A home appraisal is a professional calculation of the value of real estate property. Appraisers aren’t just making a wild guess; they are trained, licensed professionals. Certified home appraisers have no stake in the sale of the property, and perform extensive research on both local market values and the actual condition of a home. Their final appraisal represents a fair market value for the home, though sales are often made below the appraised value or slightly above it.
This post will break down the appraisal process and give you the information you need to confidently navigate the home appraisal process.
A home appraisal is one of the final steps in the purchase of a home. Mortgage lenders require an appraisal before the sale is complete. Financial institutions will not lend more money for a purchase than can be secured by the value of the property. For the same reason, a home appraisal will be required before you can refinance a home.
The first step in a home appraisal involves extensive market research. Realtors and appraisers have access to a listing service that tracks the address, square footage, and sale price of the property.
According to realtor Bill Gasset, of Maximum Exposure Real Estate, you’ll need to find appraisors and real estate agents who know their local communities inside and out. Quality appraisers will look for homes that have sold recently in the same town or neighborhood, especially those with similar square footage, with the same number of bathrooms and bedrooms.
After this research, the appraiser will have an idea of what the fair market value should be. Then, they will go to inspect the property in-person. They will be looking for both desirable features and deficiencies.
Well maintained hardwood floors, granite countertops, additional bathrooms, and other luxuries can significantly enhance the value of a home. Location matters too. Houses with a desirable view of a lake or beachfront are worth more than the same house in a bland development.
Homes close to a light rail station are worth more near major cities. Proximity to well-regarded school districts can also raise the value of a given property.
Improvements to the outdoor property raise the home’s value as well. A pond or garden in good condition is a valuable asset, as is an inground swimming pool.
Also, make sure your home’s electrical system is up to date – it wouldn’t hurt to consult a professional electrician to get your home in top-performing shape.
There are also deficiencies that can lower the expected value of a home:
- Cracked tile.
- Peeling paint.
- A lingering odor from cats or smoking.
- Water damage
- Drainage problems.
A “fixer-upper” may be a good value for home buyers, but it will appraise much lower than expected, often below what the current owner paid for it.
After the market research and a thorough inspection of the property, appraisers will write their report and deliver it to the bank or lender which ordered the appraisal. At this point, their job is done.
Home appraisals are a tool to ward off fraud and misrepresentation. They primarily protect the bank or mortgage lender. Once the bank assumes the title for the property, they expect that property to be collateral against the value of the home. In the unfortunate case that the homeowner defaults on their mortgage, the bank expects to be able to sell the home and recover some or all of what they initially lent.
A fair appraisal allows the bank to decide how much money they are willing to lend. Usually, they are reluctant to finance more than 80% of the appraised market value, requiring the difference as a down payment.
In the bullish housing market, the bank might agree to finance a home for nearly the full appraised value. On the other hand, they will never agree to lend money in excess of the appraised value, because the difference would effectively become unsecured debt.
While intended to protect the bank, the appraisal also benefits the purchaser of the home from deceit or fraud – especially if they are coming from a more competitive market.
Potential home buyers might be willing to pay well above the local market value for a given home if they are not being represented by a real estate agent. While an appraisal might not stop unaware buyers from spending a few thousand more than they need to, it can certainly stop them from overpaying buy some fraudulently high sum.
Normally, home appraisals are paid for by the purchaser. This point is negotiable, and many sellers will agree to absorb the cost.
There are also cases where the potential buyer might want a professional appraisal. This can happen when buyers are looking for an investment instead of a home. Instead of a traditional appraisal of the value of the home as a resident, potential buyers looking for a property they can lease of rent want to know what the potential revenue of their purchase is. These are known as income capitalization appraisals.
Sellers may also request their own appraisal, especially in a competitive market, to use as a baseline for any negotiations when selling a house.
You now understand the appraisal process thoroughly. Whether you are seeking an appraisal for a home you are selling or need one as a potential buyer, this handy guide has given you a professional breakdown of the appraisal process.
Jennifer Bell is a freelance writer, blogger, dog-enthusiast and avid beachgoer operating out of Southern New Jersey