- The appraiser then prepares a detailed report that includes the home’s description, photos, maps, sketches, adjustments, and the appraised value.
- The appraiser submits the report to the AMC, which reviews it for quality and compliance, and then sends it to the lender.
- The lender reviews the report and shares it with the buyer and the seller. The buyer usually pays for the appraisal fee, which averages $400 to $900, depending on the size and complexity of the property and the type of loan (conventional, FHA, VA, etc.).
- Market Value in a residential home appraisal is almost always (99.999%) different than the assessed tax value because the process to determine value is not the same.
What Are the Benefits of a Home Appraisal?
A home appraisal can benefit both buyers and sellers in different ways:
- For buyers, a home appraisal can help them avoid overpaying for a property, negotiate a lower price if the appraisal comes in below the contract price, or cancel the contract if the appraisal is too low and the seller is unwilling to lower the price.
- For sellers, a home appraisal can help them justify their asking price, attract more buyers who can obtain financing, or make repairs or improvements to increase the home’s value before listing it.
- For both parties, a home appraisal can provide peace of mind that the home’s value is fair and accurate, and that the transaction is based on sound financial decisions.
What Are the Challenges of a Home Appraisal?
While a home appraisal can be beneficial, it can also pose some challenges for both buyers and sellers. Some of the common challenges are:
- The home appraisal may come in lower than the contract price, which can cause a delay or a cancellation of the transaction. This can happen if the market conditions change, the appraiser makes a mistake, or the seller or REALTOR® overprices the property.
- The home appraisal may come in higher than the contract price, which can make the buyer feel like they are getting a bargain, but also make the seller feel like they are leaving money on the table. This can happen if the seller or real estate agent underprices the property, the appraiser is too generous, or the market conditions improve.
- The home appraisal may take longer than expected, which can affect the closing date and the loan approval. This can happen if the appraiser is busy, the property is complex, or the report requires revisions.
- The home appraisal may not reflect the true value of the property, which can affect the buyer’s satisfaction and the seller’s reputation. This can happen if the appraiser is inexperienced, biased, or unethical.
How to Prepare for a Home Appraisal?
To avoid or minimize the challenges of a home appraisal, both buyers and sellers can take some steps to prepare for it. Here are some tips:
- For buyers, it is important to do your own research on the property and the market, and compare the contract price with the recent sales of similar homes. You can also ask your lender or agent to provide you with a copy of the appraisal report and review it for accuracy and completeness. If you find any errors or discrepancies, you can challenge the appraisal and request a second opinion.
- For sellers, it is important to make your property look its best and fix any major issues that can affect its value. You can also provide the appraiser with a list of improvements and upgrades that you have made to the property, along with any supporting documents such as receipts, permits, or warranties. You can also ask your agent to accompany the appraiser and point out any positive features or factors that can enhance the value of the property.
In conclusion, a home appraisal is an essential part of any real estate transaction that involves a mortgage loan. It provides an objective and reliable assessment of a home’s value, which can benefit both buyers and sellers. However, it can also pose some challenges that can affect the outcome of the transaction. Therefore, it is important to prepare for a home appraisal and understand how it works. If you have any questions about home appraisals or need help finding a qualified appraiser, feel free to contact us today.