There’s no disputing that appraisals carry a lot of weight when it comes to real estate. In general terms, an appraisal is the estimate of a property’s market value, in comparison to similar properties in the area. This estimate is calculated through a painstaking process, and is conducted by licensed professionals who are deemed objective third parties (indicating they have no financial or other connection to the property). Appraisals are not by any stretch of the imagination, “guesswork.”
A home’s appraisal will be influenced by numerous factors including:
• Recent sales of similar properties in the area
• Size of your lot and square footage of the house
• Number of bedrooms and bathrooms
• Location of the home• Condition and aesthetics
• Upgrades and home improvements
Appraisals for Buyers — Appraisals are particularly important to buyers, as an appraisal is mandatory when securing home financing. This is because a real estate appraisal serves as an assurance to the lender that the property is worth the amount they are lending. In other words, an appraisal is a safeguard against risk for a lender, in the event that you default on your mortgage.
Appraisals are incredibly detailed and based upon a licensed appraiser’s on-site evaluation of a home, along with their research and analysis of sales data in the same area. Appraisals include amongst other things: evaluation of the real estate market in the neighborhood, details about the property compared to other similar properties, and any issues that may lower the value of the property.
As a buyer, appraisals that come in lower than the sales price can create a headache. However, if you have your heart set on a home and the appraisal comes in too low, there are a few things you can do. You may be able to appeal the appraisal, working together with your mortgage professional, your REALTOR,® and the seller, to seek out comparable values that may rebut the original appraisal. It should be noted that this process takes time, and it can be an uphill battle, but it’s worth a shot. Alternately, you could order a second appraisal, or try to negotiate with the seller to bring down the price of the home.
Keep in mind that an appraisal is not the same as a home inspection. A home inspection focuses on ensuring that mechanical systems in a home (HVAC, plumbing, electrical, etc.) are in good working condition. Therefore, a home inspection is highly suggested, but the results do not always directly affect the loan approval process. An appraisal on the other hand, is required and plays a significant role in obtaining financing for your home.
Appraisals for Sellers — Appraisals aren’t only important for buyers. For sellers, appraisals can mean the difference between selling your home quickly, or finding yourself with a property on the market for an extended period of time. That’s precisely why many sellers opt to have an appraisal conducted themselves before listing their home for sale. This provides homeowners with a credible idea of how to price their home accurately for a quicker sale.
If you’re planning to sell your home, make sure all renovations and upgrades that have been made to your home are brought to the attention of your appraiser. If you’ve installed new cabinetry, flooring, or countertops, make sure the appraiser knows about it. If you’ve recently replaced your windows or updated appliances, be sure to mention that too. However, keep in mind that the appraiser will need to verify your claims, so you may need copies of work orders or receipts to confirm the dates and costs of the upgrades.
Should the appraisal come in lower than you anticipated, steps to take include appealing the appraisal, reducing the sales price, or asking your buyer to bring in additional money to split the difference.
Appraisals for Homeowner Refinance —Homeowners who wish to refinance will find that appraisals can again make a world of difference. This is because you won’t be able to refinance your mortgage if your home’s value is less than the amount you owe on the property. Likewise, if your appraisal reveals that you have less than 20% equity in your home, you may be forced to refinance with additional costs of mortgage insurance, or you may not qualify for a refinance with a lower rate.